Debt/Equity Ratio <10
Debt/Total Capital <10 Current Ratio >1
Quick Ratio >1
Cash Ratio >1
ROA (5 Yr Avg) >15
Price/Book >0
P/E (Trailing 12 Months) >0
Last Qtr EPS >0
Current ROE (TTM) >15
Last Reported Qtr >0
Last Qtr EPS >0
Avg EPS Surprise (Last 4 Qtrs) >0
ROI (5 Yr Avg) >15
Last Yr’s EPS (F0) Before NRI >0
Long-Term Growth Consensus Est. >5
5 Yr. Hist. EPS Growth >5
This screen yields the following results:
AAPL,ACL,APEI,COH,CPLA,CTSH,DECK,DLB,EZPW,FLIR,FSLR,GIL,GOOG,HITT,IDCC,ISRG,JCOM,MA,MASI,MDF,NVEC,SOHU,SYNT,TDC,TECH,WDC,WIT.
A good stock to invest in 2011 is the one out of the following that has the highest future earnings yield in a predictable business that you understand that has a competitive advantage that will last for 10 years.
Although these stocks are good, some good things to invest in 2011 are not stock related. Real Estate Mogul Sam Zell as well as Warren Buffett have expressed their thoughts on real estate, both believe it is bottoming now if it has not already.
However, Zell expressed concern about commercial real estate in the US as the US is an aging population with declining productive capacity. Instead he’s looking at shopping malls in Brazil to invest in.
Sam Zell implies that there are dangers facing the U.S. businesses
“Ultimately, the biggest loss to America would be the loss of the dollar as the world’s reserve currency. If that were no longer the case, you would see a 25 percent drop in the standard of living in America,” Zell said. If that happened, luxury and middle class businesses would be hurt significantly, and food and fuel and those that produce food and fuel would become more important. Whether it’s a locally based loss of purchasing power, or an overall loss of production, a reduced standard of living in any given place means a reduction in luxury and an increase in necessity based items.
Buffett tends to ignore the macroeconomic view due to all the potential negative things that have occurred throughout the years. The depression, wars, inflation, soaring debt, depression fears, etc have all plagued stocks, but in the long run stocks will go up, and the ones that go up are strong businesses.
Since there is a tendency to have over optimism when looking forward at the future, and the future is less known, of the 5 year historical EPS growth and the 5 year future projected growth, we will take the lower one of the two. We then will take the EPS multiplied by one plus that growth rate (so if the eps was $1 and growth was 16% we would take $1 times 1.16 and get 1.16) We do this from year 0 to year 1, year 1 to year 2 and so on until year 10. At year 10 we take the earnings per share divided by the price, to get us the earnings yield. This is the percentage gain the earnings will yield at that point if the price is the same. In reality the price will probably grow and the accumulated earnings will go towards improving the book value of the company as well, but these numbers give us a great long term picture and a spot from which we can compare one investment to another.
Based on this, in order from the best stocks to buy now to the worst we organize this like so:
WDC
FSLR
NVEC
DECK
APEI
MDF
IDCC
CPLA
MA
EZPW
FLIR
JCOM
SYNT
GOOG
ISRG
DLB
AAPL
ACL
MASI
COH
SOHU
CTSH
WIT
HITT
TDC
TECH
GIL
Note that some stocks like WDC, FSLR and MDF has significantly more upside if the projected growth is accurate.
Now this is great and everything but are these businesses really predictable? Check out the predictability ranking in guru focus. Enter each one of these. The one’s that are less predictable we should either devalue the projected earnings even of the conservative one and devalue, but the one’s that are more predictable, we can be more confident that the 5 year forward projection is close to accurate.
Only CTSH,TECH,COH,EZPW have predictability ratings over 3. CTSH and TECH are 5 star ratings for predictability. COH is 4 star and EZPW is 3.5 star. CTSH and TECH we can just use 100% of their 5 year future earnings forecast. If you use 100% of EZPW’s long term growth, and it’s accurate it is the best investment to buy now and last from 2011 to 2021. Since there is a greater risk of the company not earning that much due to the lack of predictability and it is instead half that much, it is not nearly as impressive. If you average the last 5 years and the future projected 5 years, it is pretty good, but still not the best.
