The Chestnut and Cedar Stock Report: A Guide for Investors

Overview

"The Chestnut and Cedar Stock Report" was written by Joe Spinella, a CPA and financial executive at one of those New Economy style companies that fell on hard times. If anyone, he as an investor knows the pain and loss inflicted on investors who believed in the adage, "This time it's different." It was not, as we all learned the hard way....

This book makes it as easy as possible for laymen like me to navigate through today's stock market. It will guide me to make up for my ...

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Overview

"The Chestnut and Cedar Stock Report" was written by Joe Spinella, a CPA and financial executive at one of those New Economy style companies that fell on hard times. If anyone, he as an investor knows the pain and loss inflicted on investors who believed in the adage, "This time it's different." It was not, as we all learned the hard way....

This book makes it as easy as possible for laymen like me to navigate through today's stock market. It will guide me to make up for my losses and to get ahead again. And I will.

The author focuses on all three components of sound investing: Strategy, Analysis, and Timing. He also adds some new, innovative concepts, such as "Incomprehensible Asset," "Air," or "Liabilities with Equity Attributes." No need to worry, though - he explains these in customary detail, so you can incorporate them into your own investment decisions.

As a guide on Investment Strategies, Fundamental Analysis, and Technical Analysis, this book will strengthen your knowledge and confidence. Building on these will enable you to make the right investments today and in the future. No more hot tips. No more cold turkey. Just sound advice to make money. Here is to yours!

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Product Details

  • ISBN-13: 9781893798380
  • Publisher: AIL Newmedia Publishing
  • Publication date: 1/21/2005
  • Pages: 248
  • Product dimensions: 5.50 (w) x 8.50 (h) x 0.56 (d)

Read an Excerpt

"Make the right investments today and in the future"

As the Internet Bubble, a.k.a. New Economy came to an end in 2000, it became evident that prudent financial concepts which were once common sense business practices known to all, were in fact not. Industry practices and standards, for many companies turned out to be based on faulty assumptions. This disrupted many organizations, resulting in massive stock market losses. As stock prices evaporated it became clear that a more comprehensive analytical investment approach was needed. "The Chestnut and Cedar Stock Report" by Joe Spinella, a CPA , planner, and executive provides this approach. It will enable you to make the right investments today and in the future.

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First Chapter

Investment Strategies - VALUE INVESTING

Value investing is finding a good quality stock that you are proud to own for an inexpensive or bargain price.

Besides being potentially profitable, value investing is popular because it's a hands-on way for investors to be actively involved in their stock selections. It's literally digging through annual reports and news articles trying to find that bargain stock. It's like trying to find a valuable antique at a garage sale. Many people love doing this!

I call it the cookbook approach to investing. Adjust for this, adjust for that, and see what you have. Over time, by using value-investing techniques you probably will become good at understanding financial statements and business concepts. Value investing uses fundamental analysis. Contrary to what many people believe, you do not have to understand advanced mathematics, but you will need a basic understanding of practical math, good reading skills, and a skeptical mind.

Basically, a value stock has a low price to book value and a low price to earnings ratio.

In determining whether a stock is inexpensive or not, one needs to analyze the company's book value also known as shareholders' equity. You need to determine what the true net worth of the company is by calculating a quasi-tangible book value.

Subtract, from the book value of the company that you are analyzing, all the assets that you don't understand and / or have no real cash value. Over the years I found that if one doesn't understand an asset type it usually has no cash value. Some examples of accounts that should be subtracted from book value are goodwill, prepaid expenses, deferred acquisition costs, securitization servicing rights etc. The main focus is to be conservative. Also, adjust for what I call economic accounting valuation differences. These are more common sense type accounting adjustments that should be made to get a clearer picture of the true market value of the company. For example, if you are looking at a bank stock in a recessionary environment and feel that loan losses should be increasing, but the bank's financial statements do not yet reflect an increase its loss provision, try to calculate what you feel is a truer picture of the bank's loss reserve and subtract the additional amount (net of taxes) from book value. If the company has a large unrecorded pension liability, or is using unrealistic future investment return estimates, just estimate the projected short fall and reduce book value by the amount. Additionally, try to give the company credit for undervalued assets. If the company has land that has greatly appreciated in value and it's on the books at cost, I add the unrecorded appreciated value to book value. If the company has written off its fixed assets but now those same fixed assets became valuable, then add-back the appreciated amount to book value. When finished, recalculate the per-share book value; if the stock is selling at a substantial discount to its book value; that is one of the signs of a value stock.

