Category Archives: Investing

Investing: High CAGR, High ROIC, and Low WACC

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“Every investment is the present value of all future cash flow.” — Everyday Money 

The value of any investment is determined by discounting all expected future cash flows (both inflows and outflows) to their present value using an appropriate discount rate. This process accounts for the time value of money, which recognizes that money available today is worth more than the same amount in the future due to its potential earning capacity.

Regarding stock investments, there are very few public companies that consistently have these four important metrics (high CAGR, high ROIC, low WACC, and high free cash flow growth), which indicate the potential for long-term growth and appreciation,

Key Metrics:

• High CAGR: Indicates strong revenue or profit growth over a specific number of years.
• High ROIC: Shows efficient use of capital to generate profits.
• Low WACC: Suggests lower financing costs, making growth more valuable.
• High Free Cash Flow Growth: Reflects increasing cash available for investment or shareholder returns.

Public companies with exceptionally high return on invested capital (ROIC) are typically terrific long term investment. High ROIC indicates that a company is efficient in utilizing capital by generating substantial revenue growth and returns well above its cost of capital.

ROIC that far exceeds its weighted average cost of capital (WACC) means the company is not just profitable, but also highly efficient at converting invested capital into profits—every dollar invested yields a much higher return than the company’s cost to raise and deploy that capital.

Investors value companies with high ROIC because they are seen as more likely to create shareholder value over the long term.

Companies with strong ROIC, combined with robust earnings, sales, and cash flow growth, can signal the potential for continued stock price appreciation and makes it attractive to both growth and value investors. Since investing is the effectively the discounted present value of all future cash flow.

Investing is fundamentally about estimating and valuing all future cash flows in today’s dollar terms, accounting for risk and the opportunity cost of capital. The value of an investment is determined by the sum of its expected future cash flows, adjusted for the time value of money by discounting them to the present.

Moreover, a high ROIC is often associated with competitive advantages, pricing power, and efficient management, all of which support a higher valuation multiple for the company.

Definitions:  CAGR (compound annual growth rate), ROIC (return on invested capital), WACC (weighted average cost of capital).

How to Beat the Market

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“You don’t add value by rehashing the consensus — that’s already discounted in markets. I don’t think anybody’s gonna pay you very much for that..” ~ Gary Shilling

Top financial forecaster Gary Shilling believes that to beat the market, you must go against the consensus—but not simply as a contrarian for its own sake.

Shilling suggests that you, as an investor, need to identify rare situations where the consensus is clearly wrong and a major trend is developing. When you spot such an opportunity, act decisively.

Shiller emphasizes that most people can’t consistently beat the market because, on average, the market reflects all available information. Only by being correct when others are not can you outperform the market.

Billionaire Stock Selection Criteria

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Billionaire investors share several common traits that contribute to their extraordinary success. Billionaire investors’ traits can be categorized into investment strategies and broader habits:

Billionaire stock selection criteria for your investments:

Analyze Company Fundamentals: Review the company’s financial health before buying a stock. Look at metrics like revenue, profit margins, and earnings growth. Tools like Yahoo Finance or Seeking Alpha can help you understand these details.

Identify Competitive Advantages: Ask yourself what makes this company stand out. Does it have a strong brand, innovative technology, or an untouchable market position?

Consider Valuation: Use valuation metrics like the price-to-earnings (P/E) ratio or price-to-book (P/B) ratio to determine if the stock is undervalued. Compare it to industry peers or historical averages.

Evaluate Debt Levels: Check the company’s debt-to-equity ratio to ensure it isn’t overly burdened by debt. Lower ratios often indicate financial stability.

Follow Market Trends: Look for industries with growth potential, such as renewable energy, AI, or biotech. Diversifying across sectors can also reduce risk.

Assess Management Quality: Research the leadership team. Have they successfully steered the company through challenges in the past? Confidence in management is key to long-term success.

Focus on Long-Term Growth: Avoid getting caught up in short-term market volatility. Instead, invest in companies you believe will perform well over the next 5–10 years.

Consider creating a checklist or using a portfolio analysis app to make this process easier. Of course, always align your investments with your financial goals and risk tolerance.

