You may already know Validea, but I recently saw their guru analysis and found it intriguing.
I’ve always been a fan of new stock valuation methods, checklists or strategies. The Guru checklists they offer is just my style when it comes to learning new analysis methods and seeing the framework of famous investors thought and analysis process.
The prominent theme on Old School Value for a while will be looking into these strategies and checklists of guru’s. That way you can get an idea of what the pros looked at and decide whether it is worth implementing into your own investment checklist and strategy.
Value vs growth.
Most of the stuff you read from me is based on value investing. Pure growth stocks is something that I haven’t dabbled into.
To me value is buying something deep in the sale box for 50c and then selling it for $1. It may take a while and sometimes I end up with a dud, but in the end, there is usually a buyer.
Growth on the other hand is like buying the iPhone4 the day it comes out and then selling it to the person at the end of the line for twice the amount. This too usually has a buyer on the other end.
Either can work, but it is a matter of personality and preference.
Martin Zweig was a growth money manager back in the 1990′s as well as an investment newsletter writer. For Zweig, his growth strategy worked and his clients benefited. He was named stock picker of the year 2 times in a row and wrote a book titled “Winning on Wall Street”, which outlines his investing strategy.
Zweig’s basic investing strategy is to be fully invested in the market when market indications are positive (bullish) and to sell when the indications become negative (bearish). He places heavy emphasis on risk minimization and limiting losses.
The fact that he was able to generate returns of 16% per annum compounded return between 1980 and 1995 is impressive in itself.
Zweig focused on growth stocks, market timing and technical analysis, but what is it that made him so good? You may not agree with his style, but the numbers don’t lie.
I won’t be getting into his theories on market timing and technical analysis. Way too complicated for me.
If you already read the book or know that “the trend is your friend”, you don’t need an introduction at all. For other people like myself, might as well try and discover something to apply.
Martin Zweig’s religious focus was to check earnings consistency, trend and acceleration. The following points help to view the stock from different angles.
1. P/E Ratio [Pass]
“The data going all the way back to the 1930s show conclusively that stocks with low price/earnings ratios outperform stocks with high price/earnings ratios over the longer term”. – Martin Zweig
AAPL has a trailing 12 month P/E of 21. The current market P/E is roughly 17 so the first test is a pass.
2. Earnings Trend [Pass]
“If a company can show nice consistent earnings, I don’t care if it makes broomsticks or computer parts.” – Martin Zweig
AAPL’s revenue growth from 2009 to 2010 is 52%. Earnings growth rate is 67%.
The past 5 year revenue growth is 36.5% compared to a 5 year EPS growth of 58%.
The 5 year revenue growth is much lower than the EPS growth, but seeing as how the latest full year revenue growth rate exceeds the 5 year average, this criteria becomes a pass.
3. Quarterly Revenue Growth Rate [Pass]
The EPS growth for AAPL between this quarter and last year’s quarter comes out to be 66.7%.
4. Current Quarter EPS [Pass]
Current diluted EPS of $4.64 is positive which passes this test.
5. Quarterly EPS from Last Year [Pass]
AAPL had an EPS of $2.77 the same period last year.
6. EPS Growth from 3 Quarters Compared to Past 3 Quarters [Pass]
Growth from the last 3 quarter was an astonishing 67.5% compared to last years same 3 quarterly period EPS growth of 66.8%
7. EPS Growth Over Past 5 Years [Pass]
Over the past 5 years the EPS has been 2.27, 3.93, 6.78, 9.08 and 15.15. Easily passes this criteria.
8. Long Term EPS Growth [Pass]
With EPS growth at 57% over a 5 year period, AAPL clearly passes this test.
As you can see from the items above, Zweig puts most of his focus on earnings. As a value investor, earnings doesn’t play that much of an important role but since EPS is what Wall Street looks at, it can’t be completely ignored.
AAPL passes all of the tests hands down.
No doubt that Martin Zweig would have owned AAPL if he was still managing money.