We will never forget
2013-09-11
On this anniversary of September 11, 2001, let us remember the innocent people who were killed on US soil.
Book value can show some great bargains but please be careful
2013-09-10
The book value of a company is the total assets on the balance sheet minus the liabilities. This is the net worth of the company. It’s what shareholders actually own. If the company suddenly closed its doors tomorrow and paid off the debt, this is the amount of money that would be left to pay you and your fellow shareholders.
Some investors will look at the book value compared to the stock price. If the stock price is higher than the book value, it could be overpriced. However, realize that stock prices may factor in what some investors believe are the future earnings and performance of the company. The stock price is also subject to the herd mentality of owning a stock. Book value simply looks at current assets.
A stock trading less than its book value doesn’t necessarily mean it is a bargain. Book value does consider future earnings or the expectation of great performance.
I almost never talk about the book value of a company when I do my stock analysis on this site. I find it to be a metric that makes little sense when taken over the course of time. To me, it is more important to see if a company consistently performs well; as that is a great indicator that it will continue to perform. Just as when you hire a new employee for your firm, you hire that person because you feel s/he has performed well in the past and you expect that performance to continue into the future.
Book value tends to be important for a single point in time and not a trend that continuously gets better or worse. So if you believe in the notion of consistent performance in the past means that future performance is likely, then the book value has diminished importance. As I have tweeted many times under @ConfidentInvest, past performance may not be a perfect tool for predicting the future, but it is the best tool that we have at our disposal.
This is why book value rarely matters; the value of future performance is typically a far bigger driver of a stock price. Share prices of companies regularly exceed book value when investors believe that there is some confidence of future performance.
There are times when book value can be a signal for a good bargain. During the financial crisis of the 2007 and 2008, Goldman Sachs [stckqut]GS[/stckqut] had a book value in the mid $80 range. At its low in that time frame, it was trading at about $50. This was due to concern about its ability to have future earnings as a company. The herd mentality of the company drove the stock price down. If you bought at that price, you could have made a nice profit. This profit would have been realized even though Goldman may not have been a Good Company at that time.
Book value is where you may want to veer from the analysis on my site. There are times that you will find a company that is simply been beaten down too far. If you see that this downtrodden company is trading below its book value, you may want to consider an investment. Please be careful with this investment though since worse times often follow bad times. Not all companies that are trading under book value will ever recover from their illnesses.
Top health insurance companies are not overly profitable
2013-07-30
This is not a political site. I try very hard to avoid political issues, especially those that are controversial. The last thing I want people to do is to get bad advice on investing because of political preferences. One of my readers asked my advice on health insurance companies though. The theory was that since so many people thought that health insurance companies were making a ton of profit (one of the reasons for Obamacare), they should be great investments.
My first comment is that you should never buy the stock of a company due to an entire industry. You should evaluate the company by itself and not based on the industry. If you don’t know how to do this, I suggest that you buy my book, The Confident Investor. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.
My second comment is that you should avoid sector investments. You can buy mutual funds or ETFs that follow a single sector. Avoid putting these into your portfolio. Find the best companies to invest in and then invest in them with a plan. Once again, if you don’t know how to do this, check out my book.
To answer the reader question, I started researching United HealthGroup [stckqut]UNH[/stckqut]. I went to Morningstar for my initial research and used that tool to generate the data for United HealthGroup and its top competitors. Morningstar gave me a list of companies and then I did a bit of quick analysis.
| Symbol | Revenue | Net Income | Profit | Market Cap | |
| (M) | (M) | percentage | (M) | ||
| UnitedHealth Group Inc | UNH | $113,700 | $5,330 | 4.69% | $72,879 |
| Express Scripts | ESRX | $107,800 | $1,418 | 1.32% | $54,365 |
| WellPoint Inc | WLP | $64,000 | $2,684 | 4.19% | $26,071 |
| Cigna Corp | CI | $30,500 | $1,309 | 4.29% | $22,209 |
| Aetna Inc | AET | $37,200 | $1,637 | 4.40% | $21,017 |
| Humana | HUM | $39,400 | $1,447 | 3.67% | $14,030 |
| Centene Corporation | CNC | $9,600 | $1 | 0.01% | $3,019 |
| WellCare Health Plans, Inc. | WCG | $7,900 | $155 | 1.96% | $2,675 |
| Health Net Inc | HNT | $11,300 | $198 | 1.75% | $2,640 |
| Odontoprev S.A. | ODPVY | $1,000 | $161 | 16.10% | $2,276 |
| Molina Healthcare, Inc. | MOH | $6,200 | $21 | 0.34% | $1,812 |
| Sum | $428,600 | $14,361 | 3.35% |
As we can see, the health insurance companies don’t generate that great of a return. These companies average out to 3.35% profit. The S&P500 averaged 16.14%! That means that health insurance companies aren’t just rolling in cash like Michael Moore implies. Taking the profit motive out of healthcare doesn’t seem to be the driving focus of Obamacare.
