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#8 - Getting nervous?

Stock Picking after Moat | Invest with Martin

Nervous markets

It's uncertain times unfortunately. There's so much going on in the world at the moment, that investors don't really know what to do. How can you tell? The markets are moving sideways. Let's take a look at this graph from the biggest index in the world (you might have guessed it) the S&P 500.

Normally we have a down going (like the covid crash) or upgoing movement (from April 2020 to December 2021), as investors are either optimistic or pessimistic about the future. When we go sideways, we don't really know what to expect. There's simply too much going on in the world, which makes it hard to predict if the economies are going up or down in the future. The price I have marked with the green arrows have been hit 14 times during the last 7 months. Meaning nothing really happened. The main questions yet to be answered are: "Will we go up as corona ends, the war in Ukraine calms down and the inflation will come under control?" or... "Will we go down because China stays in lockdown due to covid, the war in Ukraine escalates and inflation gets out of hand causing a recession (economic downturn)?" And no one really knows. Usually there's some good information and key insights to get, but investors don't seem to agree, and so the markets are moving sideways. These are of course HUGE questions as well, and quite a mouthful to look into as a new or coming investor like yourself. My advice as always, is to see this as an opportunity to slowly buy into the markets, now that they're cheaper. If they fall further you can buy more into them. I've talked about this in my first newsletters as well. Ease into the markets. Don't panic and sell everything, if you're already invested. You need to remember that the markets always come back. We just tend to forget, when it looks bad for a while.

Spotting a high performing company

Two weeks ago we talked about the "health" of the company, which really shows in their debt. Today we are going to talk about point number 3 on the list (last week I took a little de-tour):​​​​​​

  1. The company needs a competitive advantage called a "moat".

  2. The company needs to be healthy, meaning a low debt.

  3. It needs to be performing well and consistently, so we can predict it into the future.

  4. It needs to be better and better at making money for us.

  5. The company has to trade for a price that is giving us a huge discount, so we are confident making money.

We took Microsoft as the example last time, so let's stick to it. Again I will be using the source, for the financial data. A well performing company like Microsoft need to be doing 5 things:

  • Growing revenue

  • Growing net income

  • High and growing profit margins

  • High return on equity

  • High return on assets

We will take the first 3 in todays newsletter, to avoid it being too long :)

Growing revenue

Revenue is the total amount of money the company is making. As investors we want this to be growing, in order to know that the company is making more and more money. You need to be looking 10 years back, but to keep it simple I will show the last 6 years:​​​

As you can see Microsoft have been growing all years. If you calculate it, you will get around 13% per year. A good benchmark is 5%, so they are doing great.

Net income

Having a strong and growing revenue, is nothing if they company can not make any money after all expenses. You can see net income at the bottom of the picture above. With the exception of 2018 where it went down, we have a growing net income of about 24% per year in average. A good benchmark is 9%. Microsoft is both making a lot of money, and can put a lot of them in their pockets.

Profit margin

The last point here is the profit margin, which simply is just net income / revenue. For 2021 it's: 61.271 / 168.088 = 0,36 = 36%. So for every $100 they're making, $36 of them is income. That's incredible. Imagine if you could put 36% of your pay aside every year, and do what you want with it. What you want to look for here is that the profit margin is growing, so you know that they are getting better at making money, which shows an efficient company. Microsoft does just that. Next week we are going to look at the next two of a well performing company "Return on Equity" and "Return on Assets" aka ROE and ROA. Have a great Easter-holiday

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