TDI Podcast 29: Never Play Offense with Your Defense

September 28, 2007

Guest: Liz Ann Sonders, Chief Investment Strategist for Charles Schwab. (SCHW)

What is happening with the markets, is your money safe ? Money markets and sub-prime exposure are discussed. Is there a recession looming and how safe is your money market. Never play offense with the defensive part of your portfolio. Good stuff on this episode!Liz An Sonders

We are going to begin working on the essential disciplines of successful starting next episode. The plan is to follow the chapters of Andrew’s book to help you make solid investment decisions so you can proudly wear the title of a “Disciplined Investor”. Now the fun begins….You are encouraged to get a copy of the book to use as a home-game workbook…Stay tuned…

Great News!!!! Subscribers are growing quickly. Welcome all new listeners. This week the Podcast is #7 in the iTunes Business Category and #4 in the Investment category. Listeners questions answered in this podcast. Write to or
you can ask questions on our Voicemail system. 877-623-8473.TDI Episode 29

Andrew will be speaking at the Wealth Expo in New York on October 20th at 4:30pm. Come and listen to the session. Also, that week is media mayhem – Book signings and all sorts of TV and Radio…!

Kindly subscribe and go to iTunes or your favorite podcast directory and post a review of the show – (We are now a 4 1/2 star rated and featured show on iTunes) This is much appreciated!

Book Orders are being accepted at the website store, at Amazon and other fine retailers… Amazon now has the book scanned and available to take a look at the actual book and sample pages online, so check it out.


Stock Valuation – Sears in Focus

September 27, 2007

(Excerpt from The Disciplined Investor, pages 90-91 – See Inside the Book at Amazon)

There are several types of assets a company can own. Each business is different but all will have some combination of capital stock, land, some form of real estate, inventory, trucks and many other items of value. These assets will have differing abilities to create profits as well as levels of liquidity. Some assets are characterized as tangible while others may be considered use or even current.

As an example, inventory is usually very easy to convert to cash. Therefore it would be considered liquid. On the other end of the spectrum would be farmland and any other items that require a longer time to sell and, therefore, require much more time to liquidate. On the balance sheets, liquidity is important. It is differentiated by the terms current assets and non-current assets.

Another distinction that is considered is whether they are “real.” Remember that some assets, such as cash, are easily valued and liquidated. Then there are those that are much more difficult to pin a price on, such as farmland and buildings. Regardless, the fact is that you can actually touch and feel these, and they are therefore considered “tangible assets.” Beyond those assets that we can easily see, there are those that have significant value but are not quite as apparent. Goodwill, as an example, may include the value of a name brand or possibly a well-known company spokesperson. (Think of William Shatner and

It takes a good eye to recognize the hidden values that may be found on the balance sheet. For instance, take as a good example Sears. For years, they were valued according to generally accepted accounting principles (GAAP) as well as traditional investment valuation techniques. It was only recently that the idea of valuing Sears to include their significant real estate holdings was introduced. This occurred as analysts realized that they have tremendous unrealized value in their land holdings. During 2004-2006, Sears’ stock shot up as investors wanted to own them as a real estate play, in addition to their ability to create revenue from the sale of washers and dryers. (end of excerpt)

The idea that Sears (SHLD) could be a real estate play had pushed investors to buy up shares in late 2004, pushing towards $190 in mid 2007. The move was from a long-term base in the $40-$50 range. Now, the stock is hovering around $130 and the same force that pushed it higher have brought out the skeptics who believe that the significant real estate holdings could further erode the price of the shares. (not to mention that it is essential a hedge fund now)

The 30% move down for the stock since the high in mid-may appears to be a result ofSears the announcements of lackluster earnings and the realization that forward earnings will come under pressure because of lower consumer demand. In fact, it was only a few weeks ago that Sears announced a 40% reduction of profits : “Our gross margins came under pressure from sales declines and increased promotional activity, and as a result, our net income was significantly below last year and our expectations,” Chief Executive and President Aylwin Lewis said in a statement August 20th, 2007. (and similar statement in quarters past)

So, what about the real estate holdings? Do we look to write down the stock value in the same way as we need to for all other real estate plays that had the same increase during the boom of 2004-2007? If we look to unwind the value of the real estate (Estimated at $15 billion) from the company price, we could extrapolated that from the Market Cap of $18 billion, the shares are still trading at a significantly high multiple considering that the fact that the retailer is bleeding heavily. If we just look at the real estate, then we are hit with the concern over valuation.

Add both of these to the mix and unless Edward Lampert has some more magic up his sleeves, then this is going to flounder…AT BEST! Until they can get a handle on the paltry margin problem (shrinking as we speak) and the realization that the land value is only good if they sell (which they are not) then there is no reason to own this stock.

Will a mystery buyer come out of the woodwork and offer a premium? Probably not as there is a substantial premium already built in this in the form of the real estate value/multiple. This is clearly not the type of position that a Disciplined Investor would buy or hold today as there is many problems concerning the ability to properly value the shares.

