the 4 pillars of investing fundamentals: module 3 · gotta pay employees too, right? they have...

Fundamentals: Module 3THE 4 PILLARS OF INVESTING

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The 4 Pillars of Investing | Fundamentals : Module 3

© Tanner Training LLC. All rights reserved.

This is two corporate financial statements. On this side, we’ve got the Apple computer, the iMac, the iPhone, the iTunes, the iTV, everything. And then you got Blockbuster video who is a victim of obsolescence risk. So let’s see how this plays out and how looking at a corporate financial statement and some corporate fundamental analysis can help us find value or identify risk or stability, as we go to purchase stocks. So, Apple computers, $86 billion in assets at the end of 2010. Now, why am I doing this a while back? So you can see some growth, watch this. $86 billion; now that represents all the stuff they have that they can use to make money. Now, it also costs them some money to make some money, but generating that income from the assets, $26 billion the last quarter. That’s an unbelievable amount of revenue. Of course it costs them some money. They gotta pay employees too, right? They have expenses as well. They have assets produce the money, but they gotta spend some to make that cash too, so $21 billion to make all that stuff. That’s $6 billion within a quarter. Who only needs a small portion of that to keep them happy. $6 billion? I’d take it. So, that’s really cool.

Now, another thing they did is, remember how we talked about an example would be a corporate bond and they have debt they take on, because they want to grow fast, right? They want to grow really really fast. And sure, $6 billion isn’t bad, but you could grow a lot faster if you borrowed $32. So they have $32 billion in liabilities, and some of that’s just for growth, some of it’s for other things. But that’s an interesting thing because, you know there are some gurus who I like, they’re entertaining; I’m not going to mention any names like Suze Orman and Dave Ramsey, I’m not going to mention names like that who always say “Debt is the devil, don’t go into debt, debt’s bad, cut up your credit cards and don’t go into debt and wah wah wah.” Listen, the United States is abusing their debt; Apple is using their debt. Don’t abuse it, use it.

In fact, the reason Apple and some of these companies grow so fast is why? They’re using debt to grow. They’re using debt. More powerful to just leverage the money than it is to pay things out of earnings. You will not grow fast. So I don’t care if I want to grow stock like Apple and they have

FUNDAMENTALSMODULE 1 2 3 4

A transcription of

The 4 Pillars of Investing

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some debt, as long as they’re using the debt to grow and not to pay for liabilities, as long as their programs are solvent. They’re looking like they’re solvent to me with $6 billion coming in each quarter. Whatever they’re doing is working. Why don’t they pay off all the debt? Well then they’d only have $50 million; I mean they’ve got a net worth of $54 billion, they’re only going to have $54 billion in assets, and you cannot generate $26 billion out of $54 billion in assets. That’s why they’re using some leverage. So they’re doing pretty well.

Blockbuster, $1.1 billion, so not very big. Apple’s the biggest market capital of all the US companies. They generated $736 million, so darn near, isn’t that interesting? They’re generating almost as much revenue here as they have assets. The problem is they spend a lot more to get it; wait a minute, they only brought in $736 million but they spent $789, well yeah they got employees, they got all these…you know all these Blockbuster videos you see, they take up a lot of space, and there’s rent and leases to pay, all kinds of stuff, employees and fees and franchise stuff to pay. So, lots of stuff going out there, $53 million. How long is your business going to last? They’re insolvent.

So what is the pattern? See, that’s why I want to show you quarter four of 2010. What’s the pattern? Insolvent, then what? Do you remember? Delinquent or default and then bankruptcy. So whenever you see a company start to go delinquent, what is likely to happen? Policy plus demographics equals the future. Well, think about this. I go out, I’m a big Apple fan, I’m on an Apple right now. I don’t know if you are; you’re probably on some computer, right? And so, I buy Apple TV, haven’t been to Blockbuster since I bought my Apple TV. I’m not gonna go stand in line and get a DVD, that’s insane. I’m downloading my movies. I’m not going to pay a late fee from Blockbuster because I forgot to…it’s a pain in the butt to drop that off. I just download a rental from Apple on iTunes for three days or however long and boom, I’m set. I got a month to watch it. Once I watch it, I don’t need it anymore, don’t need to take it back.

