The Hunt Report
Howdy Y'all and Welcome to the Hunt Report,
To give you an introduction to my screening: I am what is known as a "value" investor, ie, a "Graham/Dodd" or "Buffet" style investor. I buy companies that are selling CHEAP relative to their earnings and growth. How do I assess value? Two ways: PEG and DCF. PEG is the P/E to growth (PEG) ratio. For a discussion of this metric, read the Motley Fool series of books, or "One Up on Wall Street" by Peter Lynch. The website moneychimp also has a nice discussion of the same:
http://www.moneychimp.com/articles/valuation/peg.htm
Suffice it to say, a PEG less than 1 is "undervalued."
So that is my first screen. Is the stock's PEG less than 1? I will note all of my holdings PEG.
I then screen for things that would increase risk, such as high debt levels, low cash reserves, company size, consistency of earnings, etc...
If it passes these screens, I look at the industry. Is this a high growth industry? Do I have an intuitive feel for where this industry is heading? So for example, we are sitting on top of a housing bubble. So even though many housing stocks are valued CHEAP here relative to earnings and future earnings estimates, I strongly believe this industry is headed down from here, not up. For that very reason, I sold out of my homebuilding stocks last summer, at a nice profit.
Finally, I look at the relative strength or trendline to know where to enter (ie, should I wait for a pull-back to buy? should I pull the trigger here? etc...). The IBD newpaper or www.investor.com or www.clearstation.com or a host of others can tell you whether the stock is overbought or oversold, and so give you some idea as to whether you can expect to get some at a cheaper price. This doesn't always work in a rapid-rising market, however. No matter, if you are really buying at a CHEAP valuation, then this shouldn't matter too much, because if it goes down a little, you will simply buy more.
So, how do we know what our sell targets are? This is a bit more tricky. You want to have some kind of guesstimate about what a "fair value" for the stock would be. In other words, at what price would the PEG equal one, or the more correct way to look at, as a function of discounted cash flows (DCF). That is, all the cash the company should give to you over the time you own it. For a nice discussion of how to value a company, go here, and follow the links:
http://www.moneychimp.com/articles/valuation/stockvalue.htm
The correct way is by looking at the earnings per share (Yahoo lists the same), and then conservatively estimating (perhaps based on past performance or other companies of the same size or your own intuition or ?) the RATE of growth per year of the companies earnings. I will always give a range so that I know what the valuation should be, given a specific estimated earnings growth rate. This is how I do my annual reshuffling.
For a quick and simple calculator that will give you the same, go here:
http://www.moneychimp.com/articles/valuation/dcf.htm
Ok, finally, here are my current favorites and largest holdings (other than NATUF, which I am just trusting you on ;^):
Symbol: CEO
Industry: Energy
Current Price: $88.03
the P/E/G is 0.43 (P/E = 10.1 divided by the analysts annual estimated growth rate (AEGR) of 23.6% for the next five years)
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
$84.31 at 10% ann growth for next 5 years (0% after)
$102.12 at 15% growth "
$123.03 at 20% growth "
$147.45 at 25% growth "
So even if you are fairly conservative such as I, and estimate 20% growth for the next 5 years, and then 0% growth after that, I get a price target of $123.
Symbol: UNT
Industry: Energy
Current Price: $58.50
the P/E/G is 0.3 (P/E=13.7 divided by the analysts annual estimated growth rate (AEGR) of 45.5% for the next five years)
Given EPS (Yahoo) of $3.43, and assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
15% AEGR: $56.32
20% AEGR: $67.85
25% AEGR: $81.31
30% AEGR: $96.95
35% AEGR: $115.02
40% AEGR: $135.82
45% AEGR: $159.63
50% AEGR: $186.78
Now, yoy quarterly earnings growth was 134% last I checked, so I think even 30% growth is not a bad guess...but I'm conservative...the analysts average estimate is 46%/year for the next 5 years...So my current target is $96.95.
Symbol: PKX
Industry: Steel
Current Price: $59.30
the P/E/G is 0.37 (P/E = 4.1 divided by the analysts estimated growth rate of 11.2% for the next five years)
Diluted EPS: $14.72
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
$133.82 at 0% ann growth for next 5 years (0% after)
$145.20 at 2% growth "
$151.20 at 3% growth "
$157.41 at 4% growth "
$163.85 at 5% growth "
$207.42 at 11% growth "
Now their year-over-year quarterly earnings growth was over 40%. Analysts are estimating 11.2% AEGR, so lets just say that they are estimating this beast to be worth $207.42. So even if you are fairly conservative such as I, and estimate 5% growth for the next 5 years, and then 0% growth after that, you get a price target of $164. CHEAP here!
