Monday, September 26, 2011

S&P's Take On Coca Cola (1)


To start, I need to make an important point.  In no way am I recommending Coca Cola as an investment opportunity or a good stock to buy.  I picked this company because, as I said in the last blog, I suspect that this blog's visitors from around the world have all had a Coke at one time or another.  My can of Diet Coke sits on the desk as I post this.

With that disclaimer out of the way, let's look at the August 27, 2011 Standard & Poors (S&P) report on The Coca Cola Co. (stock symbol - KO).  Hopefully you were able to obtain a copy, which will make it easier to follow my description of the ten page report.  I am going to give only a brief description of each page.  I am not going to review the information in the report in detail.

Page One  The S&P recommendation (5 star - Strong Buy), current price ($68.50 as of Aug. 26th), twelve month target price ($79) and a description of KO's investment type (Large-Cap Growth) are at the top of the page.  The next section gives Key Stock Statistics, such as the stock's 52 week range, trailing twelve months (TTM) earnings per share (EPS) of $5.37, TTM price/earnings (12.8) and additional information which would be of interest to the individual investor.

This page contains a price performance chart going back to 2008, which graphs what KO's stock has done over the last few years.  These statistics are flanked by S&P's Qualitative Risk Assessment, which shows that S&P considers the company relatively stable.  Coke receives a Quantitative Evaluation of A+ and a Relative Strength Rank of strong.   The Highlights of the company and the Investment Rationale/Risk prepared by the analyst, Esther Kwon, CFA, are located beneath the Price Performance Chart.  To the right of this analysis are Revenue and Earnings Data going back to 2006.  The section on Dividend Data for the previous four quarters is just below that.  Quite a bit of information is provided on just this first page of the report.  It would take an investor a lot of time to ferret out this data on his or her own.

Page Two  This page contains the analyst's Business Summary.  Next to this summary is Corporate Information including the company's address, telephone number, Executive Officers, Members of the Board and additional facts about KO.  Coca Cola, like most companies, has an individual listed as the Investor Contact.  When I look at a company's S&P report, I sometimes call that company's investor contact with questions.  I have always found the contact person to be cordial and helpful, willing to answer my questions, subject to securities laws restrictions.  Don't expect to get any insider information.

Page Three  Here is the most sought after information for the fundamental investor.  At the top of the page are S&P's Quantitative Evaluations of the company including its Fair Value Rank and Calculation for KO, the company's Investibility Quotient Percentile, Volatility, Technical Evaluation and Insider Activity.  Next to this section is the Expanded Ratio Analysis which provides the price/sales ratio, the price/EBITDA ratio, the price/pretax income ratio, the price/earnings (P/E) ratio and the average diluted shares outstanding for the years 2007 to 2010.  An investor may consider one or more of these ratios significant in his or her personal investment strategy.  It would take a good deal of time for an individual to determine them with a calculator.

The lower half of page three contains a lot of data titled Company Financials.  This section includes per share data, income statement analysis, balance sheet and other financial figures for the past ten years.  This is a treasure trove of information for the fundamental investor.  The individual investor will find all of the data he or she may need in order to decide if KO might meet the investor's requirements for a good investment.

We will continue our review of S&P's report on The Coca Cola Co. in the next blog.

Comments are always welcome.

Monday, September 19, 2011

On-Line Brokers: Stock Screens and Stock Research


When we completed our stock screening in the last blog, Stock Screen (2), we were left with 64 possible investments.  Since the screen was pretty basic and for illustration purposes only, we won't bother looking at the companies with these rudimentary financial characteristics.  On the other hand, it is worth exploring the next step an individual investor must take in order to find the investment candidates to consider in making his or her final buying decision.  The computer saved us quite a bit of time, but now an investor must spend that time reading.

Many companies produce stock market and individual stock research; however, their reports are not free to the public.   Standard & Poors (S&P) and Value Line are two well known US research companies.   Although their websites provide information and commentary, an investor must subscribe in order to receive stock reports.  Such research companies sell their reports to individual investors and to stock brokerage companies.  In order to access them at no charge, the individual investor must establish an account with a brokerage firm.  Obviously, this is not a real issue since the investor has to do this anyway in order to place buy and sell orders in the market.

I recommend that the individual investor open his or her account with an on-line broker in order to save trading fees and expenses.  Most of them have a fixed trade fee, which is usually less than $10 per transaction.  Some of the well known US on-line companies are Charles Schwab, E*Trade, TD Ameritrade and Scott Trade.  I assume these companies offer their services over the internet to investors in other countries.  There may be similar on-line companies in other countries around the world since stock trading is such a global business.

