Old School Value

2009 Top 40 Best Stocks to Retire On

This is part 2 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list.

Part 1 | Part 2

Bargain Growth aka Growth at a Reasonable Price (GARP)

Companies 11 through 20 are categorized as stalwarts or companies that can consistently create growth. This is the Peter Lynch style section of the portfolio.

Another Lynch precept is to invest only in companies with debt-to-equity ratios below 0.33. That requirement eliminated three of our 2008 holdings: 3M, McKesson, and Parker Hannifin all carry slightly too much debt. Meanwhile, two of our other stocks, Accenture and Microsoft, managed to generate more free cash flow last quarter, proving themselves to be what Lynch calls “stalwarts,” or consistent performers. They remain on our roster. - Fortune

Now let’s look at the next 10.

40 Best Retirement Stocks: No.11-20

1. Cisco Systems (CSCO)
2. Microsoft (MSFT)
3. Walgreen (WAG)
4. Gilead Sciences (GILD)
5. Mastercard (MA): Outside circle of competence
   
6. Thermo Fisher Scientific (TMO)
7. Baker Hughes Inc (BHI)
8. Becton Dickinson & Co (BDX)
9. Bristol-Myers Squibb (BMY)
10. Carlisle Companies (CSL)

Although I understand what Mastercard does I’m still uncertain about the valuation process and my abilities to get deeper into financials so I’ll let it be. If you look at the embedded spreadsheet at the bottom of the post, you’ll see that I didn’t highlight a single one out of this 10 because I don’t believe there are any bargains in this list as the categorization suggests.

BHI, BDX and MSFT were priced lower than my valuations but BHI is too inconsistent and unreliable to be included in any long term portfolio. BDX looks to be a good company but the margin of safety just isn’t there.

Microsoft (MSFT) Commentary

Regarding MSFT, I’ve never liked it as an investment. As a company, MSFT is always falling behind in everything they do. They are slow to react, slow to innovate and slow to adjust. Look at the romping they get from Apple with the mp3 players, Mac books is inching up and even iPhone is a better mobile product than Windows Mobile (although iPhone isn’t just a software). Apple’s growing fan base can’t be beat.

In the gaming section, Wii is the market leader. I can’t actually remember MSFT ever being a leader in the gaming section either. Nintendo had lagging console game sales for years but put a major turnaround through innovation something that I find is missing with MSFT.

Search and Bing? Still less than 10% while Google has over 75% market share. Younger, sleeker and innovative company just sped past.

But having said all that MSFT is still likely to grow at a consistent pace with Windows and Office, they just can’t seem to dominate anything other than what they were doing since their startup years.

• Current Price: $24.04
• Discounted Cash Flow Fair Value: $32.17
• Ben Graham Formula Value: $43.50

Walgreen (WAG) Commentary

WAG is a company that I’ve always like and is a prime example of a consistent and faithful company. It goes about its business with expert precision and execution. If you look at their margins for the past 10 years, it is solid as a rock. No veering off course into stupidity, which is why the company is so widely followed and constantly hovering around fair intrinsic value.

This recession is a good chance for entry points on WAG for people that have been waiting for years to get a consistently growing company.

• Current Price: $29.34
• Discounted Cash Flow Fair Value: $24.42
• Ben Graham Formula Value: $52.74

Thermo Fisher Scientific (TMO) Commentary

TMO is a new addition to the portfolio and it is a good pick.

Thermo Fisher Scientific Inc. (Thermo Fisher), incorporated in 1956, is engaged in serving science. It provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics.

• Current Price: $40.39
• Discounted Cash Flow Fair Value: $39.76
• Ben Graham Formula Value: $40.75
• Comments: Margins, growth and return metrics are good. FCF growth has been very strong but wonder whether it can be sustained. Increased margins in FY 2008. Sales becoming flat.

It seems like its premium value has been removed and is now trading at fair value. Really does seem like a GARP pick.