Symbol: HMSY
Industry: Healthcare IT
Current Price: $8.20
the P/E/G is 0.66 (P/E = 24.7 divided by the analysts estimated growth rate of 37.5% for the next five years)
Diluted EPS: $0.47
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
15% AEGR: $7.72
20% AEGR: $9.30
25% AEGR: $11.14
30% AEGR: $13.28
35% AEGR: $15.76
40% AEGR: $18.61
45% AEGR: $21.87
50% AEGR: $25.59
"HMS Holdings Corp. furnishes cost containment, revenue recovery, cost reporting, and business office outsourcing services to healthcare providers and payors." When I am a billionaire, I will buy this company. Given the dedicated cost cutting efforts promised by many hostpital/gov/business ceos, I think we're postitioned nicely. Now, yoy quarterly earnings growth was 145% last I checked, so I think even 35% growth is not a bad guess...the analysts average 5-year estimate is 37.5% ...So my current target is $15.76.
Symbol: SIMO
Industry: Semiconductor- Flash memory controllers
Current Price: $15.90
the P/E/G is 0.56 (P/E = 19.5 divided by the analysts annual estimated growth rate (AEGR) of 35.0%/year for the next five years)
Diluted EPS: $0.47
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
15% AEGR: $11.82
20% AEGR: $14.24
25% AEGR: $17.07
30% AEGR: $20.35
35% AEGR: $24.15
40% AEGR: $28.51
45% AEGR: $33.51
Now, yoy quarterly net income growth was 164% last I checked, so I think even 35% growth is not a bad guess...the analysts average 5-year estimate is 35% ...So my current target is $24.15. Still not a lot of coverage on this one (IPOd last July), so give it time to catch on...
Symbol: TTM
Industry: Automotive (currently beaten down given problems at GM/Ford)
Current Price: $16.51
the P/E/G is 0.74 (P/E=14.9 divided by the analysts estimated growth rate of 20% for the next five years)
Diluted EPS: $0.82
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
$11.12 at 10% ann growth for next 5 years (0% after)
$13.46 at 15% growth "
$16.22 at 20% growth "
$19.44 at 25% growth "
$23.18 at 30% growth "
$27.50 at 35% growth "
Analysts are estimating 20%, so lets just say that they are estimating this to be worth $16.22. Now on this one, I'm more bullish than most analysts. I believe the rapid growth of India is besting even China in many respects, and they have a larger and faster growing middle class than China. My estimate is 30% minimum, so my price target is $23.18. That said, this is more speculative of a play on my part, because I believe that strongly in India's growth.
So there's my plays as I see them. I try to use 8% stops when I first enter a position, in case I've made a bad call. I learned the hard way on several stocks (JBSS, EVOL, NAVR, etc...) which I held all the way down to their lows for some time, just stubborn in my thought that they would bounce back. The problem is, until they do, it's "dead money," which coulda/woulda/shoulda been making you money.
To give you an introduction to my screening: I am what is known as a "value" investor, ie, a "Graham/Dodd" or "Buffet" style investor. I buy companies that are selling CHEAP relative to their earnings and growth. How do I assess value? Two ways: PEG and DCF. PEG is the P/E to growth (PEG) ratio. For a discussion of this metric, read the Motley Fool series of books, or "One Up on Wall Street" by Peter Lynch. The website moneychimp also has a nice discussion of the same:
http://www.moneychimp.com
Suffice it to say, a PEG less than 1 is "undervalued."
So that is my first screen. Is the stock's PEG less than 1? I will note all of my holdings PEG.
I then screen for things that would increase risk, such as high debt levels, low cash reserves, company size, consistency of earnings, etc...
If it passes these screens, I look at the industry. Is this a high growth industry? Do I have an intuitive feel for where this industry is heading? So for example, we are sitting on top of a housing bubble. So even though many housing stocks are valued CHEAP here relative to earnings and future earnings estimates, I strongly believe this industry is headed down from here, not up. For that very reason, I sold out of my homebuilding stocks last summer, at a nice profit.
Finally, I look at the relative strength or trendline to know where to enter (ie, should I wait for a pull-back to buy? should I pull the trigger here? etc...). The IBD newpaper or www.investor.com or www.clearstation.com or a host of others can tell you whether the stock is overbought or oversold, and so give you some idea as to whether you can expect to get some at a cheaper price. This doesn't always work in a rapid-rising market, however. No matter, if you are really buying at a CHEAP valuation, then this shouldn't matter too much, because if it goes down a little, you will simply buy more.
So, how do we know what our sell targets are? This is a bit more tricky. You want to have some kind of guesstimate about what a "fair value" for the stock would be. In other words, at what price would the PEG equal one, or the more correct way to look at, as a function of discounted cash flows (DCF). That is, all the cash the company should give to you over the time you own it. For a nice discussion of how to value a company, go here, and follow the links:
http://www.moneychimp.com
The correct way is by looking at the earnings per share (Yahoo lists the same), and then conservatively estimating (perhaps based on past performance or other companies of the same size or your own intuition or ?) the RATE of growth per year of the companies earnings. I will always give a range so that I know what the valuation should be, given a specific estimated earnings growth rate. This is how I do my annual reshuffling.
