Wednesday, March 21, 2012

The Benjamin Graham formula

I have used the Benjamin Graham formula before to value stocks. It looks like this:

V* = EPS \times (8.5 + 2g)

EPS is the 12 months trailing earnings per share and g is the expected 10 year growth rate.

It is interesting that the Wikipedia page about this formula states that the formula is not intended to be used to evaluate stocks. If that is the case what is it for? The problem is that the growth rate is of course an estimate but it is still useful for making comparisons between stock valuations.

Lets plug in the numbers for five companies:


V = 35 * (8.5 + (2 * 20))
= 1700

Apple is 35% fully valued.


V = 30 * (8.5 + (2 * 20))
= 1450

Google is 43 % fully valued.


V = 2.75 * (8.5 + (2 * 10))
= 78

Microsoft is 41% fully valued.


V = 1.8 * (8.5 + (2 * 15))
= 69

Oracle is 43% fully valued.

Intuitive Surgical:

V = (12 * (8.5 + (2 * 20))
= 582

ISRG is 91% fully valued.

This is a very one dimensional analysis and obviously the growth rates are just a very rough estimate. However the results do suggest that the four tech titans are good value even after the recent market surge.

It is interesting to note the Google currently has a higher share price than Apple even though its EPS is lower and its growth rate is a lot slower. This is a situation that will not last.

I believe that the current Apple situation is an unusual one in that it is so obvious that the stock is undervalued and yet the stock price still fails to keep up with the business growth. I have taken advantage of this opportunity in a big way and as a result my two main portfolios are now very much in the black.

I own all four of the tech giants above and am seeking to buy more. We could well be at the start of a bull market. Don't miss out.

Saturday, March 03, 2012

Using iPads to buy an iPad

I really need an iPad. The kids really need an iPad. My wife does as well, she just doesn't realise it yet.

As my wife has other ideas about how we should spend our money I have a solution. Use some long term savings to buy some Apple stock. When it has gone up 20% I will have made enough to buy an iPad. This is in effect using the success of the iPad to fund our iPad!

Of course using stocks to fund short term spending plans is foolish. However it is fun to be foolish sometimes as long as it is carefully moderated! I don't know of a stock with a better risk reward ratio than Apple so I guess if it drops in the short term we will just have to wait a bit longer for that tablet.

On a more serious note I think my smartphone position is now complete. Here are the purchases since I last listed my smartphone purchases:

22 Jul 2011 - Sell 11 GOOG @ $592
22 Jul 2011 - Buy 17 AAPL @ $385
27 Jan 2012 - Buy 5 GOOG @ $595
27 Jan 2012 - Buy 185 MSFT @ $29.20
01 Mar 2012 - Buy 10 AAPL @ $553
02 Mar 2012 - Buy 6 AAPL @ $555

I haven't spoken much about Microsoft recently. It generates an impressive amount of cash and is busy buying back its own shares as well as paying a 3% dividend. The one thing it hasn't got is the growth to compete with Google and Apple. However the stock may have a pop when Windows 8 comes out and I may take the profits if that happens. In the meantime it is up 10% already.

So the purge of my portfolios is now complete. I no longer own any individual UK companies. I do hold the FTSE 100 ETF. I only hold 4 individual companies now - Apple, Google, Microsoft and Oracle. I also hold the NASDAQ 100 ETF (QQQ). Apple accounts for well over half my position. Charlie Munger would be proud (see a previous post about Charlie Munger having all his portfolio in one stock.)

The only question now is: have I gone far enough? Why do I still own slow movers like the ETFs and to a lesser extent Microsoft and Oracle? Should I just put everything into Apple? It is hard to answer questions like this but all I can say is that I have come a long way. At the start of this year I had positions in 14 individual companies and only 3 or 4 of them were growth stocks. Many of them were in industries that I had little knowledge of like banking or petroleum.

I now own only 4 individual companies, all in the industry I work in and understand the best - technology.

I am massively overweight in Apple but then it is still massively under-priced. I think that the share price of a mega-cap. has a certain amount of inertia. The market is simply being slow to adjust to the reality of how fast Apple is growing and how much cash it holds. The potential launches this year of the iPhone 5 (which will hopefully be less incremental that the 4s) and the iTV will only add to the excitement.

My infatuation with banking and industrial stocks is officially over. It is all about finding low cost of growth and investing in what you know. And I KNOW technology!