Buffett Fundamental Investing

Buffett Fundamental Investing.

How to Pick Stocks Like Warren Buffett by Timothy Vick
http://www.amazon.co.uk/exec/obidos/ASIN/0071357696/qid=1068162894/026-
2297028-0123661

1.Intrinsic Value = sum total of future expected Earnings with each year's Earnings
discounted by the Time Value of Money.

2.A company's Growth record is the most reliable predictor of its future course.
It is best to average past Earnings to get a realistic figure. Each year's
Earnings need to be discounted by the appropriate discount rate.

3.Is the stock more attractive than a bond? Divide the 12 months EPS by the current
rate of long-term Government Bonds e.g. EPS of £2.50 / 6% or 0.06 = £40. If the
stock trades for less than £40, it is better value than a bond. If the share's
earnings are expected to grow annually, it will beat a bond.

4.Identify the expected Price Range. Project future EPS 10 years out, based on
average of past EPS Growth. Multiply by the High and Low PE Ratios to find the
expected Price Range. Add in the expected Dividends for the period. Compute an
annualised Rate of Return based on the increase in the Share Price. Buffett's
hurdle is 15%.

5.Book Value. Ultimately, Price should approximate growth in Book Value and in
Intrinsic Value. Watch out for increases in Book Value which are generated
artificially a) issuing more shares b) acquisitions c) leaving cash in the bank to
earn interest, in which case ROE will slowly fall. Buffett is against the use of
accounting charges and write-offs to artificially improve the look of future
profits.

6.Return On Equity. ROE = Net Income / (end-of-year Shareholders' Equity +
start-of-year Shareholder's Equity / 2). [Shareholders' Equity = Assets -
Liabilities.] Good returns on ROE should benefit the Share Price. High ROE ~
EPS Growth ~ Increase in Shareholders' Equity ~ Intrinsic Value ~ Share Price. A
high ROE is difficult to maintain, as the company gets bigger. Look for high ROE
with little or no debt. Drug and Consumer product companies can carry over 50%
Debt and still have high ROEs. Share buy-backs can be used to manipulate higher
ROEs. ROE should be 15%+.

7.Rate of Return. 15% Rule. Collect and calculate figures on the following:

i current EPS

ii estimate future Growth Rate or use Consensus Forecasts

iii calculate historic average PE Ratio

iv calculate Dividend Payout ratio


Stock Evaluation. Can a company earn its present Market Cap. in terms of future
Profits? Does the company have a consistent record of accomplishment?

Shares are Bonds with less predictable Coupons. Shares must beat inflation, Government Bond Yields and be able to rise over time. Shares should be bought in preference to Bonds when the current Earnings Yield (Current Earnings / Price) is at or above the level of long term Bonds.

When To Sell:

i Bond Yields are rising and about to overtake Share Earnings Yields.

ii Share Prices are rising at a greater rate than the economy is expanding.

iii Excessive PE multiples, even allowing for productivity and low interest rates.

iv Economy cannot get any stronger.


Takeover Arbitrage:

• Buy at a Price below the target takeover Price.

• Only invest in deals already announced.

• Calculate Profits in advance. Annualised return of 20-30% needed.

• Ensure the deal is almost certain. A widening spread may mean the worst.



General Criteria:

• Consistent Earnings Growth.

• High Cash Flow and low level of Spending.

• Little need of long-term Debt.

• High ROE 15%+

• High ROA (Return on Total Inventory plus Plant)

• Low Price relative to Valuation.