#13 - A real example of a stock analysis
It really is the FED controlling the show
We've seen a lot of weird moves these last weeks and months.
The market is UP a lot.
Then the market is DOWN a lot.
Mostly down at the moment though...
But who's in charge? Normally the markets take care of themselves, but with the Ukraine war stabilizing a bit, and the Chinese still in lockdown, the only thing really moving the markets at the moment is the FED.
The FED being the Federal Reserve, being the central bank of America.
That's not unusual as such, since they are in control of the largest economy.
So what they say, or what he (Jerome Powell) say, is in many ways influencing the rest of the world economy. Especially Europe, as we are heavily dependent on the American companies and their great tech.
So what's up with the FED?
This week we had a very interesting podcast coming out with Jerome.
Basically it boils down to this:
1. They want to get the inflation under control.
2. And they can only do that by increasing the interest rate.
3. Which might not have the biggest effect, since the inflation is based on supply.
The FED controls the opposite, the demand.
Or in other words, the activity of the American economy.
We have a supply chain problem at the moment. People can't get what they want, and the FED can't call China and tell them to get their stuff together.
Or Russia for that matter.
So what's the problem?
The fear is that the American economy goes into recession. If that happens, which now looks likely, then the European economy will go down with it. Usually that's at least how the game is played.
So everyone is following poor Jerome.
We, as investors, care about what he says.
But keep one thing in mind: He doesn't care about us.
He cares about the American economy.
The workers and their wellbeing.
The unemployment numbers.
As he should, by the way.
So understand this:
Don't fight the FED.
Meaning: Don't try and bet against him.
If he wants to increase the interest rates, he will.
So once again, don't try and time the markets.
Don't bet on what he will do, or what will happen.
Investing in the markets as they go down, is a safe bet.
So is to invest in them, no matter what's going on.
It's been working for 150 years.
It will work this time as well.
Now let's look at a stock that also went down lately.
And who is caught deep in this supply problem.
Credit: Thanks to Edward Yardeni for giving a great overview of what happened in the podcast.
NVIDIA, the one will all the chips
We've been talking a lot about stocks and how to analyze them in this newsletter lately, and today I will boil it into an example.
It will be as short and powerful as possible, as I can't write a full-on analysis in one single newsletter.
These are the 5 steps we've been going through lately:
1. The company needs a competitive advantage: the moat
2. They need to be healthy: low debt
3. It needs to be performing well and consistently
4. It needs to be better and better at making money
5. And trade for a good price: intrinsic value
Let's take a look, and see how NVIDIA is doing and if they might be worth investing in. I will do it in bullet points, to keep it short and sweet.
FYI I look at NVIDIA because one of you asked for it :)
If you then want to dig in deeper, follow the links.
Here's what I do first
- Go to macrotrends.net for their numbers.
- Go to their investor website to read their reports.
- Find articles about them, so get myself updated.
1. Understand their business; do they have a moat?
- NVIDIA powers the AI running in most major tech companies.
- They have ~80% of the GPU market.
- They're positioned extremely well towards cloud.
- They power most of the automotive industry.
- They are THE company for the virtual world transition
They have strong competitive advantage.
2. Look at their debt
- Their debt is consistently low at around 1 year of income
3. Look at their financials
- Over the last 10 years, they grew revenue 22% year-over-year
- They grew their profit 37% per year-over-year
- Their profit margins is increasing and above 30%
- Their return on equity (ROE) is high than ROA and both above 20%
4. Better and better at making money
- Their earnings per share is doing amazing at 36% year-over-year
5. Intrinsic Value
- Their EPS this year is sitting at $3.85
- The EPS growth is 36% (conservatively we put it at 25%)
- Their P/E value at the end of 2021 was 76.
Looking at the history of their P/E I would put it at 25
The calculation was: EPS * (1 + r) * P/E. So:
3.85 * (1 + 0.25) * 25 = $120 in intrinsic value.
Their current price is $166, which means I would like it to go even further down.
It's a conservative price that I put here though, and some would likely say that they are a buy at the moment.
Keep in mind that it's never easy to do the calculations, and finding out whether or not to buy a company. In the current markets, where tech and growth companies are being basically crushed, I would be waiting to invest in NVIDIA.
Remember that it's one of the largest companies in the world as well, sitting at $416 billion in total market value. Their potential to keep on growing at the same speed, is lower than a decade ago.
Alright, that it. That concludes this time's look at the stock analysis, and what to look for.
Once again, send me an email if you want to dig deeper into this and be part of my two-week intense course in the middle of July.
Over the next weeks, we're going to take a closer look at ETFs and indexes, and how you can build a passive portfolio which requires a lot less maintenance for busy people like you :)
Do you want to learn more?
Then book a free 15 min call with me to learn how I can help you, and ask all the stock market questions you have: