IFB157: Price Ratios and Old Investing Books – Still Relevant

Announcer (00:00):

You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave (00:36):

All right, folks, we’ll welcome to Investing for Beginners podcast. This is episode 157 tonight, We’re going to return to the well, and we’re going to answer something, Listener questions. We’ve got some more great ones, and we thought we would take some time and answer those for you guys on the air. So without any further ado, I’m going to go ahead and read the first question.

Dave (00:54):

So I have to whom it may concern. I am currently beginning to understand slash calculate ratios recommended by Andrew, such as P E P S and PB I E price to earnings price, to sales and price to book where I am caught up is about the idea that one of these right ratios might carry more importance than another. For example, the canopy, the company canopy growth company, a CGC has a current PE of zero and a PS of 18, assuming most likely due to new slash growing company. I know that these are not normal numbers. For example, JP Morgan or JPM has a PE of 11.16, a PS of 2.06, and a price to book of 1.05 that indicates a discount price and a great buyer returning to CGC. Their price to book ratio is currently 1.76 again, indicating a sort of sale. I know this is not a great example of the normal PE and PS ratios. However, I found it a great example of prioritizing with ratios matter. Please let me know if there is any analysis slash information you can provide into weight given to these ratios and which one might take priority, and how are these affected by new companies? Thank you, Ethan. Andrew, what are your thoughts on Ethan’s question?

Andrew (02:13):

Yeah, it’s a very good one. So the whole point of these price ratios is to try and get some context on the numbers. So there’s not some magical Excel file anywhere out there that says, you know, if your PE is a 12 and not a 13, then you’re going to be golden. The stock market isn’t that it’s not some game with boundaries where you can just put in ingredients and get the magical result. So where these price ratios come into play is it tells me when a stock is very, very expensive compared to a lot of other different stocks. And so, you know, even you talk about here, how you say that this isn’t a great example. I think it’s maybe the perfect example to illustrate where price ratios can be very helpful because, as you said, the company has a PE of zero and the price to sales of 18.

Andrew (03:18):

Now I know this is one of the marijuana stocks, and I don’t cover that industry. I don’t research that industry. I just, I know from having seen some of the statistics around that industry, that there is even today, still very high evaluations with that industry. Granted, it is a growth industry, and there seems to be a lot of potentials there, but there’s just a lot of companies that don’t have the financials to back up the sorts of prices that they’re commanding on wall street. And this is a perfect example. So maybe what could be helpful here is let’s compare canopy’s numbers to let’s say the average stock market numbers. So let’s start at the price of sales. Price to sales is trying to tell us how, how expensive is the company related to how many sales they’re bringing in? So when you, if, if you want a super quick accounting, one Oh one sales are going to be sales, and then you take away how much did those sales costs, and then you end up with profits or earnings.

Andrew (04:31):

So the price to sales gives us that number at the top price to earnings will get us that number after all the expenses come out. If I’m selling some lemonade down on the street for a dollar, and it costs me 75 cents to make that lemonade and, you know, buy the cups and put up some flyers for advertising. Well, I, and you know, if I sold one cup of lemonade, that’s $1 of CIT, $1 of sales, 75 cents in the expenses that leaves me with 25 cents of profit. And so that would go into the earnings part that’s price-earnings. And again, let’s talk now let’s talk about the press to sales. So the canopy has a price of sales of 18. That’s very, very high, the average price to sales for the S and P 500 in the market. It’s somewhere between two to three. And that’s not only the average today, but that’s also been the average over the last decade.

Andrew (05:34):

And for several years longer than that, there’s not much data going back when it comes to the price of sales, but that tends to be a general two. The three are pretty average. So when we see a price of sales of 20 or 18, that’s very close to 20, you’re talking about the price of sales. That’s ten higher than the average. And so what that’s going to imply is as this a company, that’s going to grow ten times higher than the average of a regular company. And then also is it going to do it sustainably over the very longterm, similar story with the price to earnings when there’s a price to earnings of zero, that kind of implies that this company probably is not making a profit. And so you’re in this situation again, as an investor, there’s trust me if you want to find a stock or a company that’s not turning a profit, you can do so there’s plenty to choose from.