True value investors only buy if a stock is trading substantially below its tangible book value. I understand the reasoning, but it's hard finding these types of situations in all your investments and maintaining diversification and balance in your portfolio. I just use this as a guide and not as a "must have." Over the years, I have noticed these types of values in the banking, energy and chemical industries, among others.

Another factor you need to find in a value stock is a low price to earnings ("P/E") ratio. You are looking for a beaten down stock in an out of favor industry. A nice P/E discount is 20% to 50% of the industry average over a few years. You have the potential to make a nice return on both the natural rotation of the industry to a higher timeliness, as well as the stock regaining market favor. Many investors view cyclical stocks as value stocks. Cyclical stocks are value stocks only if they sell at an earnings discount to their peers and meet the book value criteria as mentioned above. If the company is selling at a discount to its tangible bookvalue but its earnings have disappeared, it becomes a possible turnaround situation and not a value stock.

In addition to earnings, look for a decent dividend yield so that you are earning a cash return while you are waiting for the stock to increase in value. This limits your down side because of the yield protection and makes it emotionally easier to hold the stock longer to realize its full return. It's also a reflection of the company's intent and ability to return excess profits back to its shareholders.

After your review, if the company still has a low price to adjusted book value and low price to earnings ratio, it becomes a serious potential value play. It's now essential to analyze the company's liquidity and debt status. Try to find a company where current asset exceeds current liabilities by 11/2 to 2 times. The 1st time is used to pay off the company's current creditors, the 2nd time is the equity needed to replenish the company's working capital requirements if supplier financing dries up, or can be used to pay off the longer term obligations of the firm. It's hard to find a company with a current ratio of two or more, but under one times means the company has a negative working capital and may need to borrow money to fund the shortfall.

Also look for a company whose tangible book value exceeds its debt. It's amazing how quickly book value disappears when a company or the economy has problems. The assets decline in value but the debts still need to be paid back. Additionally, you need to be ensured that the company has emergency availability under its credit facilities. However, it's also amazing how credit lines tend to dry up and disappear quickly when a company has a down turn in business. Lastly regarding liquidity, analyze the company's debt maturity schedule to ensure that the company can meet any long-term debt payments that may be coming due. Basically try to get a comfort level that the company can pay its obligations as they come due and that they are not over leveraged.

Other key statistics are the company's bank covenant ratios. The covenants normally specify shareholder equity levels that a company must maintain, as well as, among other restrictions, cash flow to interest expense and cash flow to debt ratios that must be met. If a company falls short in its financial covenants, the banks can call the loan and put the company into bankruptcy. Currently, however, they are rarely disclosed and many experienced investors don't even know they exist, or don't realize their importance to the survival of a company. I hope the accountants and SEC make loan covenant disclosures a mandatory requirement.

It's critical to pick a company with an excellent management team. Investor conference calls are relatively new and are very interesting to listen in on. This is a very good way to really get to understand a company and its management.

Message boards are informative but many participants have alternative motives or grudges against management that might make their comments suspect. They should be read skeptically.

It's also important to see some sort of upward trend in revenues and earnings growth. Value Line Investment Survey is found in most libraries and does a nice job showing long-term company trends. No one likes a company that constantly does worse than the year before, no matter what the value is! Every company needs some sort of "curb appeal" for you to profit from your investment. At some point you need to sell in order to make money from your investment. Upward trends help on the re-sale side of your investment.

Many investors find it hard to distinguish between "cheap" stocks and value stocks. Most times, stocks are low because they deserve to be low. There is nothing wrong with buying a "cheap" stock as long as you know and understand the risks. There are many stocks out there that have large annual losses, high debt levels and no equity. That does not necessarily mean you can't make money on them, but you should call it gambling rather than investing.

Value Investing is a time tested investment strategy that works in most market environments.

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