Stocks 101
This one is a great starting point for responsible stock investing. Maybe there’s no such thing as a responsible stock investing. There’s stock investing, and stock gambling. Investing alone should contain the responsibility attribute. Anyhow it would be a shame not to take action on this piece. Jumping from one book to the next, finally embarking on THE ultimate piece of wisdom is not how it works (Recall Dave Masters’ diagnosis of William Stoner). Chapter 15: The Final Checklist is something worth practicing. I’ll try to choose one company for each category and answer questions set forth by Lynch.
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Chapter 15: The Final Checklist
It is possible to derive numerous action points throughout this book. The ones listed here are a good compilation. Also, I can only do so much at a time, so I’ll take one step at a time.
Stocks in General
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Slow Growers
STOCKS IN GENERAL
- The p/e ratio. Is it high or low for this particular company and for similar companies in the same industry.
- The percentage of institutional ownership. The lower the better.
- Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs.
- The record of earnings growth to date and whether the earnings are sporadic or consistent. (The only category where earnings may not be important is in the asset play.)
- Whether the company has a strong balance sheet or a weak balance sheet (debt-to-equity ratio) and how it’s rated for financial strength.
- The cash position. With $16 in net cash, I know Ford is unlikely to drop below $16 a share. That’s the floor on the stock.
SLOW GROWERS
- Since you buy these for the dividends (why else would you own them?) you want to check to see if dividends have always been paid, and whether they are routinely raised.
- When possible, find out what percentage of the earnings are being paid out as dividends. If it’s a low percentage, then the company has a cushion in hard times. It can earn less money and still retain the dividend. If it’s a high percentage, then the dividend is riskier.
This is Lynch’s checklist. He has checklists for stalwarts, cyclicals, fast growers, turnarounds and asset plays. I’ll start with slow growers.
Con Edison
Electric utilities, aluminum, railroad, automobile, steel, chemical, computer – It’s hard to believe that these industries were at one point in time the AIs of today. Lynch mentions that ‘when Walter Chrysler left the railroads to run an automobile plant, he had to take a cut in pay. “This isn’t the railroad, Mr. Chrysler,” he was told.’ Good slow growers would pay regular dividends, since they wouldn’t have a way to effectively use money for new streams of revenue.
For a slow grower company, I’ll look at Consolidated Edison (NYSE: ED). It supplies electricity and gas to customers of New York through its subsidiaries. In 2023, total revenue was $15b and operating income of $2.5b, that is, 16% operating margin. It is one of the biggest utility in the US, along with Pacific Gas & Electric.
1. p/e ratio
Source: bigcharts
Source: gurufocus
The p/e ratio. Is it high or low for this particular company and for similar companies in the same industry.
• p/e ratio(TTM): 19.57
• It’s starting to approach the higher end. It is usually around 15
• Next Era is at 25, PCG is currently at 19. I’d have to look at the businesses of the comparables. I know that Next Era has a fleet of electricity generation plants including renewables and nuclear and it would affect p/e. But I guess 19 does not deviate too much from other companies.
2. Institutional Ownership
3. Insider Transactions
• percentage of institutional ownership – the lower the better: 70% (uh-oh)
• Held by insider: 0.19%
Since outstanding shares is 346m, it must mean insiders own 656k shares. In the past two years, 213k shares were purchased by insiders including the CEO, CFO, General Counsel and Officer. 47k in the recent year, and 166k in the year before that. I didn’t dive further into the general trend of share purchases so I can’t tell if this is significant, also I’d need to know the terms on the employee stock purchase program, whether or not they sold it. They get a subsidy of $1 for $9 invested by insiders up to $25k per year of not more than 20% of their pay.
Here are two websites with good insider transaction information: Barchart, Openinsider. I cross checked with SEC and it seems to align.
I wondered what level of insider transaction is “a lot.” This post from a blog called Stablebread covers what to look for in insider transactions. I decided not to go in any deeper from here on my end. My time right now would be better spent elsewhere. Besides, Lynch also added,
4. Earnings Growth
Something seems to be on the rise. from 2020 to 2023, net income grew 22%, 23%, 52%. It would have to do base effect of the covid outbreak in 2020 and the energy price hike, stemming from wars in Ukraine and middle east and mounting inflation from then on. From 2004 to 2023, earnings (net income) grew 8.5% on average every year. I think it’s difficult to call this earnings growth “consistent”. 2012-2014 and 2017-2020 saw a pretty regular decrease in both operating income & earnings.
Lynch said “The p/e ratio of any company that’s fairly priced will equal its growth rate.” Currently p/e is at 19. I don’t know if I should compare 19 to the 20 year CAGR of 8.5% or the recent 3 year’s 22%, 23%, and 52%. 19 doesn’t seem to align super well in ED’s case.
cf) According to FRED in August 2004 it was $0.1/kWh, in August 2023, it was $0.17/kWh. That’s 2.8% increase every year. According to EIA, net electricity generation in August 2004 was 335PWh, in August 2023, it was $359PWh. That’s a 0.4% increase every year.
5. Debt-to-Equity Ratio
6. Cash Position
Source: barcharts
Lynch says that he would only account for long term debt when calculating the figure, since if there is enough cash, then the short-term debt would not be a problem. Well, Consolidated Edison does not have sufficient cash to account for all the current liabilities, but all the current asset combined moves closely in tandem with the level of current liability. I’d have to see the balance sheet of other utilities, but Con Ed seems terrible by Lynch’s standard.
Source: Gurufocus
I wondered if I got the calculation correctly. Seems like I haven’t. Yahoo Finance and Gurufocus gives the same 1.23 in the most recent quarter. Gurufocus says for FY 2023 debt-to-equity ratio is 1.18.
= Total Debt / Total Stockholders Equity
Stated calculation is like this, and Yahoo Finance gave the exact same number, so guess this is a more correct method? I used total liability. From this anyhow, 1.23 doesn’t seem too bad compared to the rest of the industry.
Slow Growers
#1. Dividends
Source: Con Edison
In the company website says “Con Edison has increased dividends for 46 consecutive years.”
Besides the second quarter of 1974, dividend was paid quarterly. Note that the dividend yield below is per quarter. So for any given year, it should be multiplied by four.
Source: Gurufocus
Seems like dividend yield is on the lower-end among peers.
Slow Growers
#2. Dividend Payout Ratio
Source: Gurufocus
Lynch says the lower the figure is, the more cushion the company has in tougher times. I didn’t do a historical analysis for this one. but it’s very low, meaning something good. Perhaps too much cushion?
This marks the end of the exercise on Slow Growers. If I do get to other types of companies – stalwarts, cyclicals, fast growers, turnarounds, asset plays – I won’t create a separate post and just extend here.
Some Information
• 288 pages, 95k words
• Vocabulary level: Medium-easy
• Library of Congress Subjects: Investments, Stocks, Speculation
• Goodreads Genres: Finance, Business, Nonfiction, Money, Economics, Personal Finance, Self-Help
• Year of publication: 1988
• Meston’s Rating: 4.0
