Spending the time going over the numbers is worth it
Tuesday, December 1st, 2015
Here it is December 1st 2015, and with 11 months of the year gone most of the indexes are flat or down a percent or two. I still believe December 31st of this year we will still see profits; obviously not as large as I hoped in the beginning of the year but I still believe 2015 can squeeze out a 2 to 3 percent return.
This past Saturday I received a call on my radio show about Polaris Industries Inc. (symbol PII). When listeners call in to my radio show I do get some background from them, like if they hold the company, when they bought it and if they have a profit or a loss on their investment.
When I had this conversation with this particular caller, he said the stock had surpassed $150 earlier in the year and it was now down roughly 30% from the high reached earlier this year.
His question was, should he continue to hold onto this stock or sell before it goes any lower? He still had a profit on his investment but had lost a good part of that profit since he did not sell at the $150 level. This is a shame because it traded at that level since late 2014 until mid-2015. I figured he either wasn’t watching the fundamentals or got pulled into the hype that it would go even higher.
Most individual investors do not spend the time to review all the numbers of the companies that they own on a weekly basis. It is very time-consuming and at times can seem tedious, however it is the only way to spot when a company has become fully valued.
I have used this method for over 15 years now and there are times that I do the numbers on the company every single Monday, however we hold that company for 5, 6 maybe even 7 years.
But I have never missed a company’s target sell price because I am always on top of what the stocks are doing in my portfolio. And as I often say, people can do what I do if they spend a lot of time to learn and understand fundamental analysis.
However it must be done every single week, because if you get out of the habit of doing weekly numbers, you can miss some very good returns because you weren't watching them.
Polaris now trades around $105 a share, and with estimated earnings based on the mean of 18. Going out to December 2016, I find earnings-per-share estimate on a GAAP basis of $8.40, which tells me Polaris has a reasonable forward PE of 12.5 times and puts this company in the buy category.
The high estimate for 2016 earnings-per-share is $9.13 and the low estimate is $7.95, which gives a low standard deviation of 0.32 and is a positive.
Doing the math, the expected investment return would be 32% if bought at the current price of $105/share and would not include the decent dividend of 2% per year.
But the real lesson I want you to learn here is what the benefits are of spending the time going over the numbers of all the stocks you hold in your portfolio on a weekly basis. When you see the benefits, you will realize that the management fee my firm charges of 1.5% is probably one of the best investments an investor can make.
Polaris was a buy back in 2012. I remember looking at this company earlier when it was closer to $50 a share, but I'm trying to be reasonable with my return numbers.
So the investor bought this stock at $75 a share and sold it at the end of 2014 for $150, a profit of 100% not including dividends. The investor that paid $75 a share for the stock in 2012 and did not sell now only has a profit of 40% not including dividends. Still not a bad return, but not even half of what the investor would have had they been doing the fundamental analysis on a weekly basis.
I also recommend buying a company with a forward price earnings multiple of around 10 to 12 times. If you had now bought Polaris you'll be paying 12.5 times forward earnings and you'd get the stock at $105 a share.
With a current target sell price of $138.60 for the year ending December 2016, based on the $8.40 the investor would pick up another gain of 32% not including dividends.
If you're keeping track, you now realize that from 2012 to 2016 the investor could have had a return of 132% not including dividends.
Compare that to the buy and hold investor who bought at $75 a share and sold at the new target sell price for December 2016 of $138.60. The total return would only be 85% not including dividends.
This is a large difference. Comparison of the dollars would show a total gain of $13,200 on a $10,000 investment for the investor that was doing the numbers weekly and made the sale then bought back again, versus the buy and hold investor who would only make $8,500 on his $10,000 investment.
For those of you who are saying, “Wait a minute what about the taxes? I would have to pay on these gains, what would the results be then?” Using a 25% combined state and federal long-term capital gains rate, the first gain on the $10,000 profit would cost the investor $2,500 in taxes On the second investment of $10,000 they would pay $800 in taxes.
The combined taxes paid on the two transactions would be $3,300 and the net investment return would then be $9,900. The taxes paid on the buy and hold investment with the 85% gain would be $2,125 for a net return of $6,375.
The smart investor who did all the work and followed the numbers would have earned a net after-tax gain of $3,525, which is 55% more than the buy and hold investor. The really smart investor would have realized that paying a yearly management fee of 1.5% was the smartest investment they could make.
I apologize for not going over all the fundamentals of this company (Polaris), but to summarize I will tell you that this company would be a buy in our portfolio based on all the current fundamentals.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.
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