So that’s called obsolescence risk. When we do the risk one, we’ll revisit this. But Blockbuster is a victim of obsolescence risk. Apple TV is chewing them up. Netflix chewing them up. I don’t want to go to the video store. Going to the video store is old; DVDs, nah, we’re downloading things. That’s the new way. DVD, hey buddy, obsolescence risk down here in the corner, don’t you know what this is about? Liability is $1.16 billion; that’s about a $400 million difference right there, and so they’re in the hole. So they don’t have any equity. These guys got $54 billion in equity; these guys got nothing. They’re minus. So this is called insolvent and it leads to delinquency.

Now could they have turned it around? Yes. Could these guys falter? Yes. But we’re not talking about what’s gonna happen, we’re talking about not what could happen; we’re talking about what is most likely to happen. We don’t have a crystal ball, but we have fundamental analysis.

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What’s interesting is some people don’t look at value, they only look at price. And they don’t understand the difference between price and value. It’s one of the dangers of consumers trying to be investors; e-quadrant guys trying to act like i-quadrant guys. Check this out. At the end of 2010, Apple’s $300. Well now they’re pushing 4, why? Value, they’re earning money. People want to buy things, they’re earning money. 6 cents, now a lot of people are buying this; trading means there are buyers and sellers, so some people saw this trying to get rid of it. Some people just saw the price. Said, “Oh, it’s Blockbuster, let’s buy them, it’s cheap. What do I have to lose?” Well I’ll tell you what you gotta lose, all your money, all 6 cents, the whole thing. So Blockbuster has since this time gone bankrupt. And that’s a great lesson.

The penny stock guy is usually a penny because of something like this, or because they haven’t made any money, or it’s all potential, or you’re hoping for a turn around, and you’re gambling, you’re going with luck. You’re not getting any value back, only potential, only hope. I’d rather go with what’s likely. So you’ve gotta make your own decisions. I can’t tell you what to do. But you can learn with a corporate fundamental analysis is. Let’s talk more about it. Let’s talk about value. Let’s talk about what we get.

So part of what we do with fundamental analysis is we try to figure out the strength of an entity and how valuable it is. So we have this term here called ‘valuation’, in other words, how are we going to put a value on something? Well, you know, we put a price on things by supply and demand; that’s how we price a company. I mean, when you’re gonna buy something, you’re competing with everybody else that wants it too. So based on how many people want it, they’re going to be able to charge more. That’s called supply and demand, and that’s price. That’s what you pay. You’re paying what the supply and demand is. You’re competing with other people. We study this with something called technical analysis in our next lesson, next time, but right now, we’re on value, what people receive.

The problem with a lot of people who want to be investors is they’re so caught up with price that they aren’t interested in value. They think that Wal-Mart has low prices. But it might not be the best value. You buy the Bic pen and it costs you a few cents, but then it leaks all over your nice shirt, where the Montblanc baby, that’s looking good. Not only that, people know you’re in business, you’re serious. You got the Montblac going. So, earnings is a big deal. Well how much are you going to pay for earnings? Picture this; if what I receive when I buy stock is a share of the earnings, picture it as a box that spits out money, a machine that spits out money. How much money does it spit out? That’s going to determine, what people are going to pay is going to be determined by how much money it makes, right? So usually the more money it makes, the more they’ll pay for the stock. Of course, they issue different types of stock and different numbers of

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shares. Why is one worth $300 a share; do they earn that much more? Not necessarily. So we need to learn a few things here about earnings, and we do that by looking at the income statement, the balance sheet, and some relationships between some of the stuff.