This article points out the fallacy of following the news to find your investments. While it is worthwhile to research companies that you hear about on the news or read about in the newspaper, just because they sound good there doesn’t make them great investments. The only sound way to make a great investment is to research the company using solid tools.
8 plus 1 ways to save on last minute travel
2013-07-25
This isn’t a travel site but I do like to help my readers save money. My goal in helping you is simply so that you have more money to invest in the stock market and retire in luxury. I travel a great deal and here are a few tips that I have picked up to help me save a few dollars when I am rushing to make arrangements.
My first tip is to plan ahead but maybe that isn’t possible. The reality is that the more advanced notice that you have, the easier it will be to get bargains. This is the plus one that I advertise in the title since if you don’t have a choice then you must make a choice (sorry for stealing the Rush lyric but couldn’t resist).
1 – Flexibility
Do you have any flexibility? The more you have the better you will do in finding a deal. If today’s events have caused you to make travel arrangements for today, you will probably be at the mercy of the airlines. If you’re even a little flexible with your travel plans, you may be able to find a deal that doesn’t break the bank.
2 – Update your twitter account and Facebook before you need it
A little bit of preparedness is well advised. One place to start is your Twitter feed and your Facebook account. Accounts like @Airfarewatchdogs and @farecomparedeals are just two of the many that should be in one of your feeds if you’re watching for last-minute deals. In addition, popular travel sites and even some airlines have e-mail lists, twitter feeds, and Facebook pages that send daily, weekly or monthly specials.
3 – Those last minute travel sites actually work
Search the last minute travel sites. Lastminutetravel.com as well as Expedia, Orbit and Travelzoo are places to check. Even if they aren’t the cheapest, you can get an idea of what would be a normal price so you have a basis of comparison. The one less obvious place to look are travel sites that cater to local areas. For example, Airtech.com offers last minute deals to Europe and Hawaii. Sites like this may be harder to find, but the best way to find these sites is sometimes through local connections. The person or group that is insisting you are traveling at the last minute may give you some ideas. It never hurts to ask.
4 – Date of the week matters and so does time of day
It is my observation, the cheapest travel day is Wednesday as most business people leave on Monday or Tuesday and then return home on Thursday afternoon or Friday. Your best bet is to avoid weekend travel which is when most people leave for vacations. Try to leave on a weekday and return on a weekday if possible. Also be flexible with your airport choice. For some travelers, there are multiple airports within a few hours from home. If you can travel to a larger airport where discount carriers have service, you may be able to save a substantial amount of money. Finally, leave late at night, early in the morning, or at noon. Those less desirable travel times have more flexibility in their pricing.
5 – Go by yourself
If you have to travel as a group or family, you are at the mercy of the airlines. Because airlines have reduced their total number of flights in order to keep all planes full, finding a good price for a group is difficult. Flying alone allows you to take advantage of a single last-minute seat that may have come available due to a cancellation or an unsold ticket.
6 – Travel agents can be your best friend
It’s true that travel agents will charge a premium to book your travel for you, but they often have access to discount travel deals that aren’t published online or alternative locations that are not easy to find. This doesn’t just include airline tickets; hotels and rental cars are worth discussing with an agent. The agent will be more helpful though if you have already created a relationship or at least they feel like you are coming back in the future.
7 – Name your price
Sites where you can name a price you’re willing to pay for a hotel, airline ticket or rental car sometimes net consumers fantastic rates at the last minute. Make sure you shop around before bidding so you don’t end up bidding higher than another site’s regular price. Priceline.com is the most common of these but there are others out there – just do a little web searching.
8 – Lower your standards
You may love to book at Delta, United, Westin, Marriott, or Hilton because of the great service that you receive and their loyalty program. However, those loyalty points and extra perks cost money. There is no free lunch. Consider lower budget hotels and airlines if you are in a rush. The reality is that if you are rushing to get somewhere, all you really probably need are clean sheets and towels. That free bottled water and mints on the pillow are nice but may not be affordable in all cases. Prioritize your reason to travel above your desire to add loyalty points and you can surely save a few dollars.