Andrew (06:39):

And so if you’re going to play that game, you want to make sure that you’re very confident that you can figure out which companies are going to turn it around because negative earnings and not being able to turn a profit, that is a pretty common characteristic of growing companies. But at the same time, there’s been so many other companies that have done so well for so long and have grown profits and earnings dividends. They’ve done that for a very long time, and they’ve never had to be in this situation where they had these periods of negative earnings. So when I’m looking at a price based ratios like these, and you give the other example of JP Morgan, we have very reasonable ratios, you know, probably certain needs of 11, press a sales to have to price a book around one. So when I look at that again, it’s not saying that necessarily, I want to buy it, but I like the range that those numbers are in.

Andrew (07:41):

And when you’re using these numbers, if you can look across the universe of stocks, and if you find a number that’s completely out of whack, like a price of sales, that’s ten times higher than, than the average company will, then you better a have a very good reason why this stock is trading that way, you know, is this stock better by a factor of 10 than every other stock in the stock market. That better be like the best company in the world that we’ve ever seen by the way, or, you know, is there a possibility that wall street is abandoning all sorts of the rationale and normal price consciousness to get caught up in the excitement of a stock. And so these price ratios, regardless of whichever ones you’re looking at, and we can go deeper into, you know, in what situations some ratios might be more pertinent than others, but, you know, in general, it comes down to when some of these ratios get out of whack.

Andrew (08:55):

A lot of times, wall street could be just caught up in the emotions and the story behind the stock. And not to say that anyone stock can’t continue to be exciting and great. But historically, if you look at the different stories that have happened over history with these stocks, it’s a tale as old as time, and then things change, but things don’t change at the same time. They stay so much the same as an example. I mean, we love to talk about tulips. I love that story. There was back in the 16 hundreds, a speculative bubble in that a tool became so valuable that it became a single tool of the bulb. Yes, like the flower became so valuable. It was as expensive as several years of salary at one point, and people were trading them. You can just imagine the frenzy behind that and with each subsequent period of prosperity and booms in business, that economy, and commerce.

Andrew (10:08):

And then that transfers over to the stock market. Eventually, there’s always been these stories of great innovation and great growth, but at the same time, great speculative bubbles that have eventually popped. And so whether it was the tulips in the 16 hundreds or the Dutch sea company to follow that, and then that virus, if you will transfer over to the South to England with the South sea company, and they had their stock go up in a bubble and then pop. You’ve seen this with every period of booms in the 18 hundreds; it turned into rail what they call railroad mania. And then it turned into mining company mania. And then in the roaring twenties, before the great depression, they had all of the stocks then, and then it’s just on and on. And on then more recent history. We had the.com bubble, and that was catastrophic for people.

Andrew (11:08):

So there’s always growing companies, and there are always stocks that trade at observed at absolutely absurd valuations. Having these price ratios to discipline you and kind of narrow, your focus helps keep you away from a lot of these stocks that have been trouble for investors for so long. And so, you know, you can go down the dangerous road and T there on the cliffs, if that’s how you want to invest your hard-earned money for a lot of other reasons, rational investors. We like to see the type of businesses that create cash flows and, and distribute those cash flows back to shareholders. And so that’s why you can use like these To, you know, maybe you sacrifice a home run but have a lot more safety and stability. And that’s what you’ll tend to see when you look for stocks that have reasonable ratios price already expressed the sales and price is a book.

Dave (12:08):

That’s very well said. And I agree a hundred percent with what you’re saying and to kind of tag along with what Andrew was, was focusing on. One of the things that when you think about these price to ratios is thought about how they are concerning not only the stock market but other companies in their industry or sector. For example, I’m going to pick on JP Morgan here because he used that for an example, one of the things that you’ll notice, if you look at PEs, those are all air quotes, nice numbers to look at, and it would indicate that the company is undervalued. Still, because I spent a lot of time digging into financials for banks and insurance companies and things of that nature, generally, those are pretty average numbers for companies in that realm.