So let’s check it out. I’m going to teach my kid about earnings the same way you’re probably teaching yours. You can learn it in a book; you can learn it by having Daddy teach you. But the best way to learn about earnings is let’s go earn something, let’s start a business. So just like you, we gotta do the lemonade stand right? So introducing Tanner Brothers ice-cold lemonade, there it is, soon to be world famous I’m sure. Owner number one, five years old. Owner number two, only three years old. Do they know how to add? A little bit. Do they know how to multiply? Not really. Do they know how to divide and do ratios? Not even close. They’re only five and three, and they got their dad’s genetics, so let’s hope they do better than I did. But, Dad was a venture capitalist. We got a cash box and put some federal reserve notes, cash inside, and they said “Oh, this is our cash.” I said, “No it isn’t. We’re going to the store.” And they had to take the cash out, twenty of ‘em, and buy lemons and sugar. Probably have to say some taxes too, those were the costs. Then they had their inventory was set, and they hired an intern because they couldn’t afford an employee, so they went cheap. Hired an intern called their Mom; she was sharp, high quality cookies, high quality lemonade here. And so they started selling, man, gotta go out and sell. Number one skill of an entrepreneur, raising capital, venture capitalists and then selling inventory. Number one skill of an entrepreneur, raising capital, selling inventory baby.

And so, they had some revenue that they understood, some costs that they understood, and they saw the cash pot got bigger again. So they’re working on it, but you and I can do a little bit of math here, that’s $30 in earnings. So, on a Saturday, we know we can make $30 and that’s what we know we can do. So that’s cool. Got sixty glasses of lemonade, that’s awesome. Now, this pizza is owned by two people and it’s cut into a hundred different slices. So if we have one pizza and it’s cut into a hundred slices, and each of them have half the pizza, that means one guy gets fifty slices, the other guy gets fifty slices. Another word for slices is we’re gonna share and share like. How many shares do you have? Fifty, how many shares do you have? Fifty. Senior Partner has the tiebreaker and the voting rights in the LLC.

So here’s their $30 per share. They have 100 shares, so what do we have to do? We have to divide or split, right? We have to split that $30 up 100 ways. So if that $30 was the pizza and we cut the pizza in 100 different slices, we split, or another word is what, to divide. So we take 30 and we divide it by 100 or in other words, we split it in a hundred pieces, we get 30 cents. Each piece of the pizza represents 30 cents here. So that’s earnings per share. So here’s the question. If you’re a by-stander, and they’re willing to share this company with you; in other words, they’re willing

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to let you buy some of these shares. You know each share you get is gonna make you 30 cents. That means every Saturday you’ll make 30 cents for every share you buy-in from this company, right? Every Saturday you make 30 cents. So how much will you pay to make 30 cents? You’re a stock owner; you don’t have to do any of the work, you’re a stock owner. You simply buy-in this company. It’s 30 cents to you every Saturday, it looks like. That’s pretty cool isn’t it?

So we’ve gotta figure out how much we’re gonna pay if we’re going to have those earnings coming our way. There’s only 100 shares, lot of people are going to want to buy into this baby, lot of people. So we need a price to earnings ratio. And I hate that word ‘ratio’ because that means more fractions. So what did I say? Debt to GDP ratio, it’s just relationship. So this is just saying, hey what’s the relationship between the price of the stock and the earnings that the company produces? What’s the relationship between how much people are willing to pay and then receive? Well, our earnings for each share were 30 cents, so how much are investors willing to pay for every dollar this business is earning?

Well let’s take a look at it. We got the stock price here which is $3 it looks like. We got the earnings per share which is 30 cents. And so if we say, we take the stock price and we see what they’re willing pay $3 to get 30 cents. Well that’s a PE ratio of 10. So a PE ratio of 10 simply means someone’s going to pay $10 for every dollar that the company earns. That makes sense right now, right? 30 cents gets you three, so a dollar, it’s going to be about 10. So that makes sense right? That makes total complete sense. Not dollars, but sense. So price earnings ratio here is 10. So that already tells me, give you a little quiz here; do I want a price to earnings ratio that’s high or low? I want one that’s low, right? Because right here they’re paying $10 for dollar per earnings. I’d rather pay $5 for dollar per earnings, or $2 for dollar per earnings. But if you’re paying $100 for a dollar earnings, well that’s called a multiple. You’re paying 100 multiple.

