RTCrawford’s Weblog

Selling equities is difficult for me. I become attached them, having rooted for their success, and, whether selling at a loss or at a gain, it is hard to part with that which has consumed so much time and thought. Today, I did just that, and there may be some merit in describing the decisions that led to them.

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In prior postings, I’ve mentioned the American Eagle message board on Yahoo! Finance — a rare collection of thinking and contributing investors (long, short, and agnostic on that stock). A recent discussion with Steve West on that board prompted an idea. If the depression of Bear Markets tend to represent buying opportunities and if we are now officially in a Bear Market, what stocks do other, knowledgeable investors recommend as possessing above average management and cheap valuations, and how would they fare when run through my initial analytical screen?

Because no screen is perfect and there are any number of methods for valuing stocks, why limit the exercise to just my screen, and, equally, important, isn’t it likely that the best selections of others would point out the short-comings in my screening approach? That was the initial idea, and, when it was put to the board, the response was gratifying. Nearly 80 stocks were recommended — 68 after eliminating duplicates –, and one poster offered a list of short stocks for consideration.

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I don’t know what the outcome will be, but I’ve posted a request to my friends on the best of the Yahoo! Finance boards (AEO), with plans to deliver the results here.

Okay, okay, I know, this is off topic, but in recent months this board has been about ideas, content, and investors (long, short, and agnostic) helping (or, at least, contributing) to the knowledge of others — sounds more altruistic than the reality, but it is a better model for these boards than the normal pump and bash found elsewhere.

Under the heading of “FWIW,” I indicated that AEO may (emphasis on “may”) be seeking a bottom during a time of economic turmoil. Steve accurately responded that AEO is subject to the steering winds of the broader market (retail and beyond) and White Sandy Beaches has (correct me if wrong) indicated that the macro controls AEO, as well. Both are right (in my view) if holding a short-term perspective.

Value investors, however, tend to argue (a la Buffett), that, when the market becomes depressed, that is the time to be greedy. Well, clearly, the market is depressed … and may become further depressed before euphoria returns. Under that logic, this may be the time to buy excellent companies at reduced prices. The market is on sale, but identifying the ultimate winners is problematic (making decisions difficult under the best of circumstances, and nearly impossible when the baby is being thrown out with the bath water).

So, the question naturally arises, what would you buy at these prices? What companies strike you as under-valued, led by great management, possess the strength to survive the current economic challenges, and seem likely to out-perform whenever sanity returns?

If you provide the stock symbols, I’ll run them through my screener — which performs the discounted cash flow analysis and a number of other tests –, and I’ll post the results on my blog. Perhaps Bill Ellard will do the same (left a message on his phone), and, if so, I’ll post those results, as well. And, if others have a method for identifying value investments, where the criteria for assessment can be described for a broader audience to understand, the invitation holds for you, as well.

I’d like to get the results in fairly short order — sufficient to run the screen over the weekend and in time for the start of trading next week. So, that means just one day to post your picks.

So, what are your best investing ideas? Just post the stock symbols (sorry, no penny stocks — my screen won’t accept them). No need to explain the reasoning behind your recommendation, either. I’ll post the quantitative results without comment.

This board attracts an above average group of investors, and there ought to be a way to share our best ideas.

Thanks,

Robert

PS. The data source used for my analysis is Morningstar, which doesn’t provide complete financials for financial firms (banks, brokerages, insurance). So, Dave’s preference for AIG, for example, will render incomplete results. My preference is to avoid financial firms, but I’ll post the incomplete findings if you submit them. My preference, however, is to focus on the rest of the market.

For those who are interested, I’ll do something similar with this blog. For those who can not wait, feel free to post your recommendations there — the American Eagle (AEO) message board in Yahoo! Finance.

I have, as well, promised to post the results of others who have financial screening and analysis tools used to identify value stocks, and, in the future, I’ll run the same screen for the most popular choices in Motley Fool CAPS — a larger community of investors.

The results should be interesting, if a sufficient number of recommendations are submitted.

I spoke with a Wall Street analyst yesterday, prior to the market’s meltdown today. We were talking about news reports out of Europe, indicating predictions by Barclays Capital, the Royal Bank of Scotland, and Fortis of a major market event in the US and withdrawal of investments and capital by them from the US — as reported in the Financial Times and elsewhere. Reading this prompted me to move a third of my investments into cash (in addition to my mad money cash, set aside for investments as they become known). Another third has been pulled from a number of mutual funds and placed in S&P 500 index accounts, and the remainder is in a portfolio of stocks purchased due to the disconnect between market value and intrinsic value — a small number of which have been identified here.

