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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: HeyRainier who wrote (357)	2/25/1998 10:07:00 PM
From: ftth	Respond to of 1720

Rainier, I just got around to reading your POINT 4. That is so true. I've seen that first hand. The wizziest technology in the world doesn't translate to top or bottom line growth unless it has big demand. A company with mediocre technology, but with superb sales/marketing/advertising wins out over the company with the superb technology but mediocre S/M/A every time. Besides, a top-notch S/M/A staff can convince the unknowing customer that their mediocre technology is better that everyone elses, and that they must have it (the old "sell ice cubes to eskimos" cliche). As far as a measure for selling efficiency, COGS (cost of goods sold) is a good measure of output because it contains all components of product cost. The ratio COGS/Sales, and the trend in its growth, is a pretty good one to track. But, the accounting method used for inventories can significantly impact COGS, so this has to be considered. That's not AS important if you look at trends though (the TA of the FA), because it's a constant over the viewing period. Most of the other ratios that would be needed to evaluate the effectiveness of S/M/A aren't available though (e.g. sales per sales call, sales per advertising dollar, etc). Working capital turnover ratio (sales/working capital) measures how effectively the working capital was used to generate sales. Inventory turns and accounts receivable/payable ratios can also be good indicators in some industries. Like everything, there's never a simple, reliable answer. I appreciate the time you're taking to post these 15 points to look for. dh

To: HeyRainier who wrote (357)	3/8/1998 10:53:00 AM
From: HeyRainier	Respond to of 1720

[ What to Buy--Fifteen Points to Look For: POINT 5 ] From: Common Stocks and Uncommon Profits Here at last is a subject of importance which properly lends itself to the type of mathematical analysis which so many financial people feel is the backbone of sound investment decisions. From the standpoint of the investor, sales are only of value when and if they lead to increased profits. All the sales growth in the world won't produce the right type of investment vehicle if, over the years, profits do not grow correspondingly. The first step in examining profits is to study a company's profit margin, that is, to determine the number of cents of each dollar of sales that is brought down to operating profit. The wide variation between different companies, even those in the same industry, will immediately become apparent. Such a study should be made, not for a single year, but for a series of years. It then becomes evident that nearly all companies have broader profit margins (as well as greater total dollar profits) in years when an industry is unusually prosperous. However, it also becomes clear that the marginal companies, that is, those with the smaller profit margins, nearly always increase their profit margins by a considerably greater percentage in the good years (Rainier's note: i.e. from 3% to 5%, or a 66% increase)than do the lower-cost companies, whose profit margins also get better but not to so great a degree(Rainier's note: i.e. from 10% to 12%, a 20% increase). This usually causes the weaker companies to show a greater percentage increase in earnings in a year of abnormally good business than do the stronger companies in the same field. However, it should also be remembered that these earnings will decline correspondingly more rapidly when the business tide turns (Rainier's note: i.e. 4% to 3%, or a 25% decline, compared to a move from 10% to 9%, a decline of 10%). For this reason I believe that the greatest long-range investment profits are never obtained by investing in marginal companies. The only reason for considering a long-range investment in a company with an abnormally low profit margin is that there might be strong indications that a fundamental change is taking place within the company. This would be such that the improvement in profit margins would be occurring for reasons other than a temporarily expanded volume of business. In other words, the company would not be marginal in the true sense of the word, since the real reason for buying is that efficiency or new products developed within the company have taken it out of the marginal category. When such internal changes are taking place in a corporation which in other respects pretty well qualifies as the right type of long-range investment, it may be an unusually attractive purchase. So far as older and larger companies are concerned, most of the really big investment gains have come from companies having relatively broad profit margins. Usually they have among the best such margins in their industry. In regard to young companies, and occasionally older ones, there is one important deviation from this rule, a deviation, however, that is generally more apparent than real. Such companies will at times deliberately elect to speed up growth by spending all or a very large part of the profits they would otherwise have earned on even more research or on even more sales promotion than they would otherwise be doing. What is important in such instances is to make absolutely certain that it is actually still further research, still further sales promotion, or still more of any other activity which is being financed today so as to build for the future, that is the real cause of the narrow or non-existent profit margin. The greatest care should be used to be sure that the volume of the activities being credited with reducing the profit margin is not merely the volume of these activities needed for a good rate of growth, but actually represents even more research, sales promotion, etc., than this. When this happens, the research company with an apparently poor profit margin may be an unusually attractive investment. However, with the exception of companies of this type in which the low profit margin is being deliberately engineered in order to further accelerate the growth rate, investors desiring maximum gains over the years had best stay away from low profit-margin or marginal companies.