All of these on-line firms have a link on their websites which will send the investor to their research tools.  Those tools include stock screeners, third party stock reports, such as those published by Standard & Poors, and research reports provided by the broker.  I have not seen the Value Line reports offered by any brokerage firm I have used; however, they are available at most public libraries.  For no cost, the investor can set up a stock screen with the investor's requirements and then review reports on the matching companies identified on the screen; all without leaving the broker's website.  In the last blog I also provided a link to the Google stock screen site, which is also free.

I have been gratified by the number of viewers who have read this blog.  Since I started posting in November of last year, over 1,700 people from more than 40 countries have visited this site.  I can think of only one product which is undoubtedly familiar to all of them.  In next Monday's blog, I will describe the contents of an S&P report on a publicly traded company with a truly global product, Coca Cola.  If you have access to S&P reports, either through a broker or, maybe, at your local public library, try to get a copy of their August 27, 2011 report on KO, the company's stock symbol.  It will be more informative to follow my review if you have a copy in front of you.  It's your choice if you want to have a Coke as you read.  It is said that Warren Buffett's favorite drink is Cherry Coke.

Comments are always welcome.

Monday, September 12, 2011

Stock Screens (2)


We explored the general idea of stock screens in the last blog, Stock Screens (1).  Essentially, stock screening is a process of elimination.  With each new metric you add, the number of companies meeting your requirements is reduced.  This is the first research step for a fundamental investor.  For this blog, I will set up a stock screen and report how it winnows the number of stocks available in the market down to stocks I might want to research further.  I will use the stock screen option offered by my on-line brokerage company.  The different criteria I set for my screen will be identified in bold.

I will start by selecting the stock exchanges I want to search.  Under Basic Criteria I will choose the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the NASDAQ and the over the counter market (OTC).  That results in a total of 7,029 stocks.  There are other types of Basic Criteria I could add, but I'll just use exchanges for illustration purposes.

Although I do my own stock research,  I know that many investors rely on what research analysts have to say.  Therefore, I want companies tracked by Wall Street since it is hard to make money on a stock if nobody has heard about it.  It helps if analysts follow a company and bring it to the attention of the investing public.  I will add Analyst Ratings, specifically, the Standard & Poors (S&P) Earnings and Dividend Rankings.  I want to see companies rated from B to A+ by S&P.  I pick this range of ratings solely for purposes of example.  An individual investor must decide what, if any, rating level to use in limiting his or her search.  This reduces the number of stocks to 1,417 companies meeting just these two requirements.  Similarly, I will select Analyst Coverage and set it at a minimum of five analysts covering the companies.  This reduces our group of companies 897.  At this point, the screen is not identifying specific companies, just the number meeting the three criteria I have set so far.

Now I look at Company Performance.  I set two categories in this section: Revenue Growth History for the past five years and Earnings Growth History for the same time period.  I choose a minimum of a 15% growth rate.  A Revenue Growth History of 15% or better lowers the number of companies to 193 and a similar requirement for Earnings Growth History drops the number to 103.  As you can see, the number of companies is lowered with each new financial metric I add.

The next available criteria is Price Performance.  Since I am just trying to narrow the field of companies to look at, I am not going to pay any attention to price at this point.  If price is a factor, I can look at that once I have my list of companies.  Therefore, I do not select anything from this section.

The sixth general criteria I will look at is Valuation.  Here is where we can pick companies with the ratios discussed in the books on fundamental analysis we have previously reviewed.  To keep things simple, I am going to select only one; the price/earnings ratio for the trailing twelve months (TTM).  I will set it at 20 or below.  This reduces our field of stocks to 72.

I now limit my search based on Financial Strength.  This field includes quite a number of criteria, but, again, I am going to choose only one; a return on equity of 20% or better.  The resulting number is now down to 64 companies meeting all of the measures I have established so far.

The final section is Technicals, but since we are approaching this exercise as a fundamental analyst might, I will skip this section.

My final step is to hit the "View Matches" button.  The stock screen provides a list of the companies matching my criteria and providing specific criteria information for each company.  How much easier can it get?

Although the screens provided by brokerage houses are very comprehensive, there are also some basic stock screening programs available on line.  These are provided at no charge.  If you wanted to experiment constructing your own screen, you could go to  To set up your own stock screener, use the "Add Criteria" button on this screening site.

Next week, we will discuss what to do after you have your screen list of possible investment candidates.

Comments are always welcome.