While I agree with all you say, BrittleRock, the point of the remark is that we always have to take anything we learn from the past and apply it to our view of the future. What you call the runway is an example of this. Suppose we have a company who four years ago had 20% of the market and now has 80%. That’s fantastic growth, but we can hardly expect that to continue even 1 year in the future. Likewise a company with fantastic earnings growth over the last three years who has a new competitor with a clearly superior product. Our company may or may not get displaced because winning and keeping customers is about more than just having the better product, but we clearly need to think differently about the future than we would if we looked only at past performance.
Personally, this is why I am fairly skeptical about all numbers that are distillations of other numbers. For me, the need is to understand the company, product, and market. This involves numbers, but fairly raw numbers and a lot more than numbers.
My dissertation advisor had a rule that he drummed into our heads that no analysis meant anything until we had made biological sense from the results. Given that this was coming from the person more responsible than anyone else for introducing several forms of multivariate analysis to biological anthropology, I found it particularly sage advice. I think it applies equally well to investing.
I completely agree - I was trying to give you my interpretation of what I perceive to be Saul’s analytical approach with respect to financial reporting. This is obviously not the only tool in his bag (per the XPO example).
If you read some of my earlier posts from this year (I don’t think I have any earlier than that) you will see that my own approach to making investment decisions is not very different from what you described. I am good at math (I have a minor in it). I spent 20 years of my 30 year IT career in what was pretty much an analyst role. Yet, I struggle with the typical financial analysis of a business. I tend to look at the business operations - what do they do, how do they do it, where do they fit in the market, what’s their competitive advantage, etc.
When it comes to financial analysis, it’s not the math, and it’s not the process, it’s separating the relevant from the irrelevant that gives me heartburn. For sure, there’s more numerical data than we need. And especially when it comes to ratios and various derivatives it can easily make your (I mean my) eyes glaze over. This is one of the reasons I like Saul’s approach. Of course it’s fallible and of course it’s not everything - but given the amount of numerical data I believe that he suggests the most informative things to look at are earnings and price.
In my opinion, Saul’s investing strategy is far more complex and subtle than looking at two financial indicators. He obviously employs techniques which are not quantitative and quite possible defy description. I think intuition plays a larger role than even Saul is able to define. He’s more than once said that he will not provide a running post of all his transactions because (among other reasons) he doesn’t want to have to justify every action he takes - possibly he wouldn’t be able to provide a meaningful reason other than he felt it was the right thing to do at the time.
The question I have which does not seem to have an answer in all these posts is how is this new stat to be used in the investment decision process? Is it just a nice-to-know or does it play a material role in what to invest in or how much to invest?
Have you an opinion on that, or are you still toying with it yourself?
To be sure, there is nothing hard about the math itself, mostly addition and subtraction and the odd bit of multiplication and division. It is knowing which numbers to do it to which gets hard. I used to sell an ERP suite and became long term business partners with my customers and it was interesting how often their accountants didn’t really get the GAAP principles and needed nudging in the right direction.
One of my customers was SYBEX, a publisher of computer self-help books. That was a business where it was essential to understand the demand curve or one would do things like order a reprint just before a large number of returns would come in, leaving one with a large stock of essentially unsaleable books. So, we created monitoring tools and trend analysis tools which worked quite well, but then one doesn’t really have those tools for a business in which one is investing. The best one can do is something like Saul’s charts.
Chris - Wow! You have placed me among some very good company. I thank you for the vote of confidence, but I caution you to read my posts with a lot of reservation.
I am not nearly as knowledgeable as the other contributors you cited. Like many who visit here, I sit near the foot of the table to feast on the rich experience and wisdom of Saul, our very generous host, and a few others who are worthy of sitting near the head of the table.
Hi brittlerock,
As one who also sits near the foot of the table, I find your posts to be very thought provoking, like many other posts on this board.
>> FB has a PE of 47.8 divided by an earnings growth of 94% so
>> its 1YPEG is .51
Saul, I must be doing your math wrong ...
