I’m taking a break from my series on investing basics to show some practical stock picking in action. Maybe you like it, maybe you don’t. Unlike the other blogs which will be more evergreen, this one is pretty time-specific for this week and maybe even this month depending upon how the market moves. Since I am a long-term investor, I don’t mind if the stock moves up and down a little bit (down is better, I want better prices) because the fundamental value of the stock will not be changed significantly.
Today I am looking at the following possible stocks.
Stitch Fix, SFIX, ~$24
Activision, ATVI, ~44
NVIDIA, NVDA, ~$140
Intuit, INTU ~249
If I was a good boy, I would do as Benjamin Graham advises and do a thorough analysis of each company. Usually, I am too impatient and pressed for time to be a good boy, so I’m going to do a quick, somewhat superficial analysis that might make my investment more risky than normal.
First criteria, how affordable is the stock? I prefer to buy 100 share lots and keep my investments below $5k to limit my downside risk (IE: I can only lose $5k).
100 shares SFIX – $2,400 Check!
100 shares ATVI – $4,400 Check!
100 shares, NVDA, $14,000 strike, I would have to buy 50 shares or less
100 shares, INTU, $24,900 strike, I would have to buy 25 shares or less
One strike is not enough to count them out. Let’s consider how I feel about the company.
Stitch Fix provides its subscribers with a monthly delivery of clothing curated by their fashion experts. If you have seen me walking around, you can tell I don’t care about fashion. If I had no clothes, maybe I would be a member, but I don’t really go shopping much. Even when I do go shopping, I like to buy on sale because I’m cheap – how do you think I have money to invest? This is a strike.
Activision makes games. I am SO in. They don’t make games I am playing right now, but I long for some future day when I have the time to go buy all of the classic Warcraft and Starcraft strategy games I never finished when I was young. I can support this stock personally, so this is a Check.
Nvidia makes computer chips that go into graphic processor cards and high-powered computers for massive parallel processing. I have an Nvidia graphics card in my computer and I can easily see how big computer companies need their chips. This is also a Check.
Intuit makes software for taxes and bookkeeping. Personally, I am such an excel nerd that I’ve programmed my own spreadsheets to do my taxes and double-entry accounting. But I have many friends who buy Intuit software to do taxes and I have worked for several companies that exclusively used Quickbooks for their accounting. This is also a Check.
Next, let’s consider the annual trading range. Do we have a buying opportunity? You can easily check on google with a search for “stock price” and either the company name or the stock symbol. For day traders, they will check today’s chart, but I always switch to the 52 week or 5 year chart so I can see the long term trend.
Stitch Fix currently trades at $24 and in September 2018 traded for $50 per share. It took a $12 dip back in October and dropped below $18 per share in December. It has since climbed back to as high as $33 before wandering back down below $25. This seems like an OK buying opportunity. The stock is fairly volatile, but I like buying 50% less than the high. Check.
Activision currently trades at ~$44 a share and traded above $80 per share back in July 2018 and October 2018. In early November it dropped to $50 and continued to fall until it hit $39.85 in February 2019. It has continued to muddle around in the forties for the past few months because they haven’t had a hit game in a while. This does look like a reasonable time to purchase if I believe they might recover plus they offer a dividend which yields 0.85% at this price. Better than my savings account. Check.
Nvidia, currently at $140 dropped from a high of $286 in October 2018 to below $130 in January 2019. It began to rally and almost hit $200 a share before falling again back down to $140. This is a pretty strong stock also close to half of it’s old stock price. It’s 0.46% dividend yield is small, but it adds a potential bonus upside. Check!
Intuit currently trades at $247, down from its high of $272.14 in April 2019. It had hit $182.61 in December, but had rallied well since then. Although it has a reasonable 0.76% dividend, I don’t like to buy stocks so close to the top. While good stocks will continue to rise, I’m really looking for my best opportunity at this time and the other three look better. Strike.
