But A Few Thoughts

I've always been interested in the wacky world of the stock market. I always watch Moneyline on CNN or Wall Street Week and am constantly awed by the revolving door of top investment analysts and money managers who come in and spew their gospel on what great stocks they’ve bought and sold. You’ve heard them. How about the one where someone bought Bre-X at $0.03 and sold at $250 (I read somewhere that more people have claimed to own Bre-X stock than the actual amount of shares outstanding!). How about the justification that because Soy Bean futures are at all time lows, Microsoft begins to look more favorable. Every day we are bombarded with these wonderful tales and everyday I myself along with Johnny and Suzie Investor sit there and basically buy into it because the stewards of our hard earned capital:

  • All wear a reasonably nice blue suit.

  • Are "professionals".

  • Use the word "compelling" more often than the average person.

Now I'm sure that  they are probably upstanding individuals. They are applying what b-school taught them and I have done the same. The reality is that when I hear a highly "respected" analyst on CNBC Squawk Box say,

"…there is confusion among analysts. That some industries are performing well. Some are not…."

and none of the slick willy anchors calls them on it, I have to wonder. When I hear that the Bank of Canada raises interest rates by 0.25% and somehow a stock like Cognos (which has no debt and is not susceptible to interest rate fluctuations) becomes a piece of crap, I have to wonder.

And what I have to wonder is…

What makes a great stock such that I can make cash on it without losing any sleep?

Now from a business point of view, a good stock represents a company that offers the "stuff" society wants or needs. Peter Lynch has always said, "If you like the company and the products they sell, chances are you’ll like the stock." From a financial point of view, a good stock represents a company that takes in more money than it spends in order to create the "stuff" society wants. (Sorry for dumbing it down). Makes sense. I don’t think Buffet or Lynch will raise any issues with that.

Then I went to B-School. After taking a plethora o’accounting and finance courses, I realized that there are a ridiculous amount of ways to manipulate financial statements. Now you might be saying that accountants /auditors provide a non-biased opinion on financial statements. Helllloooooooooo!!   The reality is auditing is a competitive business these days and an accounting firm will do whatever it has to in order to retain its clients. I can’t remember a time when I saw a Qualified Opinion of a major public company made by a Big-Whatever firm.

These "massaged" documents which form the basis of many an investment decision are being used by the entire investment industry. The most noticeable is the infamous Earnings Per Share (EPS) and the value multiples that are derived from them (i.e. P/E, P/Book etc.) The reality is that EPS is a value that is open to blatant manipulation. It is a figure that appears to drive stock prices and investment decision making.(At least on CNBC it does). Earnings results are now accompanied by whether they are in line with "expectations". This addiction to EPS has reached a new level with the increasing incorporation of EPS "consensus" expectations. Your company can generate $1.00  in EPS, but if the consensus estimate (an issue in itself) is $1.01, well you’re company is pretty much crap. You might as well shut down the company. It is not about generating positive EPS. It is all about meeting the expectations of the consensus (whoever they are). (See Article: Vegas Meets Wall Street")

Now I figure there has to be a more unbiased way to measure financial performance of a company. While I was in B-School, I stumbled upon an article about a "new" performance measure developed by the consulting firm, Stern Stewart  called Economic Value Added (EVA).It is also known as Economic Profit. EVA in 10 seconds represents a companies residual wealth generated when its cost of capital is deducted from a firms operating profit (adjusted for taxes). It is a measurement tool that is gaining prominence in the U.S. It looked interesting and practical to me. I decided to write my final year investment study on it. My Prof. said that it was one of those fly-by night fads that wouldn’t last. Funny thing is earlier this year, I read an article in a financial journal written by the SAME professor who was touting it as one of the most credible measures of financial performance! He has even formed a consulting practice that specializes in EVA analysis! Either I wrote one hell of a paper or he was just scamming me. All I know is that after doing some further analysis (without being tenured of course), this concept appears to have some teeth.

With this site we hope to provide a resource to the following groups of people:

 

The Ivory Tower Crowd

We hope to explain the EVA model and how it overrides the prevailing traditional method of financial analysis.

The Show Me The Money Crowd

To apply the EVA model to value companies, specifically non-financial companies on the TSE 300 (because frankly no one else has) in order to determine whether they are truly creating wealth for its shareholders. We have built up a database of EVA analysis on the entire TSE300 Canadian companies.  

Now we don’t want to regurgitate theories and academic mumbo. There’s a gazillion other sites that cater to this. We want to focus to be on more real-world analysis. Simply put:

The identification of companies who have the uncanny ability to effectively manage its capital so that they can provide a superior return on investment to their shareholders.