Wednesday, 28 December 2005 - 2:40 PM CST

First, congratulations on a great gainer over the years! Also, I dig the site and have been checking just about every day!

Oddly enough, I have SBUX picked as one of my "large caps likely to underperform the indices" so we disagree on potential future direction - but that is what makes a market! Nothing personal involved, I could be wrong - I'm wrong every day. We shop for different styles of stocks, but I still enjoy your analysis.

Other than rich valuations for my tastes, I noted a couple of things on SBUX when looking at MSN Money's financial statements.

The ratio of NI to OCF dramatically stepped up this last year, and cash flow from "sale of short term investments" was higher than OCF. This makes me question the quality of the earnings - although you're absolutely right, the comp sales look great.

I also noticed the equity went backward while the total liabilities went up; the MSN financials show it as an increase in "short term debt" and "other current liabilities". Also a big spike in "other non-current liabilities".

I wonder how much they still compensate with options, and whether the buyback was accretive or just compensative for the options?

Stuff like the above make me question earnings quality and ability to maintain growth to justify the current multiple. Just my $0.02.

Wednesday, 28 December 2005 - 3:46 PM CST

Nodoodahs,

You have made some excellent points. Your examination of Net Income (NI) to Operating Cash Flow (OCF) is way more sophisticated than my basic approach. My holding of Starbucks is not a wager that the stock will appreciate. I made that "wager" when I first purchased the stock :).

I shall let the price performance of this holding and the other holdings in my account dictate my trading decisions.

And absolutely nothing personal on comments. I appreciate your input, respect your own knowledge base which is quite frankly way ahead of my own, but believe that my approach may work well as time goes on. Most likely, some of the things you are pointing out could help me choose about initial committments of funds and should be implemented.

I would love to have you write something about evaluating NI to OCF and how you go about determining the quality of earnings! Let me know if you have or are going to write something, and I shall either include it here on the blog or at least link back to you with that entry!

Bob

Wednesday, 28 December 2005 - 4:11 PM CST

I chatted about some financial ratios and how to spot train wrecks on the financials here:
http://www.marketthoughts.com/zs20051103.html

I outlined my basic approach here:
http://www.marketthoughts.com/zs20050623.html

Since then, I've added to it a bit. For my "value" portfolio, I generally scan for low PE and PB, moderate D/E, and trading flat or down from its 200 DMA to avoid catching a cyclical at its peak. I then check the financial ratios for the last five years in a spreadsheet, and if I like what I see I'll read the proxies and 10Q and 10K for stuff that I don't like. For example, I liked HELE until I got done reading that stuff.

http://nodoodahs.blogspot.com/2005/12/helen-of-troy.html

I still think she's got a shot to seriously outperform, but it's more of a speculative play than a value play at that point.

Nowadays I'm very focused on learning technical analysis to try and figure out when the stock has bottomed or turned. I used to just jump in as soon as I had some cash and found a value, but often they haven't finished bottoming yet when I do that. :-p

I am fascinated by your disciplined approach to determining sell points for winners, etc. Seems to be thoroughly grounded in portfolio theory, are you trying to maintain a firewall for maximum position size in any one stock?

Do you do the same for industry/segment as well?

I'm getting the hint that you look for extreme price action to find stocks to write about; what do you do to find stocks to buy, or is that the same thing for you?

Thursday, 29 December 2005 - 6:57 AM CST

Nodoodahs,

I was looking through MSN Money and they certainly have a lot of detailed information to create these ratios. I would like to add another statistic to my reviews. Of the ones that you use, which do you feel would be most relevant to my readers? Could you explain to me in detail how you go about calculating that ratio?

I truly am an amateur investor as you know. However, I would like to educate myself as well as my readers here on the blog. I read an interesting article by Paul Sturm and started to look harder at the Price/Sales ratio in terms of other stocks in the same group. Perhaps you could help me out with this one.

Thanks again for visiting often. I use the top % gainers as my initial screen. I have found that these stocks often have potential gainers in their midst.

Bob

Thursday, 29 December 2005 - 8:34 AM CST

I'm an amateur, too, but my approach is more into the numbers because that's my background. Asking me to pick one ratio is like asking me to pick out my favorite pet - I can do it, but it's not fair to the others. LOL! Here are some of them. Probably the liability side and the OCF ratios are the quickest and "best."

There are several ratios to OCF (operating cash flow) that are good. Net income / OCF, current liabilities / OCF, total liabilities / OCF, I look for trends in these, if there is a deviation from trend or average, I did deeper. If NI > OCF, there is usually something funky going on (unless you're talking about a bank or insurance company). To get NI / OCF you can use the cash flow statement by itself. To get the others, you need to use both the cash flow statement and the balance sheet.

In terms of sales or revenues, I look at inventories / rev. and accts receivable / rev. for trends, buildups in either can sometimes be a first sign of bad news. Here you need the balance sheet and the income statement.

Also, I like interest payments / (OCF + Interest payments + taxes paid) as a measure of how well the company can make payments on debt. Here you need the cash flow and income statement.

Anything funny with any of those, I check both sides of the equation and see what happened, i.e. did debt go up or did cash flow shrink?

I like that you find potential investments with a different process than I do ... it brings up stocks that I otherwise wouldn't be exposed to.

BTW I just picked up Dorel (DIIB) and I think it has potential from here. I noticed that you had suggested it a while back ...