I think the best way is to be ok with missing the investment if it goes up after you don’t buy.
That’s a very nice way of looking at it Chris. Investing is making choices. You can’t buy all the stocks (without having a big index fund yourself). Some stocks you pass on will go up. It’s guaranteed! Personally I don’t even think about them. I just care about how the ones I bought are doing.
Saul
Very interesting post.
How did you decide on 17 billion? 
I have heard of this way of looking at things but honestly didn’t fully understand it. Let me see if I can pull in some comparisons for your 17 billion dollar investment:
I had added an “Our Share of Earnings” column to my portfolio spreadsheet about a month or so ago (earnings per share * number shares owned). It was interesting. I should now add an earnings / price column, huh? Wait, is this PE, no, wait, you’re calling it earnings yield (separate from dividend yield, of course).
So your 17B in Facebook would return a 1.31% yield, similar to UA, vs an Apple, which would return a 5.92% yield, plus a 1.9 dividend. (Can we add those up? Or is the dividend a chunk out of the earnings, I think that is correct.)
So Apple is more of an earnings machine. But it is less of a growth machine, or is it?
Wait, I want to look at Walt Disney:
Wait, Skyworks.
Skyworks has a 3.49% yield, much beefier than Under Armor.
Back to Disney.
Disney, the 100+ year old company has a yield of 4.25%, including a buck fifteen paid out as dividend. Hot dog!
I am actually not 100% sure I am getting the point. Let’s refocus. You are basically saying that today’s UA yield of 1.4% ain’t good enough for your 17 billion because you’d do better, with much more security, in a Treasury. And you want to be compensated better for the degree of risk you are taking with Under Armor. Is that right?
Based on my calculations, would you be more enticed by DIS or SWKS for your 17b?
Karen
OK, now I am going to have to try to figure the growth rates for FB, DIS and SWKS for my other example for earslookin's 17 billion investment:
OK. Um, OK.
I'm looking at Facebook's investor relations Web site, for their 2014 year end earnings.
2014 2013 CHANGE
GAAP EPS $1.10 $0.80 37.5%
Non GAAP EPS $1.17 $0.93 25.8%
GAAP Net Income 2,940 1,500 96%
NON GAAP Net Income 4,713 2,334 101%
Yo, look at me looking up the numbers! Woot Woot!
So Facebook is growing somewhere between 25 and 100% last year?
When you say Adjusted earnings, then you are looking at EPS and wait..
Skechers is growing faster than Facebook? Is that right?
Well, OK. FB is kind of big.
Facebook's PE is also listed rather high, not as high as UA.
So your sweet spot is fast growth rate plus good earnings yield plus low price earnings.
Please remember though that there is a difference between a company doing well and a stock doing as well, if the stock price already has an enormous amount of growth factored in.
This is going to be difficult. See, great companies are fun. UA is tons of fun, but I see what you are saying about the price issue. It’s looking much harder to find the sweet spot of reasonable price / high growth / big earnings.
Like, you can find big earnings and slow growth pretty easy.
You can find high growth high price pretty easy.
All three? Hmph.
It’s looking much harder to find the sweet spot of reasonable price / high growth / big earnings…All three? Hmph.
Hi Karen, How about these:
BOFI - Earnings growth last year 38.5%, Tangible Book Value growth 35.85, PE 20 (very reasonable price).
SKX - Earnings growth 158%. PE 24%
SWKS - Earnings growth 88%. PE 25%
They are out there.
Saul
I do like Cramer and I listen to a lot of what he says. FWIW, he is a huge SWKS and SKX fan too. I have never heard him talk about BOFI.
Cramer has also predicted FB going to $100 and he was very positive about AAPL getting to and above $100 after the split.
I listen to lots of people and the diversity of inputs helps me (when I don’t get too tangled up in the conflicting world views.) Actually there is probably more in common among Cramer and Saul and the Pro team than meets the eye.
Karen
Here is an article I read a while ago about earnings yield but that I didn’t totally dive into:
http://www.joshuakennon.com/earnings-yields-vs-treasury-bond…
Hi Karen,
All good questions. Let’s see if these answers help. If not, please feel free to ask for further explanation.
How did you decide on 17 billion?
As of last Friday UA had roughly 214 million shares outstanding and the price was $79.41 per share. If I wanted to buy all the outstanding shares – becoming the sole owner of the company – it would cost me 214M shares * $79.41 per share = approximately $17 billion. In reality this would never happen. You and other shareholders would probably want much more than $79.41 for your shares because you’re giving up the chance to get a higher return as UA grows. But I used this number for simplicity.
Apple would cost me $730 billion (5.82 billion shares out * $125.32/share).
FB would cost me $228 billion. DIS $180 billion. SWKS $18 billion.
In all these cases, that’s if I wanted to become the sole owner of the company.
So Apple is more of an earnings machine. But it is less of a growth machine, or is it?
Yes, less of a growth machine. If UA grows 10 times it will be a little bigger than Nike today in market value. If AAPL grows 10 times it will be a little bigger than Canada today in market value. Size limits growth. AAPL’s P/E is about 17 whereas UA’s P/E is about 84. That means that investors think UA is going to grow much more than AAPL.