Dave (13:01):

And a lot of that has to do with the fact that banks, in particular, are fairly unfavored. And I have been for a while, especially from 2007 to 2009, because they were blamed for that great recession that we went through during that period. So because of that, banks tend to trade at lower multiples compared to other companies. I E the Fang stocks, Visa, MasterCard, Target, Walmart, Amazon, you could go on and on and on. So when you look at those companies, they appear to be undervalued, or as you were putting it as a great buy and they may or not be. And I guess one thing that I, I like to think about these ratios is to me, they’re a sort of a screening tool to help you find companies that could be undervalued, that you could do more research on. And these are never; I never buy a company based on seeing a great PE or a great price to sales or a great price to book.

Dave (14:05):

It’s all a combination of numbers that can help tell a story and tell you where the company is undervalued, overvalued, fair, valued, kind of what’s going on. But again, it also has to be used in conjunction with the overall stock market like Andrew was referring to, but it also needs to be referred to by the sector. So if you look at a canopy growth company, for example, again, like Andrew, I know almost nothing about the marijuana industry or the companies. And so it’s not something I could speak intelligently on, but I guess what I would recommend you do is look at the industry. There are going to be websites that will tell you the financial history of that industry. And you’ll be able to see over the last five, ten years, depending on what part of the country in a world, these companies have been able to perform in.

Dave (14:59):

It’s going to give you an idea of what some of those ratios have indicated for those companies. And now, because it’s a new industry, you’re probably going to see everything all over the map. You’re going to see negatives. You’re going to see a lot of zeros. You’re probably going to see some monstrously huge numbers, depending on the popularity of the company. You may see a PE that may have, you know, 75 because it’s, for whatever reason it’s, it’s caught on and in a niche and the price has been bid up, but it’s only earning a dollar a year or something crazy like that. So you just never know, but I think I would caution you on getting super excited. If you see some of these are super low and use this as a, as a starting point to start to do some more research, to find out as much as you can about the company, and as much as you can about the industry.

Dave (15:56):

And like Andrew was saying, comparing it to the rest of the stock market is, is a great way as well, because it can give you guidelines that can give you a historical context of where some of those numbers are sitting. And those are all things that can go a long way towards helping you predict and anticipate what will happen with the company and the future. And the more you read about the company, and the more you read about the industry, you’re going to learn more and more about that company and what it’s doing, how well it’s doing, and also how not so well it’s doing. And those are all great things to know. You can’t just look for all the good stuff we got to look for the bad stuff, too. We have to think of ourselves as show our homes we’re investigating and trying to find clues that will give us the answers to whatever the mystery might be that we’re trying to solve. And in this case, we’re trying to decide where their canopy growth, for example, is a company that might be interesting to invest in. And I think it’s a great path or going down Ethan. And I encourage you to keep going down this path and to keep asking these good questions and trying to dig in and find out as much as you can about the company and the numbers because that will do you in good stead as you go forward.

Andrew (17:08):

Yeah, definitely. Good question. So the next one here, hello, Andrew, I’m new to the stock market and struggle with a breeding company, annual reports, and analysis of the ratios. I’m an England great Britain. I guess our British systems are a little different from America. However, I need to learn how to get information about companies and how they evaluate it to decide which ones to invest in. He says the investing books you mentioned were published decades ago. Are they still relevant in 2020? And for the future, sincerely Mike

Dave (17:38):

In a word. Yes. Yeah, the books, the books that we recommended awhile ago, yes, they are still relevant in 2020. And for the future, some of those lessons that you can learn from Ben Graham, for example, in the intelligent investor, are timeless. Those are things that those are lessons that you can continue using to this day. Some of the terminologies may change a little bit, but the basic idea of trying to find companies that are selling at a discount to their intrinsic value that has longterm growth potential have developed a moat. These are all things that have been and are being used by investors in the stock market as we speak. And they will continue to be used long after you and I are here. And I just think that they’re timeless. And I don’t think that those kinds of ideas are ever going to go away.