Lastly, let’s consider the financials. I like it when companies actually make money, but keep in mind this is not always an indicator of future value. After all, I passed on Amazon because it wasn’t making money when the stock was at $75. Now it is at $1,816! At the time, I wanted more security for my meager funds… stocks that make money can weather a turn in the economy and tend to be more stable. The key indicators for me are earnings per share (EPS), price to earnings ratio (PE Ratio), revenue trend, profit trend, cash compared to debt, and cash flow. Yahoo Finance offers a handy summary:
- EPS: $0.45 / share = profitable, so far, so
good. - PE Ratio: 52.20 (the stock trades for 52 times
the earnings) = pricy! This alone is a strike. - Revenue trend: $730 million 2016, $997 million
2017, $1.23 billion 2018 = strong, consistent sales - Profit trend: $33 million 2016, -$594k 2017, $44
million 2018 = inconsistent - Cash: $297 million, Total Liabilities $166
million = pretty good. They can pay off
their debt by writing a check. - Cash flow from Operations (running the business)
were $45 million 2016, $38 million in 2017 and $72 million in 2018 = they made
real money from their business.
Activision:
(Note from the future: On October 13, 2023 Microsoft purchased Activision at $95 per share – hence, no more link to the Activision company here)
- EPS: $2.28 / share = quite profitable
- PE Ratio: 19.04 (the stock trades for 19 times
the earnings) = I am more comfortable in this range. - Revenue trend: $3.1 billion 2015, $4.2 billion
2016, $4.5 billion 2017, $4.98 billion 2018 = very strong, consistent sales - Profit trend: $892 million 2015, $996 million
2016, $273 million 2017, $1.8 billion 2017 = inconsistent, but always positive;
surge in profit last year. - Cash: $4.2 billion, Total Liabilities $6.4 billion
= OK. A little high for my tastes, but
still below their assets of $17.8 billion so quite reasonable. - Cash flow from Operations (running the business)
were $1.3 billion 2015, $2.2 billion in 2016, $2.2 billion in 2017 and $1.8 billion
in 2018 = strong and consistent. I don’t
like the weakness indicated by the dip in 2018, but it is not a huge drop.
- EPS: $5.30 / share = Quite profitable.
- PE Ratio: 26.25 (the stock trades for 26 times the earnings) = better than Stitch Fix, but not as good as Activision. Indicates more market optimism for future growth.
- Revenue Trend: $2.8 billion 2015, $4.1 billion 2016, $5.8 billion 2017, $7.2 billion 2018 = impressive growth! It looks like that 26 times earnings might have a good basis to be that high.
- Profit trend: $614 million 2015, $1.7 billion 2016, $3.0 billion 2017, $4.1 billion 2018 = also very impressive and solid growth.
- Cash: $782 million, but also a whopping $6.6 billion in short term investments. Total Liabilities $3.95 billion = quite solid. If needed, they can sell short term investments to pay off the debt with ease.
- Cash flow from Operations (running the business) were $1.2 billion 2015, $1.7 billion in 2016, $3.5 billion in 2017 and $3.7 billion in 2018 = they made real money from their business, consistently.
- EPS: $5.48 / share = Quite profitable, best of the
four stocks being considered. - PE Ratio: 45.16 (the stock trades for 45 times
the earnings) = pricy! …just not quite as
pricy as Stich Fix. - Revenue Trend: $4.2 billion 2015, $4.69 billion 2016,
$5.2 billion 2017, $5.96 billion 2018 = strong growth, but not quite as good as
Nvidia. - Profit trend: $413 million 2015, $806 billion 2016,
$971 billion 2017, $1.2 billion 2018 = very solid. - Cash: $1.5 billion, Total Liabilities $2.8 billion
= decent, especially given $5.2 billion in total assets to cover the debt. - Cash flow from Operations (running the business)
were $1.6 billion 2015, $1.5 billion in 2016, $1.6 billion in 2017 and $2.1 billion
in 2018 = constant, consistent cash flow is always impressive.
Since every company I am considering has a solid business, all would be investment worthy. However, I don’t have the money to buy them all, so I need to start comparing them.
Stitch Fix is pricy, the smallest, and least profitable of the three. I cannot personally support their product or see why they are so valuable. I’m dropping them from consideration even though the buying opportunity is there.
Intuit is consistent and profitable, but their stock is at the high end. Even though I see their business strength and will keep watching this stock, it is not a great opportunity today.
I really like both Activision and Nvidia. Both are solid companies with great financials and products I really like. Activision has the lower price which would allow for me to buy a full 100 shares, but this isn’t a significant factor. Nvidia has monster growth and an equally strong buying opportunity (near 50% of the annual high). Between the two, the best buying opportunity for today is Nvidia! Now I have to go and put in my trade!