Becton Dickinson & Co (BDX) Commentary

Becton, Dickinson and Company (BD) is a medical technology company engaged in the manufacture and sale of a range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, industry and the general public.

• Current Price: $70.70
• Discounted Cash Flow Fair Value: $82.04
• Ben Graham Formula Value: $138
• Comments: Has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing.

Bristol-Myers Squibb (BMY) Commentary

Has a nice dividend of 6% but growth has been somewhat slow when it comes to cash. However, their ability to generate cash returns off invested capital is very good at over 15%. I’m not very interested in BMY myself but I do wish there was somebody that could analyze and value Mead Johnson Nutritionals (MJN).

• Current Price: $20.24
• Discounted Cash Flow Fair Value: $17.11
• Ben Graham Formula Value: $29.94
• Comments: FCF is positive most of the time but inconsistent as in not able to raise it steadily with some big losses in between. Average return metrics. Normalized earnings is also low and inconsistent. Margins and sales unstable. I wouldn’t consider as a retirement stock.

Fortune 40 Best Stocks to Retire on Part2

Disclosure

No positions in any stocks mentioned at time of writing.

Continuing on by popular demand, this is part 1 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list. View the original list on Fortune.

Part 1 | Part 2

The new 2009 Fortune’s Best Stocks to Retire On is not a complete makeover from last years pick of 40 stocks but there has been quite a number of changes. Enough to keep things interesting.

You can also refer to my commentary on the 2008 best stocks list to catch up.

Excerpts from the Fortune Article

Snippet on how the 2008 list performed.

The Fortune 40 delivered a 20.3% loss for the 12 months ended June 1… The S&P lost 30.1% during the same period… [our]record since inception in 2002: The Fortune 40 has averaged 10% annualized returns, nearly doubling the S&P’s 5.1%.

Best performers from 2008 selected companies.

Our star stocks last year included smokeless-tobacco company UST (acquired by Altria), which returned 25.9%. Then there was National Presto, which manages to sell both ammunition and diapers, among other disparate products. It’s an unlikely combination, to say the least, but one that is apparently impervious to the economy. Investors rewarded National Presto with a 17.6% gain last year.

Worst performers from the stock list.

Our worst decliners were two small-cap recommendations pummeled by the collapse of energy prices. Offshore construction and engineering concern Global Industries plummeted 55%, and natural-gas driller Grey Wolf sank 57% before being bought in December. (Quite a contrast to how my small-cap picks have performed)

Growth and Income Selection

The first 10 companies that make up the list is part of the growth and income section of the portfolio. As the Fortune portfolio is a bag of companies fit for retirement, Fortune has categorized their portfolio positions according to each of the four strategies.

The growth and income companies are blue chip companies based on Jeremy Siegel’s book The Future for Investors.

Siegel’s stock-picking philosophy emphasizes established companies with proven products, consistent returns, healthy long-term earnings growth, and high dividends. Perhaps they aren’t the glitziest names, but “boring” can be another word for “sturdy,” and that’s appealing these days.

CL,USB and ITW were dropped this time around and replaced with MCD, FPL and WMI.

40 Best Retirement Stocks: No.1-10

1. Abbott Laboratories (ABT)
2. Coca-Cola Co (KO)
3. General Mills Inc (GIS)
4. Johnson & Johnson (JNJ)
5. Procter & Gamble Co (PG)
6. Waste Management Inc (WMI)
7. McDonald’s Corp (MCD)
8. FPL Group (FPL)
9. Accenture Ltd (ACN)
10. Chubb Corp (CB)

Once again, I’ll be passing on Chubb as I don’t have a good understanding of insurance companies and their financials.

This time around, the price discrepencies are quite small but the solid picks are JNJ, PG and the new addition, MCD. With most of the companies, it has been less than 2 months since I put up the 2008 Fortune Best Retirement Stock list and blue chips won’t change within 2 months, so the commentary is the same.