Dave (18:37):

As long as Mr. Market is available and able to play with all of us in the stock market, whether we’re guys or girls, he’s going to be there to give us deals. And as long as we’re there to partake in those deals, we have a choice to make whether we think it’s foolish or not foolish to buy at that particular time. And so those are things that have been passed down and handed down through time. And there are so many great books out there to read. And I think those are great places to start. And I’m going; being honest with you, Mike, when I first started doing this, it was hard for me to read the annual reports as well. They can be dry; they can be boring. And if you’re not a huge numbers person, it can be a little bit overwhelming.

Dave (19:22):

But what I would encourage you to do is try to, when you’re reading through them is try to find areas of the company that are going to be more interesting than others. For example, some of the legal ease that you’ll run into when you’re talking about risk, some of that stuff, your eyes can just kind of gloss over. And if you think something’s important, it’ll jump out at you. Otherwise, it’s going to be a lot of the same kinds of things over and over and over again, reading through what management thinks about the company is great stuff to do. Reading through the financials is very helpful. And if you’re not a big fan of calculating the ratios, there are a bazillion different websites out there that you can go to that will provide those for you so that you can do that in that way.

Dave (20:11):

And I just think that the more that you do this, and the more that you spend time reading through some of those, and also kind of give yourself a break. You don’t have to blaze through one of these annual reports in a day. If it takes you a week to go through it, there’s nothing wrong with that. And it’s okay to do that. That’s happened to me from time to time as well. Certain ones are trying to read through that. Sometimes they can be a slog. I’m not going to lie, but it’s, it’s, it’s important to me. And it also helps me learn more about the company. And the more that I read about the company, the more I understand it better, the easier it becomes. And so I would encourage you to do keep at it, but the list of books that we went through a little while ago and the archives, those are definitely, I would highly recommend all those books. Any of them are still going to be relevant.

Andrew (21:03):

If you haven’t already, I would recommend picking up my free ebook. That is talk it’s announced on the, on the show all the time. That’s literally what the book does. Is it breaks down these ratios that we’ve been talking about, and it gives you examples and shows you how to analyze based on those ratios. Outside of that, everything Dave said makes a lot of sense. And if you find that these sorts of things are interesting to you and you know, you want to know as much as you can about the stocks that you do end up owning.

Andrew (21:41):

And you know, whether it’s learning about the companies themselves or learning about different mindsets to have as an investor, learning about how the market works in general. I think those are all valuable things to do for anybody when it comes to managing money. Because if you’re real with yourself, either you have to pay somebody to, to know what the general context is on the markets, or you have to have that knowledge for yourself and at least have a general understanding yourself. Otherwise, when things happen like the coronavirus, for example, when the market crashed or back in 2008, 2009, a similar story, the market crashed. It seemed like the world was going to end for investors looking at their portfolios. You know, if you don’t have the context of that, these types of things are normal, that the media is scary new and over jam.

Andrew (22:50):

Overdramatizing a lot of things, but that in general, being in the stock market is the right thing to do over the long term. If you don’t have that knowledge, if you’re, if you’re trying to outsource that or hire that away, that’s great. But you know, it better be somebody that you trust like the back of your hand because these are very serious and important topics. And so when you relate that to books that were published decades ago, those are probably the best books to read versus the book that came out yesterday or last year, because of a lot of the best authors like authors we’ve recommended like Benjamin Graham. He had his book, the intelligent investor; Peter Lynch is a great guy. I think anybody who’s a beginner should pick up a couple of his books and read whether that’s beating the street or one up on wall street.

Andrew (23:48):

Those are both super easy reads, very, very inspirational, and very informative. You know, these are guys who were in the market for decades. And so a newsflash to be, to have a deep understanding and wisdom, you have to look over many decades because the market and the economy goes in these very longterm cycles. And it’s not; it’s not something where you can build a business on Monday and become a billionaire on Friday. That’s just not how the world works. And so in the same token, the stock market is just the business world. And that’s just the ownership part of the business world. And so businesses take years and years and years to grow, and businesses go through the different troubles that the industries will have. Let’s take Facebook and Twitter. For example, for a while, social media was just a buzz word term, right. And it was not in any way a part of everybody’s life.

