Friday, November 2, 2012

Money Show - Peter Hodson

Peter Hodson is editor of Canadian Money Saver Magazine. For their site click here. Peter also writes for 5iresearch. To see this site click here. His talk is called "How to pick a Good Company: What we've Learned from a Quarter-Century of Stock Buying". His was the closing keynote speech.

He says that investment financial industry is great for the industry's companies, but not so much for individuals. Investing mistakes we make are:
  • We gamble, not invest,
  • We do not buy a company because we say it is too expensive,
  • We sell a stock too early,
  • We do not buy because you are waiting for a pull back,
  • We keep your losers for too long and
  • We look for where a stock has been and this is irrelevant.
There are only 1 or 2 good stocks (like Google) which would be a 5 or 20 bagger. (That is the stock went up 5 or 20 times our buy price.) If a company goes up do you ask yourself why not sell because it just went up? If a company's stock pulls back you need to ask yourself if this is because of a bad market or is there something wrong with the company. If a company's earnings are down you should ask yourself, is it the market or the company?

He likes companies that can go up 3 to 4% per quarter. Diedrich Coffee (NASDAQ-DDRX) went up from $1 to $32.75, which was the full price at takeover. The best sources for investment ideas are the annual information forms. Read everything on a company you want to invest in.

Computer Modelling Group (TSX-CMG)'s dividends start out at $0.1 and are now $0.16. WaterFurnace Renewable Energy (TSX-WFI) started out with a dividend of $0.07 per share and its dividend today is $0.24 today.

Stantec Inc. (TSX-STN) has started to pay dividends. It is a good company and the initial dividend gives are very significant statement. Peter says that the management is good. The company has a history of problem solving. It motivates it staff with a balance of shares, salary and options.

(I follow all these stocks of Computer Modelling Group (TSX-CMG), WaterFurnace Renewable Energy (TSX-WFI) and Stantec Inc. (TSX-STN) on my website).

For signs of a good company you should look for
  • Management who have started and grown companies before
  • Tech edge
  • Patents
  • Low cost producer
  • Into new markets
  • With a new services
  • Big brother relationship (i.e. has a parent company to help them)
  • Market share
  • R&D expenses
  • Drives costs lower
  • Acquires competitors
  • Access to capital
  • Cash flow positive
  • Has earnings
  • Has partnerships
  • Has expansion plans and have enough working capital for its needs
  • When valuing a company, subtract its cash per share from the share price. If a stock is at $20 and the company has cash per share of $10, then you are really only paying $10 per share.
What else should you look for in a company?
  • Clean accounting
  • Good auditors
  • Companies that do not over promise
  • Companies that deal with their problems
  • Companies that communicate
  • Annual report has goals, does the company mean them?
  • Is company growing better than others in industry?
  • Are they making money with that growth?
  • Barriers to entry in company's market?
  • What size is the company's market?
  • Is their market cyclical or seasonal?
Webtech Wireless (TSX-WEW) has said that they got a big Brazilian contract. If this did not exist, no one would want to invest in the company. VSM MedTech Ltd. was a small company that paid their new CEO too much (more than revenue) and it got into financial difficulties. Constellation Software (TSX-CSU) is a company where Chairman/owner got $163M in stocks and company had stock price growth of zero.

Look at Calian Technologies Ltd (TSX-CTY) where company is growing its dividend, the P/E is 10 and company has $4 in cash per share. (I follow this stock).
  • Strong Industry and growing company
  • Competitor edge
  • Keeps its advantage
  • Well financed
  • Able to communicate to investors
  • Good Management
  • Attractive value
  • This equals a worthwhile investment
A great company pays extra. If there is a 20% more in shares, something has happen. You should ignore minor price fluctuations. A big move means "a change". Don't be scarred off a company by big moves.

Lessons from the experts would be: Pull the weeds: water the flowers. In other words, sell the losers and keep the good companies. A good company is rewarded with rising price/market cap and gets more attention. Look for blue skies. Bay Street analysts are conservative. Don't dream, but know the upside. You should ignore target prices. This is the worst thing of all time.

A diamond is still a diamond, even if it is in the garbage. If others do not like a company, it doesn't mean it is not good. Buy companies with:
  • High growth
  • Low multiple - can have massive margin expansion
  • Rapid EPS acceleration
  • Operation profit surge due to cost cutting
Do not buy companies with:
  • High multiples
  • Defensive growth
  • Companies with excess cash
  • May not get market/multiple expansion
  • Market share growth/monopolies
  • Merger candidates
(Note: multiples refer to Price/Earnings Ratios. A high multiple is a high P/E Ratio and a low multiple is a low P/E Ratio.)

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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