Johnson & Johnson (JNJ)

Johnson & Johnson stock analysis and report

Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson has more than 250 operating companies. The Company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.

• Current Price: $56.60
• Discounted Cash Flow Fair Value: $70.16
• Ben Graham Formula Value: $98.37
• Comments: increase in debt-equity, good margins, good FCF

Procter & Gamble (PG)

The Procter & Gamble Company is focused on providing branded consumer goods. The Company’s products are sold in over 180 countries around the world primarily through mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets

• Current Price: $51.75
• Discounted Cash Flow Fair Value: $68.75
• Ben Graham Formula Value: $102.49
• Comments: good FCF, steady margins, super CROIC, decrease debt, outstanding

McDonald’s Corp (MCD)

McDonald’s Corporation franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, limited, value-priced menu in more than 100 countries globally. The restaurants are operated either by the Company or by franchisees, including franchisees under franchise arrangements, and foreign-affiliated markets and developmental licensees under license agreements.

• Current Price: $57
• Discounted Cash Flow Fair Value: $68.75
• Ben Graham Formula Value: $105.43
• Comments: Generates cash, earnings with consistent and high returns. Market leader, still growing consistently.

2009 Fortune 40 Best Stocks to Retire on Part1

Disclosure

No positions of any stocks mentioned at time of writing

As you know, I try to approach stock analysis and business valuation with different methods in order to try and fill holes and weaknesses.

One aspect that I want to cover that I haven’t discussed before is regarding maintenance capital expenditures in Free Cash Flow (FCF) for the Discounted Cash Flow (DCF) valuation method.

Even now when it comes to FCF, I don’t worry about trying to calculate the exact details of maintenance capex, but going the extra mile to calculate maintenance capital expenditure will surely put you ahead of everyone else when it comes to uncovering hidden value.

Free Cash Flow Quick Recap

Free cash flow is the money generated that is not required to maintain operations. Simply, it is money that the business can use for whatever it wants. It can put it in the bank, give it to charity, pay a dividend, buy back shares or use it for future growth.

So when we use the simple version of the FCF formula

FCF = Net Cash from Operations - capital expenditures

we are calculating FCF by subtracting both the capital expenditure that is used to maintain operations and to fuel future growth.

(I am not talking about owner earnings here. Just the textbook FCF definition)

So in order to get an accurate FCF figure, the correct method would be to subtract ONLY the capital expenditure used to maintain the business.

What is Growth and Maintenance Capital Expenditure?

As outlined above, maintenance capex is the money that is required to maintain or replace assets.

e.g. A typically high capex company such as oil drillers are required to service its rigs and replace parts just to stay in business.

Free Cash Flow attempts to differentiate between growth and maintenance but it is rare for companies to disclose what is used for maintenance and growth in their statements, nor is it required. This makes finding maintenance capex a difficult task.

Before I go on, let me say that finding maintenance capex is definitely an art. There is no strict formula or method and I have yet to come across a firm process to date.

If you have know of a better way, please leave a comment at the end.

How to Calculate Maintenance Capital Expenditures

The common method is to assume

Maintenance Cap Ex = Depreciation and Amortization

therefore

Free Cash Flow = Net Cash from Operations - D&A

The train of thought is that buildings and equipment will need to be replaced in the future and because depreciation is usually a straight line approach, it will also be much smoother.

By looking at several years of data, a capex number that is stable yet does not lead to increased revenues is a sign that it is mostly maintenance capex.

Determining Maintenance Cap Ex

Let’s look at the difference between three companies, JNJ, WMT and ATW. I chose these three companies as I figured their capex requirements would vary.

My reasoning is that JNJ should have lower capex since their intellectual property and patents equates to a low maintenance capex, such like MSFT. They also sell their products distribution channels which should also keep the maintenance capex down.

WMT owns and leases their stores, is required to purchase more inventory in their existing stores.