Andrew (24:51):

And then Mark upper Zuckerberg came around and changed and created an industry pretty much on his own. And then you had, you know, a lot of different competitors that we don’t hear about because why would you hear about failures? So, you know, you had my space back in the day, you had vine was a social media platform that seemed to have a lot of promise. So then just fizzled out. And so you fast forward to today you had Facebook and on Twitter IPO, what seems like, you know, forever ago, but it was in the grand scheme of things. I think it was three, four or five years ago, something like that. And so, you know, since then now we have these companies struggling with how are they, how do they police their content essentially? And so you have pressure from the left I’m pressure from the right.

Andrew (25:52):

And none of them think that Facebook is doing a good job. And, and so they’re in a situation where they’re under a lot of turbulence. And so you’ve had an industry that has gone from nothing to becoming a baby, to growing,  fast, to be from not profitable at all too profitable and to now having issues that a lot of investors did not foresee because now there, there’s a boycott that’s happening to start in July. And it’s because of politics and the way things have gone. And so, you know, there’s a lot of to make a short story super, super long and try to make it a short again, there’s, there’s a lot of things that happen over the life of a company, of industry, of an economy. And so you need to stretch out and think about the decades rather than just the days or the weeks.

Andrew (26:50):

And a lot of the good investing books that are classics that have stood the test of time do take those kinds of longterm mindsets because things like the newest technologies of today, there’s always been newest technologies of today. And if you read any good book that talks about the history of the stock market, like I mentioned in the last question that we answered, there have always been these huge innovations. And it turns out that if you look at a lot of the most successful investors, they weren’t necessarily the first ones to get into these great companies, but they tended to be their quote-unquote too late and then just continue to, to ride the wave. And so that seems to be a recurring theme as you look over the years at the different businesses and the huge innovations in these huge new growth industries. I mean, if we think that the innovations of today are big, how do you think investors felt when the automobile was invented?

Andrew (27:58):

You know, and for many decades after it was invented, it was a huge part and still is a huge part of American culture. And plenty of money has been made along with the interim. And now we have this industry that’s maybe maturing. And then now there’s a new technology with Tesla that’s coming in and completely disrupting it. So again, there are just all these forces, and they happen sometimes slow sometimes fast, but it’s a very, very longterm thing when it comes to the business world and investing. And so, I don’t remember exactly where I heard this. It might’ve been Farnam street, Dave that blog we’ve been obsessing about lately, but I think he mentioned, you already know I’m going to say that to you. Yeah. He says that the books that are still popular today that were written decades ago, they’re still popular because they have stood the test of time.

Andrew (29:02):

And that’s where you’re going to get the best gems. So, you know, I could take ten books just like you could take ten companies to say, we don’t know how, how they’re going to be ten years from now. I bet you have the ten books you took that you read that were released last month. Nine of them would be trash in a year. And so the good one is the one that’s going to continue to be referred to. And people are going to continue to buy and recommend to their friends. And those are the ones that stand the test of time. And those are the ones you need to be reading. Even if they don’t know what the internet is because they know what business is. And the more you learn about history; you’ll realize that business is business. And, and it’s always been very, very similar and it’s always been the same. And so the principles behind it and the wisdom behind it has been true, and I believe will continue to be true for a very, very long time.

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Dave (30:07):

I agree with you, the article that he’s referring to as written by Shane at Farnam Street, and he was referring to books that instead of reading what’s on the top 10 list, he said read books that were written 30, 40, 50 years ago. And the reason why they’re still popular now is that as Andrew was saying, the information in them as timeless, and another thing that I guess I would recommend for Mike to think about too, is if some of these books are a little bit hard for you to read a couple of things, number one, there’s nothing wrong with listening to them. Audible has a great selection of all of these books available to you for, to listen to. And that’s something that I do with the intelligent investor. Every year, I listened to the intelligent investor this beginning of the year, it’s just something that I got into a habit doing a few years ago.

