Wednesday, June 28, 2006

An Important Ratio

Many financial/personal finance magazines tend to highlight only a few particular financial ratios. The most talked about one is the P/E ratio. This tends to be something that is easy to understand and has been widely used for years. It also tends to be a financial ratio that can be manipulated by management (i.e.- managing earnings). This is one reason why some people also use other ratios like the P/S (price to sales) ratio because Sales are a little harder to manipulate.

While these ratios are important, another important ratio is EV/EBITDA
Lots of letters there, so let's get through it:
EV stands for Enterprise Value. Think of the enterprise value as the amount someone would need to pay to takeover the company. It's a relatively easy ratio to compute: take the stock's market capitalization (price x shares), add in debt, add in preferred stock, then subtract out cash and cash equivalents.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization
This figure eliminates the effects of financing. For most income statements, you can see the value if you take sales and subtract out cost of goods sold and selling/admin expenses.

Now we just have to put everything together. Take the enterprise value and divide that by EBITDA. A "good" number is something under 10. Basically the lower the number, the more the stock is considered a value play.

Tuesday, June 27, 2006


Another bad day where the markets fell by roughly 1%. The day started off fairly well and then went downhill from there. My cash percentage is still a big percentage and I will hopefully have time to start investing that a little more. I read two old articles that got my interest today. One was in a Barron's from about a month ago about commodities and how it's a good hedge against stock positions. They also noted a few studies that showed over the long run a diversified commodity portfolio produced results that came close to the S&P return, but with lower risk. It also noted that when stocks go through periods of downtimes commodities outperform and when stocks are up commodities are down.

The other article I read highlighted an option fund. It mainly used covered call strategies and had an average annual return of about 16% over the past four years. I really think options can become a good part of my overall portfolio. Right now I just re-started Options As A Strategic Investment and after I get through this one I'm going to re-read Option Volatility & Pricing. I think, in terms of authors, McMillan and Natenberg are really good. Hull has wrote what many consider the bible of derivatives, but I have not bought that one yet (it's on my list though).

Thursday, June 22, 2006


Today Oracle made the headlines by reporting stronger than expected revenue. To me, this seems like one of the few tech giants that's actually going forward at a robust pace. They are growing through acquisitions, but the important thing is that they seem to be making these acquisitions work. The merging of two companies can turn out to be a costly mistake, but ORCL seems to be making their purchases work. The other news story is that they are taking market share away from SAP and IBM. Depending on the product line, SAP is a strong competitor with a nice-sized market share. It will be interesting to see their earnings when they report on July 20th.

Oracle is also continuing their stock buyback program, but I haven't read or looked into the net effect of their buybacks. Some companies issue press releases stating they are starting a $X buyback program. Some people view this as good news, while others view it as poor news. It all depends on the company and the sector. If a slowly growing company is buying back stock that can be seen as a good thing, but if a really fast growing company is buying stock that can be seen as a bad move because it should be investing its money internally. Anyway, back to my point. A company might state a big buyback but after you take into account shares given for options andn shares as part of acquisitions (they might buy a company for 80% cash and 20% stock), the net effect of the buyback might not be all that spectacular.
I didn't see anything mentioned with ORCL, but I'll be on the look out.

Wednesday, June 21, 2006

A bounce

The markets had a pretty good day today with each of the major indices increasing almost 1%. As the day went on the markets got stronger, ending with a slight sell-off but maintaining the majority of its gains.

One of the technicals I do like to use is the 50 day moving average. I think it's a useful indicator to hightlight bottoms and tops when it comes to longer term trends and dealing with indexes. Many people do use 50day MA's with stocks, but I also find that overall the volatility adds some noise into the data. With an index there seems to be a general band that the stock trades within. I haven't had time to update my studies on this, but the last time I gathered data I remember that the S&P usually traded within +/- 3% of it's 50day MA. When it got past these extremes it was a signal that it was going to top/bottom out pretty soon. The Nasdaq is more volatile and I think the band for that was about +/-5.5%. In one of my earlier posts I noted that I was surprised the Nasdaq was over 7% below it's 50 day MA, which would be a strong signal that a bottom is near.
I don't have the exact 50day MA number with me, but it seems that the Naz is now under 5% from it's MA. The one thing that can skew this is that now we should expect the 50 day moving average to continue to decline because of the sharp sell-offs that just happened recently. But if the Nasdaq declines less than the 50 day MA decline, it would appear to get closer to -4% from it's moving average.
I'm getting caught up on work (finally!) so if I get a chance to update my sheets, I'll post some of the results.