ATW is a heavy growth and capex company as it is a deep sea oil driller which requires an extensive amount of capital and credit for maintenance and growth.

in $mil		2005	2006	2007	2008
JNJ	Revenues	$ 50,514	$ 53,324	$ 61,095	$ 63,747
	D&A	$ 2,093	$ 2,177	$ 2,777	$ 2,832
	Capex	$ 2,632	$ 2,666	$ 2,942	$ 3,066
WMT	Revenues	$ 312,427	$ 348,650	$ 374,526	$ 405,607
	D&A	$ 4,717	$ 5,459	$ 6,317	$ 6,739
	Capex	$ 14,563	$ 15,666	$ 14,937	$ 11,499
ATW	Revenues	$ 176	$ 276	$ 403	$ 527
	D&A	$ 27	$ 26	$ 34	$ 25
	Capex	$ 26	$ 79	$ 91	$ 328

So from the above number what do you see?

Notice how a non capex heavy,  stable cash cow business such as JNJ has D&A roughly similar to capex? JNJ has a very steady and minor increment in capex which also leads to a slow yet steady growth in revenues.

WMT is also similar. In 2008 we can estimate that their maintenance capex was $6,739m (D&A) which means that $4,760m was used for growth.

Lastly, we see that ATW has a fairly stable depreciation yet their capex growth is exponential. Now this is a sure sign of investing in growth and if you read and listen to the conference calls, they are building new and better rigs to add to their fleet.

Using depreciation and amortization as maintenance capital expenditure is also useful for when capex is erratic and FCF inconsistent, which is usually the case for companies like ATW and other industrial commodity businesses.

Another alternative is to normalize the capex or free cash flow, whichever is  easiest and then used the normalized number as the beginning point to your present value formula in the DCF valuation.

Bruce Greenwald also has a approach which I will get to in another post once I finish reading his book.

Disclosure

I own ATW at the time of writing

Previously we looked at the business valuation of Mastech Holdings (MHH). To summarize, MHH is an IT staffing company in a competitive yet profitable industry. The macro environment has punished all staffing companies to the floor as companies continue to lay off people. MHH is a spinoff, a contrarian pick and a cheap stock all in one.

View the first stock analysis post on MHH. This post is all about analyzing numbers and valuation.

Spider Graph and Business Valuation Overview

Some opinions on the graph above

• Low risk: With a strong and healthy balance sheet, the risk of MHH going bankrupt and investors losing their money is very small. Current national unemployment rate is at 9.4% and I believe the jobless rate will decline more than it will increase in the future. Note that I did not say in a couple of months or this year. I’m talking over 1 year to be safe.
• High growth: Growth is dependent on the economy. Growth of job rates is the max it will be able to grow.
• Undervalued: Big margin of safety from different valuations. Continue reading.
• Well managed: In operation since 1986. Plenty of experience with the founders still running the company.
• Good financial health: Very healthy. Strong balance sheet.
• Strong moat: Shallow moat. Lots of competition. Anyone can enter the industry.

Financial Statement Analysis

Balance Sheet Analysis

• Mastech has a healthy balance sheet
• $1.55 in cash per share. i.e. 53% of share price is cash.
• No intangibles (WOW! I like)
• No long term debt
• Current debt not a problem. Current ratio of 2.51
• Net net value is $1.80 which means the company has lots of tangible assets making up the stock price
• No drastic changes in cash, accounts receivables or other balance sheet items from the past 5 quarters to set off any alarms.

Income Statement Analysis

• Gross profit margins in the 19% range. Good for a staffing company.
• Cost of Goods Sold (COGS) is very high at 80+% but other competitors around the same size is also in this range. Obviously has to spend to attract employees and earn business. Visa processing and legal fees obviously costs a substantial amount per employee.
• Small net profit margin of less than 4% average and 2.4% in the latest quarter makes it tough in bad economies.
• No new issuance of shares

Statement of Cash Flows Analysis

• Cash flow statement is clean
• Has a bad debt of $258k from not being able to collect receivables. Some of its financial clients went bankrupt.
• Generates positive cash from its operations. No need for debt. (Excellent)
• Organically creates FCF. No need to use EBITDA to try and inflate their numbers (Excellent)

Overall the financial statements are very clean, the business looks to be running smoothly without risk of going bankrupt in this tough environment.