Here are some notable stock picks favored by billionaire investors:
• Nvidia (NVDA): Steve Cohen’s Point72 Asset Management increased its stake by 75%, holding shares worth $448 million, making it the fourth-largest position in his portfolio. Nvidia has shown strong growth, up 175% in 2024.
• Amazon.com (AMZN): Philippe Laffont’s Coatue Management holds $2.1 billion of Amazon shares, representing 7.8% of its portfolio. The firm has owned Amazon since 2009 and recently increased its stake by 4.6%.
• Meta Platforms (META): Stephen Mandel’s Lone Pine Capital added $100 million to its Meta stake, which now accounts for nearly 9% of its portfolio. Meta’s profitability, driven by platforms like Facebook and Instagram, makes it a standout pick.
• PDD Holdings (PDD): David Tepper’s Appaloosa Management upped its stake by 170%, with holdings valued at $714.6 million. PDD is the second-largest position in his portfolio.!

Building Wealth

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“The wealthy understand the difference between looking rich and being rich.” – Dave Ramsey

Wealthy individuals don’t always drive flashy sports cars or luxury brands. Most of the time, they’re cruising around in vehicles that are reliable, practical, paid-off and smart—just like their financial decisions.

According to financial guru Dave Ramsey, 69% of millionaires did not average $100K or more in household income per year and one-third of millionaires never had a six-figure household income in their entire careers.

When people don’t waste money trying to look wealthy, they have money to actually become wealthy.

Ironically, there’s a high correlation between people who build wealth and those who don’t give a crap what other people think, states Ramsey. Be careful who you’re listening to. The sooner you stop worrying about the opinions of others, the sooner you can start winning, growing and improving.

The #1 mistake Americans make with money is not paying attention to their spending, budgeting or financially planning.

The wealthy get wealthier because they keep doing wealthy people stuff—investing, budgeting, and actually paying attention to where their money goes.

Want to win with money and build wealth, ask Ramsey? Start doing what works.

Buffett’s Investment Strategy

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“Charlie [Munger, the late Vice Chairman Berkshire Hathaway], in 1965, promptly advised me [Warren Buffett]: “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.” ~ Warren Buffett

Berkshire’s biggest stock holdings are all among the top dogs in their respective industries. Many of them have another attribute that billionaire investor Warren Buffett loved — capital return programs of either paying dividends or repurchasing shares of their stock.

Berkshire, under Buffett, invested in companies that were good values (“wonderful businesses purchased at fair prices”) and had attractive capital return programs through dividends payments and share buybacks.

As an individual investor, it’s important to find the types of companies and sectors you like. It’s also vital to make sure you align your investments with your risk tolerance.

Buffett has often said that Berkshire purposely keeps a massive cash position and is conservative with its investments, but that’s because capital preservation and limiting downside risk are integral parts of his philosophy.

If you have a high risk tolerance or are multiple decades away from retirement, taking on more risk could make sense for you. But only if you are comfortable with risk and have the patience to hold onto stocks through periods of volatility.

Source:  https://www.fool.com/investing/2024/03/10/dividend-stocks-majority-warren-buffett-berkshire/

Fear of Missing Out Investing

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Most new and seasoned investors make the same mistake with their money over and over:

They buy high out of greed and sell low out of fear.

At the top of the market, investors can’t buy fast enough. At the bottom, they can’t sell fast enough. And investors repeat that over and over until they’re broke.

Can you imagine doing this in any other setting? Imagine walking into an Audi dealership and saying, “I need a new A6.” The salesperson says, “Oh my gosh, you’re in luck, we just marked them up 30%.” And you say, “Awesome, I’ll take three!”

Investors are hardwired to get more of what gives us security and pleasure, and run away as fast as we can from things that cause pain. That behavior has kept people alive as a species. Mix that with investors desire to be in the herd, the feeling that there’s safety in numbers, and you get a pretty potent cocktail.

(FOMO – fear of missing out):  When everyone else is buying, it feels like if you don’t join them, you’re going to get eaten by the financial version of a saber-toothed tiger.

But it doesn’t take a genius to see that this behavior is terrible for individuals when it comes to investing.

Source:  Carl Richards, How fear and greed kill returns

10 Powerful Lessons from The Little Book That Still Beats the Market

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Here are 10 powerful lessons you might glean from Joel Greenblatt’s The Little Book That Still Beats the Market:

Value Investing Strategies

1. Focus on Quality and Bargains: The book champions value investing, where you buy stocks of high-quality companies at a discount to their intrinsic worth.

2. The Magic Formula: Greenblatt introduces his “Magic Formula,” a ranking system that identifies stocks with good earnings yield (earnings per share divided by share price) and high return on capital (a measure of profitability).

3. Simple Yet Effective: The Magic Formula is a straightforward approach that can be applied by investors of all levels of experience.

