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Eight questions to ask when evaluating a stock

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By Aman Raina, SageInvestors.ca

Special to the Financial Independence Hub

The process of trying to determine what stocks to buy and sell is a very repetitive and iterative experience. I’ve analyzed thousands upon thousands of stocks and the process I’ve used for each one has been the same. For any company being evaluated, an investor must ask the same fundamental questions over and over again in order to truly assess the investment opportunity.

The level of detail required to answer these questions are a function of time you have. If you have lots of time, you can dive more deeply into the nuances and intricacies of the company’s business model. For most investors, all that is needed is an understanding of the core elements of the business.

Make no mistake; these questions have to be answered at a basic level at a minimum in order for you to have complete understanding of the company before you commit your hard earned money to buying into it. Most people I’ve had the pleasure to work with and teach often buy stocks without even knowing what the company does or sells yet they can tell you all the specs of about their vacuum cleaner they have researched for 4 months. In my Everyday Investing course I teach, I help investors answer these questions. Below I’ve listed what I’ve determined to be the 8 questions you have to ask each time when evaluating a stock.

As we go through the questions I will put them into practice by using a stock I recently purchased as an example to illustrate. I recently made a decision to buy shares in CVS Health (Ticker: CVS).

1.) What do they sell?

Stocks are pieces of paper representing ownership of businesses. Companies are not created because nature dictated they should be. Profit-generating businesses are created to sell something, be it a product and/or service that the owners perceive society will want in large quantities. When you look at companies, it is the first fundamental question to ask. What are the core products and services that the company sells? Often in larger companies this can be answered by looking at how the company is structured with products and services often having their own separate divisions. In other cases if a company is structured by geography, the product lines will be found under each regional umbrella.

There are many sources from which you can get quick sysnopsis of a company. Here’s one I pulled from Valuentum Securities that describes CVS.

“ … The 2007 merger of CVS Corp and Caremark created the largest pharmacy health care provider in the US. The company has more than 7,800 retail locations and operates in 98 of the top 100 US drugstore markets. Its PBM business serves more than 60 million plan members. The company was founded in 1892 and is headquartered in Rhode Island.

CVS recently acquired Target’s pharmacies and clinics and it will operate the acquired pharmacies in a store-within-a-store format. The deal expands its footprint of pharmacies by ~20% (adding more than 1,660) and clinics by ~8% (adding ~80 clinics)…”

CVS also purchased Aetna Insurance, one of the largest healthcare insurance providers in the US.  With this CVS aims to become a one-stop shop for health care services in the US using their drug stores as the prime distribution point.

2.) Who do they compete with?

Chances are the company is not the only one selling the same product or service. There are likely to be other companies offering a similar or slightly similar product at higher or lower price points. Understanding or being aware of the level of competition the company faces can give us insight into how large the demand is for their product and potentially how much revenue, profit and market share they can be expected to take in the future.

In the case of CVS, the company competes with other major pharmacy chains such as Walgreens, as well as the big retailers like Walmart and Costco. The acquisition of Target’s pharmacy footprint essentially makes them de facto direct retailers. With the purchase of Aetna, their competitive universe has now expanded to include the health care insurers, like United Health.

3.) Who buys their products and services?

You know what the company sells. Now you want to know who would actually buy their goods and services. Who are the main customers for the company? What are their characteristics and background? Why do they buy the product?

For CVS, their target market is anyone that is not well or anybody that is well and wants to stay that way. I’m being very simplistic here. Again, you could do a whole market research analysis or market segmentation of their client base if you have the time.

4.) Will they buy it over and over again?

How often will a company’s client base buy their products? Can they be counted on to be repeat customers? Repeat customers mean repeat revenues and the greater the repetition, the greater for long term sustainable cash flow which will ultimately bode well for the stock price. Continue Reading…

The Back Page 2020 Energy Surprise

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By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

If the term “IMO 2020” doesn’t resonate with you, pay attention: it could be front-page stuff soon.

The International Maritime Organization is putting fuel cleanliness standards in place on January 1, 2020. But the shipping companies have been caught flat-footed, despite years of forewarning. Their scramble could have a bigger effect on 2019–2020 petroleum markets than OPEC deliberations.

According to the U.S. Energy Information Administration, the shipping industry used 3.9 million barrels of crude oil per day in 2016, about equivalent to Canada’s total output. The fuel supply chain could be upended, because the “light sweet” crude oil that you find in Texas is going to be in demand, while the portion of Canada’s production that is “heavy” will want for bids.