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It has taken several weeks to rebuild my computer system and the automated Excel files that allow me to screen stocks and identify each as, either, a value prospect or those which fall within the broad range of “other.” Just before the two crashes that represented a perfect storm of computer trauma, I looked at the out-of-favor sector of temporary staffing. For this effort, I decided to do the same, focusing on the confluence of two unloved sectors — IT and healthcare. Specifically, our focus this week is healthcare IT.

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Well, after several weeks of work, I’m back on line with the investments analysis capabilities. With any luck, my first posting will take place this weekend — the little that is left of it –, considering QSII (a smallish-cap software company that produces electronic medical records, with a recent, multi-year history of financial growth and a more recent history of stock price decline).

Thanks for your patience.

As mentioned in earlier postings, my postings have been diminished due to computer problems. At this point, the computer is back on line, but the investments analysis tools require reprogramming due to upgrade to Office 2007. At this point, the core file is back up and running. That file includes the discounted cash flow analysis, calculation of replication value and earnings power value, the Dupont disaggregation of ROA, the key ratios, Altman Z, and Piotroski. I was, in fact, up until 4 am programming it in VBA. Two other files remain — the one that compares intrinsic value over time with movement of the stock price and, more importantly, the graphs displaying the history of the financials and their components. Neither should be as long-winded an effort as the first, but, with computer programming, this is not guaranteed.

I should mention that Microsoft Office 2007 Excel is a downgrade from 2003.  It is slow … laboriously slow.  My 17-year-old son moves faster when it comes to performing assigned tasks.  Not only is programming in VBA a royal pain, calculations using range names, VLookUp and HLookUp, If-Then statements, and other calculations (such as insert column) can take minutes.  This is not a minor problem, from a quality perspective.  The entire reason for Excel’s existence is to perform calculations.  Why the company would release a product with degraded functionality is a mystery to this quality improvement professor.  Its supporters note that Excel now accommodates an expanded spreadsheet (more than 2003’s 65000 rows, for example), but this was why God made Access and Oracle databases.  65000 rows was once considered sufficient for spreadsheet purposes.  It still is, and, for those who might benefit from such an expansion, their numbers are small in comparison to the loss of efficiency and functionality.

In testing the first file, I have come across a stock that looks interesting — preliminarily. So, for those who may be needing a stock-ideas fix, take a look at Quality Systems, Inc. (NYSE: QSII). QSII produces software for the healthcare industry, has seen the stock price cut dramatically, and, on paper appears to have the strongest set of financials. The industry is out-of-favor (both, as a technical stock and given its link to healthcare), and I haven’t been able to scrub the financials as closely as I would like. But it is worth a closer a look. I should mention that I do not have a position in the stock at the moment (i.e., no dog in this fight).

In any event, with a little luck, I’ll be back on line with stock analysis soon — hopefully, by the end of this long weekend … perhaps, sooner.

Over the last several weeks, I’ve been asked about my calculations for Weighted Average Cost of Capital (WACC) and Cash Return on Invested Capital. At some point, I’ll run through the specific calculations and logic behind them. Until then, allow me to provide the calculations which appear on the spreadsheet used for equities analysis postings.

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[06/19/08 Update on computer status at end]

[Quick Analysis of UNH at end]

During a business trip to Richmond, my external hard drive was fried. This has made analyzing equities exceedingly difficult — since the files used for that purpose were on that drive. Since returning, efforts to recreate them have run into glitches on my tower computer. A trip to the UNC bookstore earlier today, to say nothing of a healthy dent to the wallet, and repair of the computer (upgrading to Office Professional 2007) is now underway. The professionals have my old hard drive (attempting to recover the files), but this will take a week or more, and recreating the system from scratch will take nearly as long. So, I’m temporarily out of commission on the investing side.

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It makes sense that they would show up on my screens for out-of-favor stocks. Anything having to do with Personnel Services comports with the legal definition of hearsay — assuming as true what has yet to be proven. In this case, even considering personnel services assumes there are personnel and, defacto, services sufficient to keep them employed. With the economy suspect and the unemployment rate rising, why would any sane investor consider this sector?

Well, why would any sane investor ignore it?

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