So that’s another word for that is a multiple. How many dollars right here, so price earnings ratio really really easy actually right? You look at the price earnings ratio and that simply means I’m going to pay what? I’m going to pay $10 to receive $1 of the company earnings, and that’s what it is. $10 for $1 of earnings. If the price earnings ratio was 12, what would that mean? That means I’m paying $12 for $1 of earnings. If the price earnings ratio was 100, what does that mean? That means I’m paying $100 for $1 of earnings. That’s how it works. People say, “Well do people really pay that much?” Yes they do. Why? Well, one reason, they might think it has potential to make more money.

Think about this; if I buy the stock for $3, and then all of a sudden they start selling more lemonade, and they can sell $100 worth of lemonade. Well that would be really really cool because I only had to pay $3 for that. So that’s why they do it, for potential. In the dotcom boom, you had multiples of 200, people paying $200 for allowance of earnings. In fact they had PEs that were

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undefined, divided by zero. People were paying $10 for $0 earnings, why? Hoping someday they would. So this starts having to tell us the value. Yeah, I’m paying $3, well price doesn’t tell me anything. Oh you’re getting 30 cents of earnings, okay, now I see some value. Now I see what I’m getting. So a person who invests without seeing the price earnings ratio has no concept of value. “Oh, I’m paying $300 a share for Apple.” Okay, what do you get for that? How much of the earnings do you get for that? “Oh, I’m paying $35 $40 for PNG.” Oh, what do you get for that?

So people that buy stock without a knowledge of fundamental analysis and price earnings ratio, yeah they know the price they’re paying but they don’t know the value they’re getting. Remember this guy named Warren Buffett? He’s called a ‘value investor.’ I’ll bet you he knows the PE ratio every time he buys something. Market capitalization; what is the total company worth? Well, if you want to take this company over and you want to buy the whole thing, the share price is $3, there’s 100 shares so, what do you have to pay? $300. Why don’t they just use English? I don’t know, they have to call it ‘market capitalization.’ In other words, how much capital would you have to come to to buy this, right, and corner it? So that is simply the share price and the total number of shares times total number of shares gives you market cap. And since this is only $300 here, market capitalization $300, this would be categorized as a nano-cap, nano meaning small, as in nanometers and very very nanotechnology, tiny, nano. Apple’s not nano, though.

Check out Apple. $342.8 billion, $340 billion dollars. They just passed Exxon Mobil. Mark Gongloff here from Wall Street Journal says, “We’re looking up to Apple now. It might be for good.” Apple, largest public company in America. It just passed Exxon Mobil. And so the oil company is what, $339, Apple’s $342; they may stay there. Why do we care? Well large capture, usually we’re talking about companies that are worth $10 billion. In other words, if you bought all of their stock, bought every share at today’s price, it’s going to cost you more than $10 billion to buy a large cap company. The S&P 500, 500 large cap companies. Mid-cap, $2 to $10 billion. Small cap, $300 million. And then on down. Why do I tell you this? Well you might have someone pitch you a mutual fund and say “Oh we’re filled with large cap companies.” Or someone pitches you a mutual fund and you say “Well, we got mid-cap companies.” Someone pitch you a small cap mutual fund, “Oh, we got small cap companies.” Well what’s the difference?