Fair Value Calculations

Discounted Cash Flow (DCF) Fair Value

First using the discounted cash flow method. We see that MHH has been able to generate FCF for the first time as a standalone company in one of the worst years ever. Their history also shows how they have been able to generate cash while being a wholly owned subsidiary of iGate. With this, I’m confident that they will be able to generate more FCF in the future as well.

So to make some assumptions, I’ll use my FCF value of $3.8 million, assume 0% growth rate for the next 10 years and then a terminal rate of 3%. These are very conservative figures. Apply a 15% discount rate, I could use 20% as well but I don’t need to fiddle with the numbers.

• The DCF method gives me a fair intrinsic value of $9.40.
• 50% margin of safety means the buy price is $4.70
• 69% discount to current price of $2.90

Benjamin Graham’s Formula Valuation

This formula uses normalized earnings and with a 0% earnings growth rate, Ben Graham tells me that MHH is worth $3.77. If I were to apply a growth rate of 3.5%, which is basically the 10 year treasury rate;

• the fair value would be $6.21
• 53% discount to current price of $2.90

Net Net Working Capital Valuation

As I mentioned above, the net net value is $1.80.

When I calculate the net net value, I ignore property and all other assets except 100% cash, 75% of accounts receivables and 50% of inventories.

Multiples Valuation and Competitor Comparison

Competitors I am comparing that were mentioned in the annual reports:

• Analysts International Corporation (ANLY)
• Computer Task Group (CTGX)
• TSR Inc (TSRI)

Other value and Magic Formula staffing companies:

• Barrett Business Services (BBSI)
• Manpower (MAN)

Looking at all these companies side by side, I can’t help but see how much better MHH is.

• MHH PE is is at 3.6 while the average is 18
• Price to cash flow is a low 3.26 compared to average of 12
• Price to FCF is 1.86 compared to average of 5
• EV/Revenue (TTM) is 0.06 compared to average of 0.13
• Less of a decline in growth compared to all its competitors except CTGX
• Financially stronger than most
• Profitability is in line with competitors but profit margins are the best
• Excellent ROA, ROE, ROIC. Much better than competition

On ALL counts MHH performs and executes better than its competitors yet it is trading at a PE of 3.6 and this is even after it ran up 50% or so following its 1st quarter results.

If I was to assume a multiple of 10, which is still conservative, the fair value comes out to $8. Note that I am using their latest EPS with this multiple. I didn’t even bother factoring in how their earnings will definitely increase.

Also, the spinoff price was at $9 which is in line with everything I’ve written here.

See all the numbers for yourself in the spreadsheet below.
MHH Competitor Comparison Spreadsheet

Summary

No brainer.

Disclosure

I hold MHH at the time of writing.

I first mentioned Mastech Holdings (MHH) when I updated the results of the negative enterprise value screen. Mastech is not a net net value stock but after briefly analyzing the financial statements, I believe it to be within my circle of competence and margin of safety. There is also a limit to the downside. In other words, this is a cheap value stock idea.

Nevertheless, all fundamental analysis requires more reading and analysis to come up with a conclusion and fair value estimate. Like previous stock analyses, it will be broken to two parts. This one looking at the business, industry, risks and advantages and the second post will go over the various numbers.

I’ll start with a quick overview.

Spider Graph Overview

Business Summary

Mastech Holdings, Inc (MHH) is a provider of IT and brokerage operations staffing and consulting services to Fortune 1000 companies.

Mastech delivers a broad range of services within business intelligence / data warehousing, service oriented architecture, web services, enterprise resource planning & customer resource management and eBusiness solutions segments.