That’s because of the pollution dynamics of the oil varieties. Think about what ships use: “bunker fuel.” Filthy, thick and viscous—one step above the tar-like stuff used to pave roads. An important component of this fuel — the enemy — is sulphur, which leads to acid rain, the destruction of ocean ecosystems and respiratory ailments. And the full-scale attack on this generation’s Big Tobacco is underway.

The regulations weren’t decided yesterday, but you wouldn’t know it from the shippers’ snail-like efforts at preparedness. Outside the “Emissions Control Area” standard for areas such as the coastal waters of North America and Europe, sulphur content must fall to 0.5% by January 1, 2020, for a ship to be allowed to set sail. In some jurisdictions, violators will even face jail time.

Figure 1:  Sulphur Content: “IMO 2020” 

Figure 1_Sulphur Content IMO 2020

Heavy Western Canada Select oil, with all that thick, sticky, high-sulphur bitumen, is exactly the variety of oil that, when refined, results in the kinds of fuels the IMO is essentially banning.

Remember when Canadian oil reached a US$50 discount to light sweet West Texas Intermediate oil last year (figure 2)? Alberta was gushing oil with no easy route to buyers. The province’s OPEC-like production cuts of 325,000 barrels per day, recently reduced to 250,000 barrels, are a temporary solution. It works, as long as nothing unexpected wallops the supply/demand dynamic. Continue Reading…

Theranos’ Elizabeth Holmes and Wolff’s new Trump book: parallel cautionary tales?

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Theranos founder Elizabeth Holmes and the book exposing the scam

Being a frugal kind of guy in Semi-Retirement, whenever possible I like to get books out from the library, whether old-fashioned physical books, e books or audio books. The main problem with this, however, is that you usually have to wait several weeks or even months to get to the head of the line for the latest bestsellers.

On a recent long weekend (the one before this one!) two bestsellers arrived the same day, which meant the pressure was on to read them in the three weeks allotted. Neither was likely to qualify for renewal, since there was a long queue of other readers waiting for their return.

The first, which arrived in e-book format, was Bad Blood, a book I had ordered several weeks earlier and has only recently slipped off the bestseller list. The other one was brand new: Michael Wolff’s followup book on Donald Trump, entitled Siege: Trump under Fire. On this one, I got really lucky, just happening to be in the library a day or two after the local branch’s local copy went on display.

Still, suddenly I had two books to read at once, which meant that anything else I either owned or was more likely to be renewable had to be put aside. No one said being frugal was easy!

I ended up reading both books over a long three-day weekend by adopting a strategy of reading a chapter in one, then switching to the next chapter in the other. Which is how I realized there were some fascinating parallels between the two books. It was something of a surreal experience, as I’m sure no one else on the planet would have read these two books simultaneously in this fashion.

Billionaires, or Thousandaires?

Both involve supposed American billionaires, although this point is debatable about both subjects. Trump’s billions are often supposed to be fanciful, which is why one New York Times columnist once earned Trump’s ire by dubbing him a “thousandaire.”

The other was a billionaire for awhile, at least on paper but these days she may not even be a thousandaire. I’m referring to Elizabeth Holmes, a young Stanford dropout who hero-worshipped Apple’s Steve Jobs and started a blood-testing company in California called Theranos.

The only problem, as Bad Blood recounts at length, is that apparently Theranos supposed ground-breaking technology didn’t work. Google Elizabeth Holmes and you can find a bunch of short videos that describe the sordid tale if you missed it the first time around and don’t wish to join the library queue for the book.

Blinded by ambition and the quest for fame and wealth, it appears Holmes and her much older partner/lover (Ramesh “Sunny” Balwani), cut numerous corners and forgot the first rule of health care is to first do no harm. They raised billions from investors, in the process fooling such retail giants as Walgreens and Safeway. Holmes had founded the firm in her early 20s and used her influential rolodex to suck in many investors who should have known better.  She also was famous for emulating Jobs and his attire of a black turtleneck sweater. And finally, as any number of Google searches will demonstrate, she pitched her voice a few octaves lower so as to impress prospects and investors with a deep baritone she must have felt would allow her to be taken more seriously.

Will Trump’s reign also end in tears?

Wolff’s Siege was released just a year after his previous Trump bestseller, Fire & Fury, and relies just as much on input from Steve Bannon. As I read and alternated chapters between the two books, it was fascinating to watch the unravelling of Holmes and to wonder whether Wolff was describing a similar unravelling of the Trump presidency. Certainly, Wolff depicts an isolated and desperate president and has predicted it will all end in tears: not necessarily ours but of Trump’s. Continue Reading…

Why retiring baby boomers won’t destroy the stock markets

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By Dale Roberts

Special to the Financial Independence Hub

It’s a fear or suggestion that we hear repeated quite often. The massive cohort of retiring baby boomers will need to sell their stocks to create income and that will crash the stock markets.