Well, here’s the difference in theory. A large cap company like Apple, the idea is supposedly they’re well established, right? So if you add all these large cap companies, a lot of power here. Hey, one location closes down, they got plenty of others. They take a hit, break a pipe in the gulf like British Petroleum, what does BP stand for? Broken pipe, no it stands for British Petroleum. You break a pipe in the gulf, hey we’re large cap man, we got all kinda of money. We’re well established, our balance sheet’s big. But, maybe not as much growth potential, right? Proctor

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and Gamble, they’ve grown a lot. They’re gonna start selling more toothpaste to us all? More Charmin? More toilet paper? They don’t make really interesting stuff, just kind of regular needed stuff. A nano-cap company though; what if you invested in Steve Jobs when he was at this stage? Building circuit boards in his garage. Boy you’d have taken advantage of some huge growth right? So, small caps have potential for growth but greater risk because they don’t have as much, they’re not as well established. So when someone says, “I’m going to sell you a large cap fund,” well the theory is that you probably won’t have as much return, probably not much growth potential, probably not as much as return. But you probably don’t have to take as much risk either.

Someone will sell you a small cap mutual fund, well big time growth. They got room to grow. It could blow up, but it could also blow out. So it could do well or it could do poorly. So that’s kind of the idea between large cap, mid-cap, small cap. To do that you have to know kind of their earnings, and you kind of have to know the stock price, got to know the number of shares to figure that out, right? Earnings growth, we always like to see growth. Now look at these guys, ABC, they had some earnings today. Look at that, above zero, they made money. XYZ, they didn’t make money today, they lost money. So which one do we want to buy? And everyone says, “Hey, that’s a no-brainer, Andy. I’m going with ABC. I want the one with earnings.” Well, guess what, what if I do that? Ooh, maybe I don’t want that anymore. Maybe I want this one. Why? Because I’m worried about this trend here. I like this trend here. See these guys haven’t made any money yet, but this guy, this looks like Blockbuster video over here. They’re still in business, but they’re getting less and less earnings every single month. Obsolescence risk, I don’t like where they’re headed. This guy, this is Netflix, good idea but had to go into debt. If you’re gonna sell this thing nationwide, you don’t have any customers, you better raise some capital. They’re gaining more and more customers. We like where they’re headed and pretty soon, what do they have? They’ll have positive earnings and that’s when the stock really starts going up.

So, we like the trend. We’re looking at growth. We’re looking at trend, not just where they are today. See, that’s where they are today, but do it in the context of trend. So that tells me something about valuable. See, value is what I’m paying for. So if I’m paying for price, or if I’m paying for earnings rather, that’s part of value. But what about growth? Is one company that’s growing more valuable than a company that’s not? Even though these guys have earnings, these guys have what? They have growth. These guys aren’t growing. So which company is more valuable? We gotta think about that. We gotta think that through. So what we’re gonna do it, we’re gonna figure them all in. Let’s consider everything.

Let’s say, I’m going to look at the price I’m paying is one factor. I’m going to look at the earnings I’m getting is another factor. I’m also going to look at the growth of the company as another

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factor. Well I knew that Tanner Brothers Lemonade had a PE ratio of 10, which means I’m paying $10 in price for $1 of earnings. Paying a PE of 10, but I also see they’ve had 10% growth. So, what is the relationship? Remember that ratio, right? What is the relationship between their growth and their PEG ratio, their price earnings? Well here, if they have 10% growth, they have PE, they got a PEG of 1, which I will say, that’s not too bad. How do I know if that’s good or not? Maybe I compare it to other lemonade stands. I probably shouldn’t compare it to a computer business, ‘cause it’s not the same idea. Or maybe I should. What I should probably do is say hey, what is the average growth of the company? ‘Cause all I’m paying for is earnings if I don’t look at industry. I say, what’s the average growth of the company and what’s the average earnings? And I should be growing better than average and I should be getting earnings that are higher than average. And if I do that, I’m looking at value, and I’m therefore called a value investor.