Image from Wiki Media (http://commons.wikimedia.org/wiki/File:Lufthansa_Airbus_A320-211_D-AIQT_02.jpg)
Do you know how to evaluate a company for a dividend investment? Here is a primer
2013-07-23
While I don’t typically invest in a company due to its dividends, others do. If you are one of those people, then you need to understand what to look for to make sure you are buying into a decent company. You need to be confident that your investment will be able to maintain or grow its dividend while not driving the company into the ground.
Dividends can (and should) flow from the cash flows derived from earnings, but there are other ways to pay out a dividend. Consider these other options. A company could pay out a dividend by:
- Draining its cash holdings.
- Selling off assets.
- Diluting your investment by issuing more shares of stock.
- Increasing its risk position by taking on more debt.
The problem here is that all of these options are temporary solutions. You eventually run out of cash and assets. Issuing more shares to pay shareholders can turn into a legal version of a Ponzi scheme. And increasing debt increases bankruptcy risk. Only long-term earnings power can sustainably fuel big dividends.
I have written a series of articles on how to read an annual report in 20 minutes. This is if you are choosing a stock after it has passed all of the standard metrics that I describe in my book, The Confident Investor. If you are buying the stock for another reason, such as for its dividend return, then you need to do more homework.
If you are choosing a stock based on its dividends, there are few things to check in the last 3 annual reports. Luckily, you really do not need to dig into the individual annual reports if you do not want to go through that effort. The information is in those reports, but free websites do most of the heavy lifting. You can find this information on the financial portals of Yahoo and MSN, but for my example I will use Morningstar. Go to Morningstar.com and search for GE. GE is the NYSE symbol for General Electric. Most people that own General Electric do so for its dividends and its exposure to the manufacturing sector and the international markets. According to Dividend.com, GE is currently offering a dividend yield of 3.27% and an annual payout of $0.76. This yield is not enough to get rich on, but it currently is beating your bank savings account.
If you go to the quotes page of Morningstar for GE, you can see a quick overview of the company. Scroll down to the Financials section and you can follow along. The first thing I want to look for is not included in the above list. I want to make sure the company is growing its top line revenue over the last 3 years and that it has been profitable for the last 3 years. Note that this would be a different check if you were buying the company as a stock growth company but in this case we are buying it for dividends. We need to make sure the dividends are coming from a solid company and those dividends are not going to be disrupted. In the case of GE, you can see that both situations are true even though Net Income is the lowest it has been in the last 3 years. That drop in income would have been very troublesome if we were evaluating the Confident Investor Rating that I describe in my book. In the case of a dividend investment, it has maintained enough profit for us to feel confident in the continued profitability.
Now let’s jump over to the Financials tab and select the Cash Flow sub tab (immediately below the tabs are sub tabs). Scroll all the way to the bottom and we see that the Operating Cash Flow and Free Cash Flow are decreasing. This is a problem. We need this number to be increasing or at least steady to trust a dividend payout.
The next item is assets. Stay on the Financials tab, but go to the Balance Sheet sub tab. Look at the Net Property, Plant and Equipment line (it should be bold). This isn’t too bad. Over the last 5 years, it has gone up and down. The worst move was about 10%, but lately it has even increased a bit. This is a sign that the company is continuing to invest in its infrastructure and at least isn’t selling it off to satisfy its dividend needs.
To check the number of shares outstanding, we can jump to the Key Ratios tab. Halfway down the Financials section is Shares. Here, we can see that the number of shares outstanding is essentially the same YOY for the last 3 years. This is fine.
For the last check, stay on the Key Ratios tab and look at the Key Ratios section. On the sub-tab Financial Health, you will see Total Liabilities. In this case, the liabilities are decreasing slightly. This means the company isn’t taking on debt to pay your dividend.
Overall, General Electric is a fairly safe dividend investment. While I don’t typically invest in a company due to its dividends, others do. If you are one of those people, then you need to understand what to look for to make sure you are buying into a decent company. You need to be confident that your investment will be able to maintain or grow its dividend while not driving the company into the ground.
The reality is that General Electric is not likely to decrease the dividend even though it has a few warning signs. Cutting a dividend almost always results in a drop in share price. Since executives and board members are usually paid with stock or receive bonuses based on stock price, they don’t want that price to drop. They will do unnatural acts if needed to maintain the stock price. This is the problem with focusing only on dividends for an investment. That addiction to the dividend can cause companies to make really bad decisions in the hopes that investors will not run from an ailing company. However, there is no free lunch for dividend owners. If you want to trust your dividend and hope that it can grow, choose companies that are extremely well run.
Do you have any questions about this? I would spend more time on this in a book, but hopefully this article gives you a few things to consider. Let me know below in the comments or send me a tweet at @ConfidentInvest.
Image is sourced from OpenClickart.com
[stckqut]GOOGL[/stckqut]