4. Long-Term Investment Horizon: The book emphasizes a long-term investment approach, focusing on holding stocks for several years to benefit from company growth.

Disciplined Investing Practices

5. Diversification: While the Magic Formula helps identify undervalued stocks, The Little Book That Still Beats the Market also emphasizes diversification to spread risk across different companies and sectors.

6. Patience and Emotional Control: Value investing requires patience and discipline. The book discourages reacting to market fluctuations and encourages sticking to your investment plan.

7. Low-Cost Investing: Greenblatt advocates for minimizing investment fees and expenses to maximize your returns.

Value Investing Philosophy

8. Margin of Safety: The book emphasizes the importance of buying stocks with a “margin of safety,” meaning the price you pay is significantly lower than the company’s intrinsic value.

9. Thinking Like a Business Owner: Value investors approach the stock market as buying ownership in businesses, not just trading pieces of paper.

10. Beating the Market, Not Timing It: The book focuses on building wealth through a long-term value investing strategy, not attempting to time the market.

Additionally

• Greenblatt’s approach has been successful for him and some investors, but past performance is not a guarantee of future results.

• The book offers a clear and concise introduction to value investing principles.

By reading The Little Book That Still Beats the Market, you can gain valuable insights into value investing strategies, understand the Magic Formula, and develop a disciplined approach to building wealth through the stock market. Remember, investing involves inherent risks, so it’s crucial to do your own research and understand your risk tolerance before making any investment decisions.

BOOK:https://amzn.to/4d8bD0Q

You can also get the audio book for FREE using the same link. Use the link to register for the audio book on Audible and start enjoying.

Peter Lynch Rule 5:

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Peter Lynch, the Fidelity investing guru, once said:

“When stocks are attractive, you buy them. Sure, they can go lower—I’ve bought stocks at $12 that went to $2, but then they went to $30.”

With this in mind, never invest in a company without understanding its finances.

The biggest losses in stocks come from companies with poor balance sheets.

Always look at the balance sheet to see if a company is solvent before you risk your money on it.

Understand how a company makes its revenue and maintains its cash flow.

Peter Lynch Rule 3:

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In the short run, the stock market acts like a “voting machine”, while functioning in the long run more like a “weighing machine”. ~ Warren Buffett

Often, in the short term, there is no correlation between the success of a company’s operations and the success of its stock over years.

In the long term, there is a 100% correlation between the success of the company and the success of its stock.

The disparity is the key to successful long-term investing.

Such opportunities arise occasionally because in the short run the stock market acts like a “voting machine” (reflecting all kinds of irrational attitudes and expectations), while functioning in the long run more like a “weighing machine” (reflecting a firm’s true value).

Best Small Cap AI Stocks to Buy and Hold

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The best artificial intelligence small-cap stocks for long-term investment

Sources
The 5 best small cap AI companies to buy now – MarketBeat

Here are some of the best small-cap artificial intelligence (AI) stocks to consider for long-term investment:

SoundHound AI (SOUN) is a leading voice AI company providing conversational intelligence solutions. It has strong revenue growth, with Q1 2024 revenue up 73% year-over-year. SoundHound is well-positioned in the rapidly growing voice AI market and has a median analyst price target of $7, representing significant upside potential from its current price around $5.40,

Recursion Pharmaceuticals (RXRX) applies AI to drug discovery and development. With a market cap around $2 billion, it is one of the larger small-cap AI stocks. Recursion’s unique AI platform for mapping cellular biology could provide an edge in developing novel treatments across many disease areas.

Duos Technologies (DUOT) provides AI-based vision technologies for rail inspection, logistics, and other industrial markets. Its rail inspection business is growing rapidly, and Duos has opportunities to expand into trucking and other transportation sectors leveraging its AI capabilities.

BigBear.ai (BBAI) offers AI-powered decision intelligence solutions for supply chains, autonomous systems, and cybersecurity. While facing recent challenges, BigBear.ai projects 25-39% revenue growth in 2024 and has made acquisitions to drive future growth in these key AI verticals.

CXApp (CXAI) provides an AI-powered workplace app for communications, meetings, and security. It has shown strong revenue growth, turning free cash flow positive in 2023, and analysts view it as an attractive small-cap AI play with room for further expansion.

The key points are that small-cap AI stocks offer higher potential returns but also higher risk and volatility compared to large established companies. A diversified portfolio and long investing horizon are advisable to manage the risks of this emerging, high-growth sector.