So here’s a PEG of 1. Well look at this. If I was paying $20 for $1 of earnings, let’s break this down, if I’m paying $20 here and I’m only getting $1 of earnings, that’s not very valuable. And I’m only growing 10%, so that’s kind of a PEG at 2, over-value. ‘Cause see I can go here and I only have to pay $10 here to get $1 of earnings and I have the same 10% growth. That’s a pretty good value. Of course, if I can get $10 in price to get that $1 of earnings, I’m only paying $10 for $1 of earnings, but they’re growing at 20%. Shoot, that’s a killer value. That’s way under value. They should be charging more for that. So this one right here, heck of a value for the price you’re paying. You’re not only getting $1 of earnings here, but you’re getting 20% growth out of your company. Pretty impressive.

Of course if you start getting into .3 and maybe .2, you gotta start asking yourself some questions. That’s too good to be true. Why is their PEG so low? That’s like buying a Ferrari for $2. That doesn’t make any sense. So, how do we look at this? Well, we look at this. We wanna look, make sure less than $5, too good to be true. So I probably look at the historical performance of the company over the last five years, see if the PEG’s growing or see if it’s shrinking, see which direction it’s going. And then I’m going to, like I said compare apples to apples. How’s it doing within the sector of its group? Should I expect that much growth? I mean, hey, if I’m looking at a P&G, should I expect them to grow like a technology company? Probably shouldn’t expect that right? And then I consider both the future earnings potential and the current. What’s the future? Oh, demographics plus policy equals the future.

Looks like we’ve got a lot of young folks. We’ve got a lot of people who are interested in having iPads and iPhones; it’s part of the culture. They certainly like to text, that’s demographics. Apple’s policy is to come out with a new iPhone every single year almost. So policy, right, plus demographics equals the future. If you’re selling 8 track tapes, you might have obsolescence risk.

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I don’t think my teenagers, or my nephew’s a teenager, I don’t think they know what those are. So that’s price earnings and growth. Do you like this stuff? I think it’s way cool.

When we work on wealth building; we just talked about value, when we work on wealth building, we want to buy assets. So we get up in the morning, what can I buy today? You’re in buying mode. Everyday you’re trying to buy business real estate. You’re trying to get rid of your cash and buy something valuable. What is cash? It doesn’t do anything, it doesn’t generate anything. We want to trade in cash for a business or real estate or stock. So there’s vocabulary. I’ve been really talking with you a lot about vocabulary. So I might ask you a question. What’s the difference between an S-corp, limited partnership or limited liability company, and what’s best for you? Those are things you want to know for your business real estate. Let’s do 1031 Exchange. How would that help you in your taxes this year, would it? You gotta know what that is.

So we’ve been working on trying to find great stocks, right? We’re looking around at all these different companies, birds-eye view, we say okay what’s a PEG? What does a PE or market cap mean, and how does it relate to value? So in other words, vocabulary helps us, the knowledge helps us translate information into meaning. If I don’t have this knowledge, not have a vocabulary when I watch CNBC, read a periodical, talk with my advisors, or go to purchase something, the information has no meaning to me. So part of what we’re hoping to do is help you become aware, move along the education continuum towards proficiency, and it just starts with little bite sized pieces like this, moving along at a really good pace. Don’t want to wait forever to start making money; you want to make a good pace. And that’s what this is for. You know, commodities has vocabulary, [27:54, inaudible] ratio, it helps us see where things are without being clouded by inflation or currency. So important stuff that we’re learning here. So each asset class has its vocabulary.

So here’s a bunch of words, a bunch of information, a bunch of vocabulary. Let’s do a wealth building activity, and let’s see if we can put some meaning to these numbers and to this vocabulary. And you can practice by comparing several different stocks, comparing their value and what they do, one to another. And if you have some stocks, you can do this. You can use whatever free stuff, Yahoo Finance. You know I use software to trade stock, but you could do this, Google Finance, Yahoo Finance, they’ll find stuff. So here I’ve just kind of gone on the internet and found a financial site, and I’m going to use Apple for mine. You can put in something you own. So here we’ve got Apple and we can get quotes on that. But if you look, all the way down here at the bottom, I’ve got this down here, what does it say here, it says what? Key statistics, I’m going to circle that. Key statistics down here in the bottom left. And those key statistics are simply going

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to tell me this stuff here. It brings this up. And I put the income statement on here just so we can refer to what part of the financial statement this is kind of talking about.