I went and got the quarterly reports for Facebook ([http://investor.fb.com/eventdetail.cfm?eventid=154637](http://investor.fb.com/eventdetail.cfm?eventid=154637)), and this is what I come up with:
Today Price 83.98
EPS FY14 1.10
1Y trailing P/E 76.35 (83.98 today price divided by 1Y trailing earnings of 1.10)
EPS FY13 .59
1Y Growth 86.44% (FY14 EPS of 1.10 divided by FY13 EPS of .59 == 1.8644)
1YPEG == 1.4234 (1Y trailing PE of 76.35% divided by 1Y growth of 53.64%)
I must have two of the numbers backwards when dividing to get something that looks like a reciprocal of what you shared, but I've re-read your more detailed descriptions in post #7456 multiple times:
>> Then you divide your trailing earnings into today's stock price and you have
>> your current PE.
>> You divide the increase in earnings this year over last year by last years
>> earnings and you have the rate of growth of earnings.
>> You divide your PE by the rate of growth of earnings and you have your 1YPEG.
Double-check me??
Sorry for the confusion. I always use adjusted earnings, which I have noted many times. For more color on why, please go to the FAQ (Post #7062), and use your “Find” feature to find “adjusted”, and you’ll have it. Here’s a short excerpt:
* I pay no attention to GAAP earnings and only look at non-GAAP or adjusted earnings. I know this bothers some people, but it’s what I do. I feel that GAAP earnings ridiculously distort the picture. (Consider company X that has a big tax benefit this quarter and reports huge GAAP earnings, and then next year they pay normal taxes and looking at GAAP, it appears as if their earnings have tanked, just for a trivial example. Or company Y that has outstanding warrants. If their stock price goes up, GAAP rules makes their apparent GAAP earnings go down due to repricing of warrants. Just nonsense. I especially remove stock-based compensation as an expense). [Post 6]
As you see, that gives trailing earnings of $1.73, a PE of 47-48, and a growth rate of 94%. Hope that helps. But do check out the FAQ/Knowledgebase. A lot of work has gone into it and it’s well worth the effort.
Oops. I didn't mean to use the GAAP numbers, so let's try again. Using data from
[http://files.shareholder.com/downloads/AMDA-NJ5DZ/74559630x0...](http://files.shareholder.com/downloads/AMDA-NJ5DZ/74559630x0x805520/2D74EDCA-E02A-420B-A262-BC096264BB93/FB_Q414EarningsSlides20150128.pdf)
(which is slightly different from what you posted -- did you add/subtract something else?):
2013: .13 .21 .27 .32 ( .93 FY13 tot)
2014: .35 .43 .43 .54 (1.75 FY14 tot)
Today Price 83.98
EPS FY14 1.75 (non-GAAP 1Y trailing earnings)
P/E 47.99 (today price of 83.98 divided by 1Y trailing earnings of 1.75 == 47.99)
EPS FY13 .93 (non-GAAP)
1Y Growth 88.17% (1.75 divided by .93)
1YPEG == 0.544 (76.35 1Y trailing PE divided by 1Y growth of 88.17%)
That's much closer to your 0.51 from a few days ago, so I think I got it. Thanks!!
Need to Google spreadsheet this quick calc so it's not prone to my error again. Even
better if the =googlefinance() stuff will pull in prior quarter EPS numbers for me... :)
(I have read the FAQ, more than once in fact! Good stuff.)
Replying to my own thread with a Google Spreadsheets calculator to do the math for me; figured others might find it useful. You still have to hunt down the non-GAAP EPS data for last 8 quarters/2 years from the investor sites, but once you enter that info, that the rest is done for you.
You’ll have to copy this to your own Google Spreadsheet (or download to Excel) to edit.
As instructed, enter only the quarterly data or the EOY EPS totals. If both are entered, the EOY total will take precedence and be used in calculations, so be careful you don’t leave another company’s EOY data in there when you switch and start entering per-quarter data for the next company.
1YPEG == 0.544. That’s much closer to your 0.51 from a few days ago, so I think I got it.
Hi again, I didn’t try to figure out the small difference, as PEG’s of 0.51 and 0.54 would give you absolutely identical conclusions with regards to investing. I think that FB was just a few dollars cheaper in price when I figured it.