SHLD Chart

PEG Ratio Plays

September 21, 2007

I am often asked to explain what is the PEG Ratio. This is a great tool to help understand the valuation of a stock in the context of the future earnings potential. This is a tool that should be used in conjunction with others in order to discern of the stock is reasonably valued.

If you want to learn how to profit from the MSN Money Screening Tools, buy The Disciplined Investor only $14.95! “…the best 15 bucks you will ever spend!” – Available now in our online store

At the bottom of this post is a listing of those stocks that have PEG Ratios significantly below their peer group. The MSN Money Stock Screener was used to find candidates within the Large Cap Universe of the S&P 1500.

Excerpt from The Disciplined Investor (from pages 84-85)

The P/E ratio is helpful when looking at the relative valuation of one stock as compared to another, but it is only useful when accompanied by the understanding that it should only be used to compare stocks in similar sectors and industries. It would make no sense at all to compare the P/E of a utility stock to the P/E of a technology stock—that would be like comparing apples to oranges.

To level the field, an excellent derivation of the P/E ratio is used to see if a stock is valued fairly compared to its own future growth. This is called the PEG ratio – or earnings to growth ratio.

The calculation: price/earnings (P/E) ratio divided by expected per-share earnings growth over the next year.

More than likely, a result that is less than one tells us that we may have a good investment that is undervalued for the time being. On the other hand, a result of more than one is usually a sign that the position is valued higher than it should be. Originally, the PEG Ratio was developed to look at stock statistics in more than one dimension. By adding expected growth to the P/E ratio, it will effectively provide a comparison tool to level the paying field when valuing stocks.

Originally, the PEG Ratio was developed to look at stock statistics in more than one dimension. By adding expected growth to the P/E ratio, it will effectively provide a comparison tool to level the paying field when valuing stocks. Small to Mid-Cap stocks are well suited to utilize the PEG Ratio as the initial screening tool since they usually pay little or no dividends. In effect, is a good tool for some stocks that are usually more difficult to value using traditional methods.iTunes Subscribe

Just as it is true that the ratio is beneficial for smaller stocks, larger stocks should have an additional requirement to help create a more usable and more appropriate valuation tool. By simply adding an overlay of dividend yield along with the earnings, a much better outcome can be crafted for largecap stocks.

Here is a quick guide for using the PEG Ratio as a part of your investment disciplines:

PEG Ratio Signal Guide
.50 or less -> Strong Buy
.50 to .75 ->Buy
.75 to 1.00 ->Hold
1.00 to 1.25 ->Possible Sell
1.25 to 1.75-> Consider Shorting
Over 1.75 ->Short/Sell

TOP 5 as of 9/21/2007- (RIG) (NE) (AVP) (MUR) (MOLX) (MNST)


Peg Ratio Plays

TDI Podcast 28: A Morbid Tale of Profit

September 19, 2007

Guest: Steven Leimberg tells us about the gruesome money scheme that has investors looking to profit by buying life insurance on seniors. Where else can you say: “The sooner they die, the more profit the investor makes” – very nice!

Steve LeimbergA Morbid Tale of Profit: AKA –The Death Of the Insurance Industry covers this topic in detail and has the industry concerned. We tackle the very troubling area of stranger owned life insurance is discussed. Is it fraud???? Steven tells us all about it.

Companies within Industry: (LPHI) (MET) (MMC) (PRU) (AEG) (MFC) (SLF) (ING) (PFG) (AIG)

Andrew’s book is finally available at The Disciplined Investor Store… this podcast is “JAM PACKED” with advice, help and even a slew of terms explained.

You can ask questions on our Voicemail system that Andrew will answer – 877-623-8473. Comments on blogsite are always welcome….

Kindly subscribe and go to iTunes or your favorite podcast directory and post a review of the show – This is much appreciated!

Book Orders are being accepted at the website at Amazon and other fine retailers…

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The Disciplined Investor – In Stock and Shipping

September 19, 2007

It is finally here!

The book looks great and is now available at a few select bookstores (Amazon, Borders..) as well as THE DISCIPLINED INVESTORE. As this is a very exciting time, I hope that you will help to spread the word by letting your friends and colleagues know about it. I have been told that later this month it should become available in many fine bookstores (local and chains).

Follow Up: Amazon seems to have inventory issues and may show a 4-6 week delivery period. That is NOT correct. They receive shipments daily, so please disregard if you are considering purchasing through that outlet as the “glitch” will be corrected and books are actually shipping daily.

If you were waiting to get your copy (as many of you have expressed interest) – now is the time… Click on over to our new Online Store or the Amazon Link to get a peek. The book is also indexed and some of the pages are viewable online through Google Book Search.

The Disciplined Investor will help you:TDi Front Cover

YESEliminate emotion from your investment decisions.
YESMatch your investment strategy to your risk tolerance.
YESLearn why asset allocation is so important for a portfolio.
YESDiscover tools for monitoring your portfolio’s performance.
YESUnderstand sell stops, short-selling, diversification.
YES Learn about the insider tools professionals use everyday

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