Dave (31:06):

And so every year I relisten to it, and you always want something new when you do something like that. And it also helps me continue to read other things so I can do that, why I’m doing stuff. And it just kind of keeps my brain occupied, but it also helps me learn things, but it also can help. Sometimes, these books are maybe not appealing to people, but if you listen to them, it might be a little more entertaining, and you can get more out of it. The other thing that I wanted to throw at you too is, and this is something that Shane mentioned in his article that Andrew and I were talking about. There’s nothing wrong with not finishing the book or picking different parts of the book and reading through those parts and other parts that maybe aren’t holding your interest.

Dave (31:48):

There’s nothing wrong with not, not reading those. We have been taught since we were little kids that you got to read a book from beginning to end. And I’ll be honest with you when I first started getting into this and discovered that, Hey, I don’t have to read the whole book. I was kind of flabbergasted because that’s not the way I grew up. I grew up having to finish there. You know, you start a book, you’ve got to finish it. And truth be told there are only two books in my life. I’ve never finished Moby Dick and the other one just; I couldn’t do it. Just couldn’t do it, Moby Dick. When he was talking about oil paintings, I just, I could, I know we’re done here. I had to stop. And Don Quixote was just too weird.

Dave (32:29):

So apparently I did not do enough drugs when I was younger, and I couldn’t follow that book, but anyway, that’s just my 2 cents worth. But I guess that would be; I guess my thought on a little tag on to what Andrew was saying. Yeah. I think it’s great that he’s reading in general. Hopefully, we then discourage him from that by yeah, exactly. Right. But no, I think readings great. There are so many ways to go about doing it. And I think sometimes people just get bogged down, and I have to do it this way, but there are so many different options available now. Whether you listen to the audiobooks, whether there are people that do read them on YouTube, so there, I mean, there’s just, there are different ways that you can go about doing it. And I would encourage you definitely to continue to read, cause you can learn a ton by doing it that way.

Dave (33:24):

Alright. So moving on from the reading we’re going to talk, so I’ve got another question for you. So Andrew, do you have any thoughts on Viacom, which is VIAC seems like a great value by right now based on your teachings, but didn’t see it listed in your newsletter currently as a bye. Thanks, Kevin. So Andrew, what’re your thoughts on VIAC?

Andrew (33:44):

Okay. So, you know, it’s always a hundred percent possible that there’s a stock out there. That’s a good, Just a radar at the time, but yeah, let’s, let’s take a look at Viacom kind of on the air and just put some thoughts on it. And maybe we can add a little bit of light on there if people have been looking at the stock. So I pulled them up on Finn is, and this is a company that’s in the S and P 500, it’s a $15 billion market cap. So that puts it. I wouldn’t call it necessarily a small-cap. It’s, it’s a mid-cap in my book. And so the dividends high it’s 4%, and the price to earnings is very low. It’s 5.46 per sales, 0.5 precipices 1.07. So I think, I think, you might be thinking that I see a PE like that and my eyes jump out, and I get excited, but it’s the other way around. I look at a PE like that.

Andrew (34:47):

And when it’s so low, I, I worry that there’s something there that’s, that’s, that’s troubling because, you know, while wall street can, can beat up some stocks unfairly, but when a stock, gets beat down like that, you tend to think that maybe there’s, there are some underlying issues there. So I think that’s good to know based on these three price ratios, the company seems very, very cheap. Now let’s try to figure out why. So then I’ll pull up my next website here, quick fs.net, and look at some of their metrics that kind of pop up. So all you have to do, you type in the ticker and click the company. And so they have similar price ratios, PE 6.5 press book, 1.1, they have been growing revenue. So that’s good. They’ve been growing EPS. That’s also good. So from this standpoint, the company looks pretty decent, a 10% return on invested capital return on equity, close to 25%.

