What Am I Looking for on a Stock Overview

[Tron]

Friends,

Considering the facts that I am young and good looking, I feel that I am able to field the risks of investing directly into stock (I already have some money in a mutual fund; Strategic Equity, holla). Specifically, I would like to invest in some companies that I find myself using on a regular basis, like Chipotle (CMG) or Volcom (VLCM).

I am super-new to investing, so I have no idea what I am looking for whem I pull up these stocks on Yahoo Finance or Morningstar or whatnot. Expenses? Cash flow? Huh?

I'm sure this topic has been covered before, but I'm not familiar with searching the Finance forum, so I would very much appreciate it if some of you could give me some pointers as to the rough qualities of a good investment, or point me to a thread where this is covered.

Thanks a lot.

[Dazarath]

Here's a quick one by DC. I lurk on this forum a lot, and to be honest, this topic is not really covered often.

http://forumserver.twoplustwo.com/sh...age=0&vc=1

[kimchi]

There are always 100 reasons to buy a stock, and just as many reasons to sell.

I think most people concentrate on what/when to buy. But I believe you should think about how much to buy and when to sell. Afterall, that is what governs your profits.

[Tron]

Thanks a ton, Daz. kimchi... While I'm sure you meant well, your response is little help to me because I am a total n00b, and what I am trying to learn is HOW I should think about how much to buy and when to sell (P.S. I'm in it for the long-term, baby!).

[John Shiznit]

my opinion is its not necessarily a good idea to buy stock in a company that is mainstream trendy. everybody loves chipolte these days. its popularity probabably has nowhere to go but down and its an expensive stock in terms of P/E.


i never really hear of vlcm so maybe that would be better if you think its going to catch on.

all im saying is its better to get in on a company before everyone knows how great it is because these stocks tend to get pushed way up in a bull mkt.

just my opinion though and if you buy stocks that are "values" you generally have to wait along time for them to come around.

[DesertCat]

I'm about to summarize another chapter of The Intelligent Investor for the forum, you might want to read that. It's approach is value investing, i.e. buy when an investment is selling for a very large discount to it's true (intrinsic) value. Sell when it's price approaches that value.

The value of any investment is equal to the the discounted (for time) streams of cash it produces. Discounted means that a dollar next year isn't worth as much as dollar today. Google DCF or Dividend Discount model, to learn how that's calculated. Few people actually calculate DCF estimates (including Warren Buffett), but it's important to understand that the fast profits grow in the future, the greater value they have today. Essentially this is simplified by many market participants into a PE ratio, i.e. they'll pay a higher PE ratio for a company that grows earnings faster, and vica versa.

Ideally, you want to find a great company in a business with good barriers to competition, able to re-invest all profits at a high return, and ensuring it will increase in value for a very long time. Even though you don't recieve your share of profits as cash, you can treat the company as if it's investing your share at a very high return. In that case you wouldn't mind holding it "forever" as it will grow your ownership value at a high compounded rate.

If the company doesn't earn good returns on reinvested profits, it's squandering your money and you probably don't want to hold it at all.

Looking up Chipotle Mexican Grill (CMG) on the SEC report site I found their annual report (10k) for last year. Page 24 shows you their sales for the last 5 yeasrs, you can see they've gone from losing money to making a nice profit (About $1.20 per share if you don't count the nonrecurring tax benefits) over that period. On page 26 they say the expect to grow income from operations over the long term at 25% per year. That's equivalent to doubling profits every 3 years, so in 9 years they should be making around $9.60 per share.

Currently they are trading at around $60, or a PE ratio of about 50. That's very high and reflects market optimism that they will continue to grow at a high rate. Another way to look at it is they are yielding about 2%. You could get 5% risk free right now in a short term CD. The reason to buy CMG is that you believe that yield is going to grow greatly, if they make $9.60 in 9 years your yield at that point will be 16% on your original investment.

The ROE (return on equity) is about 10%, since Book Value is about $12 per share. That's not very high, but CMG looks like they just turned the corner on profitability and could possibly have higher margins, and hence a higher ROE in the future.

What you need to decide is whether management is correct in their growth forecast. 25% a year is a pretty high number. It doesn't all have to come from increased sales, if they increase their profit margins sales may only have to increase at a slower rate. But even 18% a year is doubling every 4 years. Can they hit $2.5B in revenues in 2013 without having to slowing down? $5B in 2017?

If you believe they can keep this up for 10 years and then will have to slow, you can estimate the value of the stock through a DCF calculation. But be careful, DCF calculations can provide a wide range of values depending upon your assumptions.

Ideally you want to be able to convince your self that CMG is so cheap, that even if you've made some mistakes in your estimates, it's very unlikly you are overpaying (you want a big margin of safety). My guess is it's very unlikely that CMG is cheap. It might be fairly valued, but what's the point of buying that? A 50 PE stock is very dangerous, it's so highly valued that one bad quarter can cut it's price in half. The idea of investing is similar to poker, find ++EV situations to make big bets. Don't get involved if it's -EV or if you can't calculate the EV.

Anyways, I've given you some ideas on how to approach one of your ideas. You need to read all of their filings, including the 10k, the latest quarter (10Q) and probably their IPO prospectus. If you do that, and have further questions, I'll always be happy to help.

[Tron]

Wow, thank you very much.

[John Shiznit]

The bottom line on all this though is dont buy a company just because you like their products.

Young tech geek types got killed in the internet bubble days. They just assumed their company makes cool products, the stock always goes up, it must be a great investment. Not the way to think especially for the long term.