After projecting them all forward, CTSH or Cognizant tech is the most predictable AND highest earnings and in 10 years it should grow from an EPS of 2.37 to 37.97. Of all of these, the most undervalued right now (based on price/earnings) is WDC. CTSH is not nearly as attractive based on it’s current P/E suggesting if the future changes and the growth doesn’t come, it will not be as good of an investment as those that are currently earning consistent income.
Now, based on this we can divide either the average EPS over those 10 years while projecting each year of earnings by .15, or we can divide the 10th year EPS by .15 to get the price at which we expect the stock to earn 15% per year, either by the 10th year or over 10 years, depending on which we want to figure out. Any price lower than that is expected to earn more than 15%. If you plan on investing over MORE than a 10 year period of time, you should divide by the projected 10th year’s EPS. If you plan on investing over 10 years or a shorter period of time, you should use the average EPS over that 10 year period. If you want to take a 5 year period instead, you should then only average the EPS over the first 5 years. I believe if you want shorter investments, you should use a high tight flag trading system as the actual price of stock can sometimes remain undervalued for quite some time. There’s always risk that the future doesn’t pan out as expected and that the stock won’t earn as much
Rather than tell you the percentage the stock is expected to gain and have to edit the chart, here is the results of the above stocks projections and the price needed to earn 15%.
ticker |price 15% gain by yr 10|price of stock required for 15% average yield over 10 years
WDC $103.75 $70.12
FSLR $410.45 $191.18
NVEC $153.36 $68.45
DECK $237.12 $107.44
APEI $92.95 $42.20
MDF $10.72 $7.25
IDCC $92.51 $53.39
CPLA $105.77 $59.54
MA $460.74 $249.26
GOOG $894.18 $478.20
DLB $66.35 $38.29
ACL $190.55 $113.31
MASI $34.96 $18.76
HITT $48.46 $31.68
TDC $37.74 $23.64
CTSH $253.17 $97.98
TECH $59.10 $37.80
COH $54.43 $33.01
EZPW $39.54 $22.52
SYNT $80.29 $45.01
FLIR $49.99 $27.25
JCOM $45.43 $26.82
ISRG $431.80 $210.77
AAPL $445.55 $249.80
SOHU $87.91 $52.59
WIT $13.17 $7.23
GIL $20.92 $16.01
I hope this information helps you to make an informed long term investment.
Update: 5/4/2011
A fan of this site emailed me and shared some concerns that I wanted to go over. The question was about why I had these stock tickers and an ammount, and how to tell if the stocks above were currently good stocks to buy and represented a good investment in 2011.
I want to clarify, the question that Buffett seeks to answer according to Buffettology is “what stocks to buy” AND what price.
The following stocks represent good businesses
WDC,FSLR,NVEC,DECK,APEI,MDF,IDCC,CPLA,MA,GOOG,DLB,ACL,MASI,HITT,TDC,CTSH,TECH,COH,EZPW,SYNT,FLIR,JCOM,ISRG,AAPL,SOHU,WIT,GIL
The price they are supposed to be bought at depends on the return, but the price needed to yield a 15% return over 10 years according to earnings was listed in the table
| WDC | 70.12 |
| FSLR | 191.18 |
| NVEC | 68.45 |
| DECK | 107.44 |
| APEI | 42.2 |
| MDF | 7.25 |
| IDCC | 53.39 |
| CPLA | 59.54 |
| MA | 249.26 |
| GOOG | 478.2 |
| DLB | 38.29 |
| ACL | 113.31 |
| MASI | 18.76 |
| HITT | 31.68 |
| TDC | 23.64 |
| CTSH | 97.98 |
| TECH | 37.8 |
| COH | 33.01 |
| EZPW | 22.52 |
| SYNT | 45.01 |
| FLIR | 27.25 |
| JCOM | 26.82 |
| ISRG | 210.77 |
| AAPL | 249.8 |
| SOHU | 52.59 |
| WIT | 7.23 |
| GIL | 16.01 |
If it is still not clear, allow me to illustrate. You can take all the names I gave and enter them into yahoo finance. (see the results) You then can click the “download” button. Then you can enter the prices I gave you next to them.