Mastech was established in 1986, has more than 2o years of operating history and was a wholly-owned subsidiary of iGATE but spun off from its parent on September 30, 2008.

The company managed to survive the dot com bust and retooled its recruiting model to focus on the recruitment of U.S. based IT talent which has allowed the company to access to a larger and differentiated recruiting pool compared to many of their competitors.

Growth Strategy and Competitive Advantage

The staffing industry as a whole is very fragmented with low barriers of entry and high competition. This means that there is no clear leader dominating the industry like Cola and Pepsi. The pie is big enough for everyone i.e. everyone has the potential to profit and stay in business although a moat does not exist.

In this type of industry, regardless of size, a company can steal or lose market share.

As for growth, I see it being dependent on a couple of things.

1. Stealing market share and contracts - Staffing is a service. It isn’t a product that can be sold internationally. An H1-B visa is useless outside the United States and a US staffing company isn’t likely to send their contractors to other countries.
2. Growth is entirely dependent on the economy - This is an investment that should be monitored along with the economy. When the economy is good, companies increase their business which will require additional employees whether they be permanent or temporary. With the nationwide unemployment rate being 10% at the moment, it is safe to say that the probability of economic growth is  higher than a depression.
3. Acquisition of companies - MHH has a healthy balance sheet and has the ability to acquire other companies.

One competitive advantage that MHH states in their 10-K is the following:

“Unlike most staffing firms that have a high concentration of either H1-B workers or W-2 hourly U.S. citizens, we have approximately a 50/50 composition of H1-B and W-2 hourly employees. As such, this balanced mix allows us to tap a broad candidate pool.”

I’m not quite sure how much of an advantage this is, since it should be easily replicated.

However, if you look at the numbers that I will go through later, MHH compares to a company 4-5 times its size. Their margins and profitability are higher than a number of their competitors which does prove they have an advantage. I just can’t see or pinpoint it.

Sales and Marketing

Mastech focuses their marketing primarily on large businesses with spending power and recurring staffing and software development needs.

MHH tends to spend “much of our marketing efforts are focused on increasing business with our existing accounts.” As you can see already, MHH is not a growth company.

The company does business through two business channels - wholesale and retail with most of the strategic relationships in this channel are established vice presidents and sales director.

“Wholesale channel consists of system integrators and other IT staffing firm customers …  Revenues from this channel represented 48% of total revenues in 2008.

IT retail channel focuses on customers that are end-users of IT staffing services.

Within the retail channel, many end-users of IT staffing services have retained a third party to provide vendor management services to centralize the consultant hiring process. Under this arrangement, the third-party managed service provider (“MSP”) retains control of the vendor selection and vendor evaluation process, which acts to weaken the relationship built with client contacts.”

Risks

1. Concentrated customers

IBM, Tek Systems and Wachovia Securities are the top three clients representing 14.9%, 12.7% and 10.7% of total 2008 revenues, respectively. If they lose even one of these clients, MHH will suffer huge setbacks.

However, with their history, expertise, broad talent pool and client relationship, this possibility seems to be small.

2. No Pricing Power

Because the industry is highly fragmented, MHH do not have the luxury of increasing prices without jeopardizing their business.

3. Immigration law

Immigration law is also another issue. There is a quota limit to how many H1-B visa’s can be issued each year and it fills up very rapidly. The good thing is that Mastech focuses on employing people in the US already with a H1-B visa.

4. Dependent on Economy

Mastech’s business is directly correlated to the economy. i.e. buy the stock when the economy is bad and sell when things are doing well.

5. Margins and profits will suffer if the trend towards Managed Service Providers (MSP) continues. Managed Service Providers are employed by bigger companies and act as the middle man to handle the negotiation and hiring of contractors. More companies have been using this business model which means that a direct and close relationship will be hard to maintain.