You are basically saying that today’s UA yield of 1.4% ain’t good enough for your 17 billion because you’d do better, with much more security, in a Treasury. And you want to be compensated better for the degree of risk you are taking with Under Armor. Is that right?
Yes, that’s right.
I can’t compare a P/E to a Treasury yield because P/E and yield are different measurements – apples to kumquats. But if I flip P/E on it’s head – earnings yield is the inverse of P/E – then now I can compare two yields. Earnings yield is just 1 divided by the P/E. For UA this would be 1/83.59 = 1.2%, or alternatively it is the EPS divided by price so .95/79.41 = 1.2%. You can calculate it either way.
So if UA were never to grow I’d only be getting 1.2% on my money every year going forward. The 10-year Treasury is roughly 1.85% and is much safer credit wise than UA. I’d be crazy to invest in UA if it weren’t going to grow it’s earnings. However, UA is growing earnings at 30% per year. If UA is going to continue to grow then that might make it more attractive than a safer 1.8% because down the road my UA earnings yield would be much higher than it is today, and would pay me back for taking the extra risk. This is because of the power of compounding.
The other thing is that it is not just growth. It is also about how the company is going to finance the growth. That is a whole 'nother story we haven’t talked about yet.
Based on my calculations, would you be more enticed by DIS or SWKS for your 17b?
P/E and earnings yield are just one tool in the investor toolbox. And there are a number of limitations to these tools which we haven’t yet talked about. So to answer your question, I would not be enticed or unenticed (is that a word?) to either one just knowing the P/E or earnings yield. Those tools would just point me in a direction for further research.
Hope this helps.
Ears
something I like to look at also is the p/e over time. Ycharts has great historical data and while UA has never been cheap it has been in p/e range of 30-50 and has shot up recently to be in the 80-90 range so an non-insignificant part of their price increase has been an increase in price instead of driven by their earnings. From my eye they look pretty expensive.
Here’s a picture of UA and SKX using Saul’s graphing technique:
https://drive.google.com/file/d/0B8bBByJ1RunbOXJJYlQ0WWk5ZzA…
These kinds of charts are most effective when you compare one business to another in the same industry.
SKX has had very uneven earnings – like Forest Gump’s box of chocolates, you don’t know what you’re going to get. UA’s earnings have been very consistent. Investors like consistency.
SKX price is very close to the earnings line. UA is way above. For UA, the gap has been widening between price and earnings. Not usually a good sign for those looking for a bargain. Like trying to get a ticket to the Super Bowl the day of the game.
The best time to buy both of these would have been when people were most fearful – in March 2009.
SKX earnings illustrates a minor problem with this graphing approach. SKX earnings were negative for a time between 2011 and 2013. Log scales can’t display negative numbers. You have to find a work-around, none of them ideal. I’ve chosen just to blank out the numbers – where you see the hole in earnings for SKX, that’s where they had negative earnings.
The quarterly earnings numbers were download from my online broker. Prices were download from Yahoo (adjusted close).
Thanks,
Ears
4) The best time to buy both of these would have been when people were most fearful – in March 2009.
If only one had access to a time machine… LOL
Living as we do on the right edge of price charts the view is very different coming and going, it’s like driving with a clear rear window and a fogged up windshield. One day I was driving on a curvy road doing about 40 or 50 MPH when the windshield shattered making it impossible to see through it. I knew I had to slow down but not by jamming on the breaks. I tried to poke my head out the side window. Of course, the guy behind starts honking his horn like mad. The good news is that I’m here to tell the story.
And the moral of the story is that investing is like driving with a shattered windshield. LOL
Denny Schlesinger
I own both Sketchers and UnderArmour. I feel like Sketchers is a hot stock but at any moment I expect the shoes to go out of favor completely and the stock to nose dive. UnderArmour on the other hand has a huge and growing following and a solid brand name.
But the thing that really gives me confidence in UA stock is that Notre Dame took stock for most of their deal and they know a thing or two about really good investments.
University of Cincinnati just signed on with UnderArmor this month and everybody here in Cincinnati is very excited, too.
I know the above isn’t analytical stock decision-making but I think there is truth in it somewhere.
Foll on!
J.
Explorer Mission
Long on UA and Sketchers
I like UA. Have for a while. Yes, the valuation is a bit high, and I have trimmed the position over the years as it grew, but they are delivering on that growth (wearables, sports contracts, international, etc). It’s also one of the perennial darlings of wall st (for now at least).
I like SKX too, the valuation is more reasonable, but I think the product is more fickle, and definitely not a story for anyone beyond the numbers. One miss on growth or light forward guidance and I think it goes down hard. Between the 2, SKX has been less consistent in growth and I think has less of the broader market to get into. It will always be a mid tier, mid priced shoe with no particular name brand appeal. That said, stuff like that sells, and if they manage it well there is growth there… but they get little premium beyond the growth they show.
I don’t really think these 2 companies are an apples to apples comparison. In UA, you risk slowing growth bringing the stock price down with it as the PE shrinks. With SKX you risk the inconsistency in earnings that can happen if they have some bad quarters.
But the cool thing is, I can have positions in both stocks and have them be good investments, even if I am only a customer of one company for their products. They are both growing and I think will provide good long term returns.