So let’s go. First up, we got market cap. Hey, you guys know what that is. That’s if you bought the whole thing out. So if Apple’s $300 a share, you know how many shares they’ve split that thing up into. Pretty amazing. And so the market cap is just the total dollar value of the company. What would it take to buy the whole thing? Now, enterprise value, remember we’re talking about valuation here, these are all valuation measures; these are all things we use to find out the value. So, why would market cap give me some value here? Well, it tells me that this is large cap which means they’re pretty established. I might find more what? More value in having an established company, right? More value. What is the enterprise value? Well, that’s kind of like market cap. What it does, it takes the value of the whole company, but it also includes what? The cash they have. It includes their assets and it includes their liabilities. So it kind of tells us, if we just don’t look at the price of the company but if we actually owned it, we’d have some cash and some debt to deal with.

Okay, trailing PE. Trailing means yesterday right, trailing behind. What is this TTM? I bet is stands for ‘trailing twelve months’, what do you think? So over the last twelve months, right, what have their earnings been and then intraday, in other words, today’s prices moving intraday, what’s been the average price today? So if you look at the last twelve months of earnings and you look at the price today, I can see that I can get $1 of what is it? It’s what price we pay for $1 of earnings. So that means that I’m only paying $14.41 if I want a share in $1 of earnings. That’s pretty cool. I mean you figure, you buy that, it’s not too long before that thing’s generating money. Now, again, people say “If it’s only doing that twelve months, that’s 14 years before I get my money back.” But you gotta figure, what about growth?

The forward PE, it’s looking like it might even be better. Which means they think they’re gonna earn some money. But don’t be deceived; that’s not a reason to hold off and buy-in the stock necessarily, ‘cause the price could be more expensive there. Think about it this way. Let’s say you buy a house and the house costs $120,000, and you get the rent, and let’s say the rent is $2,000. So see people will pay this price, this is the P, will pay this price to receive E, this earnings, right? Well if I pay this now, maybe in the future I’m locked in. See I paid $120, and maybe in the future it’s making $5,000 a month in rent. See that? So people pay these prices now because they think their earnings might go up in the future. You follow?

So just because it has a PE of $11 in the future, you may want to buy it now. So that’s the paying for earnings in the future. You look at $4 PE, that’s just expected. So you want to make sure, FYE, what’s that stand for? Oh, fiscal year end? In the fiscal year, ending September 25th, we think this will be the PE. Well, that’s not a guarantee is it? Things can happen. So anytime you look at

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something forward, that’s what they think might happen. They think that’s likely. But it’s not guaranteed. PEG ratio, 5 years expected, this is pretty good. Remember Tanner Brothers at $61? That’s pretty darn good, man, you know what that means? That means they’re growing. That means this company’s earnings have been growing and growing and growing and growing. And think about that, Apple sure, their stock’s gone up to $300 a share, so you figure when you pay $300 a share, you’re paying $14 for every $1 in earnings. You’re getting a lot of earnings at $300 a share. So what’s been amazing really about Apple is yeah, their prices exploded, but so have their earnings growth. They’re selling iPods and iPhones and all kinds of i-stuff all around the world.

So your PEG ratio is your price but also figures in your earnings and your growth. So looks like they’re growing. Looks like they’ve got some really decent earnings and they’re growing. $6.1, killer PEG ratio. We’d want to compare that to others in the industry and others against the S&P 500, see how they’re doing. Price, notice these things, price to sales. So in other words, they’re having income here. They’re selling stuff. That’s not earnings, that’s just the sales. This isn’t taking in the expense, it’s just the sales. So, how many sales are you getting for what you’re paying? You’re only paying $3 to get $1 in sales, that’s pretty impressive. Price to book, what’s price to book mean? Price to book is this, your book value, in other words, what’s on the books? Well that’s what you’re paying for your assets, most recent quarter anyway, MRQ. So price to sales, price to book, how much you’re paying for the assets.