Andrew (36:01):

Those are all very, very good things. Now I think the big question becomes there’s one more metric we can look at, and I’ll get to that in a second. But the big, the big question is what the coronavirus impact is, right? Because that’s a question, unfortunately, you need to ask yourself, at least for at least the, probably for the rest of the year and perhaps for longer, I like to look at stocks as how’s the coronavirus going to impact them. And so if I believe that wall street thinks it’s going to impact them more than I think, then I think that can be a good value, but at the same, you know, whether that’s the case or not, you still want to think about that. So Viacom, just for people who aren’t familiar, their complete company name is Viacom, CBS. So maybe that’s where more of us understand what the company does.

Andrew (36:59):

So obviously they own things like the CBS sports network, the CBS channel, right? So they have segments, four segments. It looks like entertainment, cable networks publishing, and local media. So, you know, just based on that, you would think that the coronavirus should not hurt them because they still profit when people are at home consuming their content. But you know, one thing you need to, you always want to take the thinking one step further. So while people will still probably be consuming their content, you have to understand if fewer businesses are spending on advertising, then that’s going to be hard for a company like Viacom, CBS because lower ratings mean lower advertising revenues. And that just kind of trickles down to a lot of the different media segments. So the company might have. And so, you know, with CBS in general, I know that one of their big events is March madness. And so with that not having happened that probably will have a huge impact on their quarterly earnings, particularly if that advertising segment takes up a lot of their earnings. So I think I’ve talked long enough, Dave, whether you think, okay. So I liked a lot of the things that Andrew was talking about. So to kind of maybe

Dave (38:36):

Dig into the numbers a little bit to maybe put it into context, some of the things that Andrew was referring to. So, for example, at the end of March, the end of the quarter, the stock price had dropped a $14 a share. So it was one of the companies that had gotten smacked during the coronavirus smackdown that happened in the stock market. Just to kind of put that in context at the end of the quarter for December, it was trading at $41 the quarter before that $40 quarter before that $49 and a quarter before that $47. So quite a huge drop. So if you dig a little bit farther down, so as we look at a lot of the other numbers if you look at the revenue for the quarter, it was down from the fourth quarter by quite a lot, but I don’t know if that is more of a related to seasonality.

Dave (39:37):

It might be. So I can’t speak to that part of it, but I can tell you that from the year-ago, the quarter in March of 2019, it was down about 20%, I believe. And if you go farther down to the income statement, for example, you can see that the earnings for the quarter or down almost four times from the previous year’s quarter, which would we to earnings per share quite a bit less because the shares outstanding were almost identical from the, from the year-ago, quarter. So would you do all that math, if you will, you can see that the company kind of got smacked, but it also lost a lot of revenue? And I was looking at the earnings transcript and the slideshow that they put along with that. And one of the things that they mentioned in there was a good portion of their revenue comes from advertising and advertising.

Dave (40:35):

If you may or may not know, it was smacked hard during this last quarter because of the slowdowns with the coronavirus; people just weren’t paying for advertising. They, they cut their budgets, they slashed budgets tremendously. And when, if I eCom is making a lot of their money from advertising, then that is going to hit them in the pocketbook pretty hard. And so that I think is something that kind of jumped out at me as I was looking through the numbers the company as, as a whole, if you look at the historical averages like Andrew was talking about, it looks like a great company it’s done well. All the, all the metrics are very nice, and you know, the growing revenue is fantastic, and the return on equity return on assets return on invested capital, all fantastic, all great stuff. And those are all things that bode well for the company going into the future.

Dave (41:30):

I guess I would be curious to see what will happen as we go farther into the next quarter’s earnings and see how that kind of all shakes out. Because I think in all reality it, regardless of whatever company that is going, the majority of them are going to tell the tale so to speak in the next quarter. Or so, one thing I wanted to mention is the debt to equity has gone up quite a bit. I did read that they did a couple of bond offerings during the last quarter to try to raise capital, to help them through the period. But that’s something to keep an eye on as, as the company goes forward. It’s not outrageous their debt to equity is 1.52, according to guru focus. So we’re hitting all the hall, the financial websites and this one today. So those are some of my thoughts. Andrew, you got any other ideas?