| current price | price needed or lower for 15% gain per year over 10 years | predictability rank | ||
| CTSH | 76.43 | 97.98 | 5 | 78% |
| DECK | 83.36 | 107.44 | 4 | 78% |
| COH | 58.67 | 33.01 | 4 | 178% |
| EZPW | 30.041 | 22.52 | 3.5 | 133% |
| TECH | 79.33 | 37.8 | 3 | 210% |
| SYNT | 53.36 | 45.01 | 3 | 119% |
| WDC | 37.55 | 70.12 | 1 | 54% |
| NVEC | 55.86 | 68.45 | 1 | 82% |
| MDF | 4.47 | 7.25 | 1 | 62% |
| IDCC | 44.46 | 53.39 | 1 | 83% |
| FLIR | 34.63 | 27.25 | 1 | 127% |
| JCOM | 28.54 | 26.82 | 1 | 106% |
| ISRG | 348.2 | 210.77 | 1 | 165% |
| AAPL | 348.1 | 249.8 | 1 | 139% |
| SOHU | 90.89 | 52.59 | 1 | 173% |
| WIT | 13.52 | 7.23 | 1 | 187% |
| GIL | 35.91 | 16.01 | 1 | 224% |
| FSLR | 125.5 | 191.18 | NR | 66% |
| APEI | 42.5 | 42.2 | NR | 101% |
| CPLA | 50.33 | 59.54 | NR | 85% |
| MA | 280.11 | 249.26 | NR | 112% |
| GOOG | 533.86 | 478.2 | NR | 112% |
| DLB | 49.36 | 38.29 | NR | 129% |
| ACL | 167.99 | 113.31 | NR | 148% |
| MASI | 32.565 | 18.76 | NR | 174% |
| HITT | 61.18 | 31.68 | NR | 193% |
| TDC | 53.63 | 23.64 | NR | 227% |
Here are the numbers complete with the current price, the price needed (or lower) for a 15% gain on average based on 10 years of earnings and the predictability rank according to gurufocus.com. The last number is the percentage of that 15% gain mark. A 78% means the stock is 78% of the price needed for 15% gain and is therefore undervalued. You can compare these relative numbers to determine the buy.
if the current price is less than the price needed for 15%, it qualifies and can be added to your “buy list”. Now you are going to have to do your homework BEFORE you buy, and that means reading into the company and ensuring the business is really predictable and the earnings are accurately forecasted.
Based on this list, as of today 5/4, CTSH is equal to DECK in terms of value if the projected numbers are correct, and WDC, MDF and FSLR are even more undervalued, but generally unless you personally have an edge in that particular business and can manually dissect the earnings and determine an accurate picture of the low and high, you should stay away from any company without a 3 star predictability rank or higher. As such with CTSH and DECK being equal, but with CTSH having a higher predictability rank, CTSH is currently the best stock to buy in 2011. However, small deviations in the predicted earnings growth used and the actual, can make a huge difference over a long period of time, and as such, you should invest at your own risk and take responsibility and come up with your own outlook as well (and of course read our disclaimer). Base that outlook on some kind of a confidence rate and you should be able to determine a more responsible and accurate outlook and you will learn to be a dependent investor, unlike the other lemmings that will just buy what a guru buys and follow them off the proverbial cliff. For example, I am much more familiar with Google’s business and as such, I believe I can more accurately come up with a picture of how the business will look in 10 years. As such, I understand the upside and downside and expected gain and can make a more informed decision. Generally the less predictable stocks will have more possibility of being undervalued, but also more possibility of being over valued so those with an informational advantage and understanding of that business should be able to develop the skills to find a larger edge. Either way, identifying the best stocks to invest in 2011 hopefully is something that after reading this article and others on the site is something that you can now more accurately do on your own.
Good luck and happy investing!
Also note that the outlook may have changed since the time I originally made this post.
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