6. MHH also operates internationally to recruit talent which introduces currency risk.

7. Mastech hold several “preferred vendor” contracts which provides business volume although the margins are smaller. If they were to lose their preferred status, they would see a drop is revenue.

8. Co-founders of iGate, Sunil Wadhwani and Ashok Trivedi, hold 57% of MHH common stock. If they are shareholder orientated, great, if not, even an wolf activist Bill Ackman won’t be able to do anything.

To be continued

The next post will focus on the financial statements, fair value calculations and other number discussions. Stay tuned.

Disclosure

I hold MHH at the time of writing.

The last proper investment book review I wrote was on The Art of Short Selling. Since then I’ve read a few investing and non investing books but of the investment books I went through, nothing was worth writing about.

Too Many Bad Investment Books On the Market

The Only Three Questions that Count by Ken Fisher was rubbish and I gave up half way. I didn’t find it helpful in any investing or behavioral finance areas. The foreword by Jim Cramer should have rung an alarm. I much prefer Philip Fisher’s Common Stocks and Uncommon Profits.

I also would have enjoyed Contrarian Investment Strategies a lot more had it not been so redundant.

So a big pile of frustration was lifted when I received F Wall Street: Joe Ponzio’s No-Nonsense Approach to Value Investing For the Rest of Us. Forget Wall Street? Fudge Wall Street? or what ever you wish to call Wall Street, F Wall Street provides an indepth look and discussion of what Wall Street is really after (your money), how you are better off investing on your own, how to value businesses, how to manage your portfolio and more. Let me try and go through it briefly to whet your curiosity.

F… Wall Street

This book is targeted towards the beginner to intermediate investor but is still a great read for the advanced. It is an easy to read book that doesn’t try to lose you in jargon and an overwhelming mess of formulas and symbols.

What I especially liked about the book is how it addresses many of the topics that other investing books do a terrible job of or refuse to go into. Topics such as how to value a business, how much to buy, tracking your businesses and when to sell.

Book Structure

The book is structured into four sections.

The first part deals with the basics. Issues such as Wall Street myths, stock market perceptions, mutual funds, risk and how businesses and their stock grow. Joe is able to take the boring and dryness out of the common finance topics and explain it in a clear and easy to understand manner. The simple to understand examples certainly do help in conveying the message.

Second, it looks at how to approach investing from a business perspective. Meaning, stocks are small pieces of business. Not speculative lottery tickets. Joe introduces us to the concept of “price follows value” as well as how to value a business by reading the financial statements.

Again, even a high schooler would do better in school to read this book when it comes to ease of understanding.

Are you still apprehensive and overwhelmed when thinking about financial statements? Then start reading this book.

It continues on to a simple yet detailed and full blown discussion of Buffett’s owner earnings, with examples in JNJ, MSFT and ABT. Joe also kindly explains how to use Excel’s present value function. I’ve yet to come across any other investing book that tries to help you calculate the intrinsic value of a company like this book does.

I found the third section to be very interesting. All about managing a portfolio.

When to buy, how much to buy, keeping track of your businesses, when to sell and a good section on workouts and arbitrage. My first arbitrage of Tribune corp is also in the book

The final and fourth part discusses the psychological aspect of investing. Investors are classified as “The General Conventionalist”, “The Enterprising Conventionalist”, “The Safety Seeker” and “The Non-Conventionalist”. As I’ve mentioned a few times long ago, an investor is successful when they understand who they are and what style they fit. A nice look at bonds and patience wraps up the book.

Summary

In case you haven’t noticed, I really enjoyed this book. I didn’t have the time to read it in one sitting, but it took about 6-7 20min sessions to see it through.

This book is now my number 1 or 2 recommendation for all new to intermediate investors and earns its place on my very selective recommended reading sidebar, where even The Intelligent Investor doesn’t have a place.

Go get F Wall Street: Joe Ponzio’s No-Nonsense Approach to Value Investing For the Rest of Us now.