Andrew (42:25):

Yeah. So while you’re on the topic of debt, because that’s where I’m laser then right now on their annual reports, does it show you the core, their numbers how much they earned roughly two miles a loss? Probably

Dave (42:44):

The earnings, no, the earnings were actually positive, but it was about 516 million. So it was pretty low.

Andrew (42:53):

So what I’ve been looking at when it comes to debt lately, cause I mean, obviously you want the whole, that picture that’s equity is a great ratio for that, but at the same time, you also want to know not everybody’s debt is equal. So for the case of Viacom, they have, you can look in any company, 10 K, and you can look at obligations, and they will break down when certain debt is due at which periods. So for Viacom, they have 4.8 billion due for 2020. And then from 2021 to 2022, it’s at 12.2 billion. So that’s quite a bit. And then it drops down for 2023 to 20, 24 around 7 billion. So you’re looking at almost 5 billion that’s due this year and then 6 billion that’s due for the next two years. So, you know, if they earned 500 million this quarter, if that continues for the rest of the year, that’s only 2 billion.

Andrew (44:01):

So they’re going to be using our back of the napkin math. They’re going to be two and a half billion short for this year. And then for next year and the following year, they would be 4 billion short per year. So that’s not a good sign. Now I think it would be kind of foolish just to project one-quarter of coronavirus and say that that’s going to be their complete results for, for the future. I think somewhere of a mix between where they were and where they were after the crisis, and then maybe averaging between where they were before the crisis, where they were after, and then somewhere in the middle there, and then maybe comparing that to how much they owe. And then I would take that and maybe look at some of their other competitors, maybe a company like Disney, who owns ABC and all those networks, you know, what, what are the differences between the debt picture’s there?

Andrew (45:07):

And there is one more or less risky than the other. I think that could be a good start. I mean, I was talking last week about one of them, maybe it was two weeks ago. I don’t; sometimes, the weeks just blur these days. You know, one of the reasons I liked one of the stocks that I picked over the others is that they just didn’t have much do in the next couple of years. And so that gives you a leg up to be able to not only have a lot of free cash flow but just imagine if they’re smart about what they do with all this extra cash in a time where businesses are tightening the belt and pulling up for you, if you can have a business that has a bunch of cash and is ready to pounce on opportunities, take the market, share grow and take the opportunity of, of industries that are not in good spots.

Andrew (46:02):

That’s where that’s when you want. That’s exactly why you buy stocks with great balance sheets because they’re able to take advantage of times another tough. And so when you look at when you’re going deeper, and you’re starting to go past the surface level numbers, and then maybe trying to evaluate how, how do I see this investment next year or the year after? And then how has that performance gone to springboard into five years from now in 10 years from now? And, you know, what’s the overall picture. When you look at a company like this, you can’t ignore Netflix or Disney plus or Hulu. You know, these are all stream, the new streaming services that are taking market share from a lot of the cable companies. So that’s, that’s a longterm factor to a lot to think about, but this gives a good starting point. I think if you can get for me, I like to get a big picture idea. I like to get lately. I’ve liked to get the coronavirus picture. And then what does recovery look like? And then from there, you get into the nitty-gritty of the numbers and then maybe making some industry comparisons on how, how, how is this going to perform against other companies? And are we going to have enough liquidity? And then you maybe circle back

Andrew (47:30):

Again and look at, you know, what was the stock trading at? And is this a fair price? And do I think I get a margin of safety from this? And then hopefully at that point, you haven’t given yourself so many considerations that you’ve made your head spin, but you’ve got yourself at a place where you have a good understanding of the business. You, you understand what the numbers mean today and what you’d like to see in the feature. And then you just trust your convictions and go with it.

Dave (48:00):

All right, folks, we’ll that is going to wrap up our conversation for this evening. I hope you guys enjoyed our conversation and the answers to our questions. And thanks again for taking the time to write those into us. We appreciate it. And we hope you guys get something useful out of use on your investing journey. So without any further ado, I’m going to go ahead and sign this off. You guys go out there and invest with a margin of safety emphasis on safety. Have a great week, and we’ll talk to you all next week.

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