Monday, June 19, 2006

An expensive weekend

Well I really didn't hold back this weekend in terms of spending! I think I spent close to $150 on movies and groceries/Target stuff. That wasn't too bad, but then another $140 was spent on father's day. I also bought five concert tickets for two concerts and that came out to almost $300.
I'm going to get paid back for three of the tickets (since two are for me), but it's still money flowing out!
My biggest purchase had to be my new digital camera. I have a 3 megapixel right now, but while I think it takes great pictures it was getting too big for me. Compared to the compact digital cameras out now, my camera is huge (it's a canon powershot a75). So I decided to sell that one (if anyone is interested email me and I'll sell it for cheap) and got a new Canon. I went with the Canon SD600 because it's compact, but not as pricey as some of the other models. I don't need the extra features that the other ones had so I saved a little bit of money. Then I ended up buying a 2 gig media card so I can hold tons of pictures and video. This will come in handy because I'll be able to take video of the concerts I go to and I'm about 90% sure I'm going to Europe later this year so I will definitely take tons of pictures.
We're planning to go to: London, Paris, Germany and possible one more place.

Monday, June 12, 2006

What magazines to read?

I often get emails asking what financial websites people should check out to learn more about investing. Lately I've received a few emails about magazines, so I thought to sum things up in a post.
I generally prefer to read things on paper rather than online content and I know others feel the same way. For the list below, I would recommend buying one or two issues and see how you like them. If you like the magazine, then you might as well subscribe to them because it will be cheaper in the long run.

The first two magazines I would start off with are: Smart Money and Bloomberg's Personal Finance magazine. Both have articles about investing and personal finance and I probably like Smart Money a little more.

Once you get a little more familiar with things, I would suggest a subscription to Barron's. Barron's is a newspaper that comes out once per week and has a ton of information. They have great weekly recaps and specific stories highlighting stocks.

After Barron's I think Business Week is the best choice. This weekly magazine does not give as much financial data as Barron's, but it gives you more business stories. I think it's a great magazine and it sums up the major stories of the week, while writing about stocks and industries.

If you're up for even more reading then it's time to move on to the Wall Street Journal. Of course this is a daily newspaper and you will have all the info on the important business and political stories.
Another magazine I like that leans a little more toward politics/policy is The Economist. I don't think this is a magazine for people just starting off about investing, but it's worth it for other investors.
It seems like a lot of reading and it is! Most of the people I know read all of the above plus specific trade journals and other financial newspapers (like the Financial Times).
One more: for those interested more on the academic side of investing/business I would suggest The Journal of Finance. I've been subscribing for awhile and this Journal has been around for decades.

Thursday, June 08, 2006

Time for junk?

I came across a few articles lately that basically said a small allocation in junk bonds might not be such a bad thing. I definitely think the safer way might be through a fund, unless you do a lot of research into a particular fund. I checked out a few junk bonds and some of their charts are actually pretty attractive, plus they are on the plus side for the year. Some of them yield in the 8-10% range, but some of these are also trading at big premiums to their net asset values (NAV).

With the markets being down it's time to do a few things. If you're a long term investor then this is becoming a good time for you. It takes patience, but I suggest to spend some time researching companies. Some companies are just being brought down because of the market, fear, and macroeconomic variables. These companies are starting to become cheap (I think MSN money highlighted Coke -KO- today). If you're a shorter term trader, it might be time to branch out into some different asset classes. All the top performing etf's for the year have to do with foreign stocks. Lower market cap stocks (small caps, micro caps) tend to have less systematic/market risk on average, but more volatility. It would be interesting to see if some of the better performers of the last few weeks are in this category.

One last data: earlier today the markets were selling off and I noticed the Naz was trading at a 7.2% discount to its 50 day moving average. I don't remember seeing it that low in years!

Monday, June 05, 2006

Where's my $9,842?

I just came across a site,, where it attempts to value your site/blog based on certain factors like the number of search results from Yahoo and Google and how long the domain name is (I got points taken off for having a longer name).
It creates two values: an estimated base value and an estimated actual value. The base value is the minimum the site is worth and the actual value is based on the factors combined with recent web site sales. My actual value turned out to be $9,842 so if you want to write that check, click the email button and I'll let you know who to make it out to!

This reminds me of another finance site from about one year ago. I forgot the name of the site, but it was a rather popular finance site. Apparently someone offered the two writers $2000 for their blog and they sold it. The buyer promised to continue the blog and offer many new things (new writers, etc.). A few weeks go by and nothing updates. Then a little over a month goes by and people start to realize that the site is dead. Some guy paid $2000 for the site and did nothing with it! Talk about a waste of money.