Hey, enterprise value, this is another ratio right? So in other words, we have this enterprise value as it relates to the revenue, again the income. EBIDA, that sounds like something from my friend Tom Wilright Robert’s CPA, how about this; earnings before maybe interest, taxes, depreciation, and appreciation, something like that. That sounds good to me. So in other words, what’s the enterprise value according to the earnings? Not just the revenue but also the earnings. Very fun stuff. So there’s a wealth building activity for you. Go look at your stocks. See how you compare against the S&P 500. See how you compare against other stocks that you could be holding. You might be not poised to grow as much as another. You might be paying more for $1 earnings than you think. So, start learning a little bit about value, fundamental analysis, so the strength of an entity.

Let’s do a comparison. Here’s P&G, Proctor & Gamble, large cap, large cap, both of them above $10 billion. But let’s look at this right here, let’s look at the trailing PE at $14. Let’s look over here at the trailing PE at $14. So I’m paying $14.89 for $1 earnings here, and over here I’m paying $14.41. Pretty much the same right? $14 for $1 of earnings. So, this is $300 a share, PNG, they’re probably somewhere in the $30-$40 a share, so why would I, what’s the difference? How do I choose? How do I find what’s valuable? Well look at the PEG ratio here. This looks like this is poised to grow a lot more than this one’s poised to grow, do you follow? So if I’m looking for just

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price to earnings, it’s pretty comparable. But here I’m paying $1.55 for those earnings and their growth. And here I’m only paying $.61. Look at this, $1.55 for price earnings and growth, well here it’s only $.61. So over here, this is the growth company isn’t it? This is the growth company.

But here’s the other thing I’ve gotta realize. Apple is a growth company which means, yeah I’m paying $14 for $1 earnings. Problem is, I don’t get any of that earnings. Why? Well, the board, the shareholders can vote for the board, the board, the CFO; they’re going to decided, hey, should we do a dividend? Should we actually give this money to the people who own the company? Or should we reinvest this for even more growth? Can we try to get ourselves even bigger and dominate more market share? It is technology. There’s obsolescence risk. Maybe we better take our earnings and invest in research so we can make smaller iPads that are faster that have longer battery life. And maybe we need to keep up with this, so we take all our profits and we invest in growth, which will make our stock price go up because we’re more valuable. ‘Cause we’re getting even more earnings, because we invested in growth.

And so if a person wants growth, they’re thinking “Hey, I’m gonna do this and buy Apple at $300 so I can sell it at $6”, like Google or something. Of course, if a person wants dividends, they’ll pay a dividend of P&G. So over here, you’re going to pay your $14 for earnings that are going to be reinvested in for growth. Lot of people upset with Apple, they aren’t paying it back. Well, don’t be upset, just learn to do fundamental analysis. If you want some money back, buy P&G. $14 gets you $1 earnings; they’re gonna take some of that earnings and give it back to you. Go buy Verizon, they pay a dividend. So do you want growth? Do you want to try and buy the stock at $300 and sell it at $6? Or say hey, look I just want to buy P&G. I want to hold on to it for a while. It might not grow that much, but at least I’m getting paid each month. That’s an important part of fundamental analysis. It’s also an important part of cash flow. We’re gonna do a class on cash flow, but I get email from people all the time saying, “Should I buy silver? Should I buy gold? Should I buy stock? Should I buy Apple? Should I buy this?” Well, you need to know what you want to buy before you buy it. You need to know what your goals are. So maybe we should talk about that for a minute.

END OF FUNDAMENTALS – MODULE 3

the 4 pillars of investing fundamentals: module 3 · gotta pay employees too, right? they have...

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