For a quick and simple calculator that will give you the same, go here:
http://www.moneychimp.com
Ok, finally, here are my current favorites and largest holdings (other than NATUF, which I am just trusting you on ;^):
Symbol: CEO
Industry: Energy
Current Price: $88.03
the P/E/G is 0.43 (P/E = 10.1 divided by the analysts annual estimated growth rate (AEGR) of 23.6% for the next five years)
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
$84.31 at 10% ann growth for next 5 years (0% after)
$102.12 at 15% growth "
$123.03 at 20% growth "
$147.45 at 25% growth "
So even if you are fairly conservative such as I, and estimate 20% growth for the next 5 years, and then 0% growth after that, I get a price target of $123.
Symbol: UNT
Industry: Energy
Current Price: $58.50
the P/E/G is 0.3 (P/E=13.7 divided by the analysts annual estimated growth rate (AEGR) of 45.5% for the next five years)
Given EPS (Yahoo) of $3.43, and assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
15% AEGR: $56.32
20% AEGR: $67.85
25% AEGR: $81.31
30% AEGR: $96.95
35% AEGR: $115.02
40% AEGR: $135.82
45% AEGR: $159.63
50% AEGR: $186.78
Now, yoy quarterly earnings growth was 134% last I checked, so I think even 30% growth is not a bad guess...but I'm conservative...the analysts average estimate is 46%/year for the next 5 years...So my current target is $96.95.
Symbol: PKX
Industry: Steel
Current Price: $59.30
the P/E/G is 0.37 (P/E = 4.1 divided by the analysts estimated growth rate of 11.2% for the next five years)
Diluted EPS: $14.72
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
$133.82 at 0% ann growth for next 5 years (0% after)
$145.20 at 2% growth "
$151.20 at 3% growth "
$157.41 at 4% growth "
$163.85 at 5% growth "
$207.42 at 11% growth "
Now their year-over-year quarterly earnings growth was over 40%. Analysts are estimating 11.2% AEGR, so lets just say that they are estimating this beast to be worth $207.42. So even if you are fairly conservative such as I, and estimate 5% growth for the next 5 years, and then 0% growth after that, you get a price target of $164. CHEAP here!
Symbol: HMSY
Industry: Healthcare IT
Current Price: $8.20
the P/E/G is 0.66 (P/E = 24.7 divided by the analysts estimated growth rate of 37.5% for the next five years)
Diluted EPS: $0.47
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
15% AEGR: $7.72
20% AEGR: $9.30
25% AEGR: $11.14
30% AEGR: $13.28
35% AEGR: $15.76
40% AEGR: $18.61
45% AEGR: $21.87
50% AEGR: $25.59
"HMS Holdings Corp. furnishes cost containment, revenue recovery, cost reporting, and business office outsourcing services to healthcare providers and payors." When I am a billionaire, I will buy this company. Given the dedicated cost cutting efforts promised by many hostpital/gov/business ceos, I think we're postitioned nicely. Now, yoy quarterly earnings growth was 145% last I checked, so I think even 35% growth is not a bad guess...the analysts average 5-year estimate is 37.5% ...So my current target is $15.76.
Symbol: SIMO
Industry: Semiconductor- Flash memory controllers
Current Price: $15.90
the P/E/G is 0.56 (P/E = 19.5 divided by the analysts annual estimated growth rate (AEGR) of 35.0%/year for the next five years)
Diluted EPS: $0.47
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
15% AEGR: $11.82
20% AEGR: $14.24
25% AEGR: $17.07
30% AEGR: $20.35
35% AEGR: $24.15
40% AEGR: $28.51
45% AEGR: $33.51
Now, yoy quarterly net income growth was 164% last I checked, so I think even 35% growth is not a bad guess...the analysts average 5-year estimate is 35% ...So my current target is $24.15. Still not a lot of coverage on this one (IPOd last July), so give it time to catch on...
Symbol: TTM
Industry: Automotive (currently beaten down given problems at GM/Ford)
Current Price: $16.51
the P/E/G is 0.74 (P/E=14.9 divided by the analysts estimated growth rate of 20% for the next five years)
Diluted EPS: $0.82
Fair Value (i.e., what is it worth?) assuming a 5-year revenue growth rate at given % noted below, and assuming 0% growth thereafter, and assuming an 11% discount rate, here's my DCF calculations:
$11.12 at 10% ann growth for next 5 years (0% after)
$13.46 at 15% growth "
$16.22 at 20% growth "
$19.44 at 25% growth "
$23.18 at 30% growth "
$27.50 at 35% growth "
Analysts are estimating 20%, so lets just say that they are estimating this to be worth $16.22. Now on this one, I'm more bullish than most analysts. I believe the rapid growth of India is besting even China in many respects, and they have a larger and faster growing middle class than China. My estimate is 30% minimum, so my price target is $23.18. That said, this is more speculative of a play on my part, because I believe that strongly in India's growth.
So there's my plays as I see them. I try to use 8% stops when I first enter a position, in case I've made a bad call. I learned the hard way on several stocks (JBSS, EVOL, NAVR, etc...) which I held all the way down to their lows for some time, just stubborn in my thought that they would bounce back. The problem is, until they do, it's "dead money," which coulda/woulda/shoulda been making you money.
posted by Stephen_Hunt | 10:21 PM
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