Or let’s just say it could cause a slow bleed, taking down or suppressing the stock markets over the coming decades. As you may know the the stock market is, well, a market: it simply lines up the buyers and sellers and when there are more sellers than buyers the price of the stocks will decline.

When we hear the numbers on the baby boomers and more specifically how many boomers will retire each day, it’s often the US numbers that are repeated. When it comes to financial markets it is often very US-centric.

From this from Forbes.com article …

There were 77 million Baby Boomers born between 1947 and 1964, roughly 4.5 million per year. Some doomsayers are predicting the Boomers will drain the equity markets of their capital once they retire. Should you worry? Are your equity portfolios at risk?

It’s now predicted that there are 10,000 baby boomers retiring (in the US) each day. Now when the AARP releases figures such as that they simply use age 65 as a retirement date. Perhaps that’s not a bad benchmark but so many will retire well before age 65, and many more will not retire until well into their 70s and beyond. Many will not retire at all; they’ll continue with part time work. Baby boomers are known for being quite entrepreneurial.

And then, not all retiring baby boomers are going to go out and sell all of their stocks on their 65th birthdays. The public and private pension managers are not going to aggressively sell out of their US stock positions. Pensions hold well-diversified portfolios of US and International stocks and bonds and that also includes massive exposure to private equity: assets that are not ‘in’ the stock markets.

Why the boomers won’t crash the markets

The markets are mostly efficient and they factor in all available information with respect to individual stocks, economies and larger trends. It’s not news that North America is getting ‘older.’ That’s already priced in to the markets.

There is a heavy concentration of US stock ownership by more wealthy US citizens. The challenge for many may not be how fast can they sell their stocks but what to do with all of this wealth. Also, baby boomers are about to inherit over $15 trillion over the next 20 years. That will reduce or eliminate the need to sell those stock shares. You’ll find that, and some other interesting baby boomer stats in this Fool article.

I’ve been writing on Seeking Alpha for quite some time, and the readership is largely quite affluent. Many of these American boomer investors write more of accumulating more stocks in the retirement stage. In Retirees Don’t Say No When The Market Offers You A Nice Bonus I linked to a study that confirms that more affluent US retirees don’t spend down their retirement assets. They even become ‘savers.’

It’s a continual theme as well that many of these retirees ‘live off of the dividends.’ They’re not selling shares; they are simply collecting and spending the dividends. They will not put sell pressure on the markets.

New buyers

The millennial generation is even larger than the Baby Boomers and they will enter their accumulation stage and will be buyers of stock assets directly and by way of their pensions. There will be demand for stocks from younger generations. The Washington Post stated that the millennials will overtake the Boomers in 2019. We also have those echo-boomers and Gen-X’ers stepping in.

Bond yields are low; investors and pension managers know that they need those stocks for the longer term growth potential. Of course, we can often get greater income (and growing income) from stock dividends compared to bonds. The low yield environment also affects those newer and current accumulators as well as they may choose to shun low yielding bonds and embrace more stock exposure.

In Canada we see investors in that Balanced Growth Sweet Spot.

What history has to say

And if we look to the past and to studies, historically the correlation between age and asset prices is weak according to this white paper … Continue Reading…

Declutter the pesky nest egg

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“Decluttering the pesky nest egg ranks high among investors. Now is a great time to snap into action.”

Investment clutter can easily develop from a variety of sources. The number of accounts opened, types of risks incurred, type of advice sought and style of adviser hired are just a few starting points that contribute. Some of the clutter often falls to the back of the closet, never to see the light of day again.

So I ask: “Is your investment closet cluttered with plenty of stuff?”

The stuff was likely purchased over several years and from multiple providers. The passage of time transformed it into a muddle that typically no longer serves its intended purposes. Perhaps, the investment closet has not been purged for longer than anyone cares to remember. If it feels like a mishmash, it probably is.

I keep tabs on portfolio requests seeking fresh opinions. The majority of cases hold 15 to 35 investments, primarily mutual funds and assortments of individual stocks. Keeping track of such selections is not easy for most investors. Overlap often makes its way into portfolios. The good news is that the best time to declutter the jumble is when stock prices are at or near their highs. Like now.

Spot the clutter

Accordingly, I highlight critical signs that recognize “cluttered investing”.If you spot any of these in your investment closet, you have some work to do: Continue Reading…