Let's not forget how much better the individual investor has it today than, oh, just about ever.
Consider the familiar refrain where the father tells the son how lucky Junior is, because when dear old Dad was young, he walked five miles through snow to school and back each day. The son, busy playing Doom or Quake, barely glances over and grunts, while the father's friend raises a beer and eyebrow and one ups, "You had shoes?"
Brokerage commissions? They all but crushed the individual investor who couldn't afford to buy round lots of 100 shares. (Haven't got a discount broker yet? Get cracking!) The larger the commission as a percentage of total purchase, the more your stock has to appreciate before you are even. From the first days of The Motley Fool Investment Guide, we've insisted that the commission shouldn't exceed 2%. Today, that's easily doable.
Gathering quarterly and annual reports was a frustrating and expensive process. And once you got the numbers, crunching them involved adding machines that did only the four basics -- at the pull of a crank and printed on a paper roll. (And I thought my first adding machine was way cool. Though we didn't say cool.) Sharpened pencils entered numbers in ledgers. Not to mention that companies routinely leaked information to favored individuals, especially analysts, so that stocks moved before we learned and could act.
Today, the playing field is more level and we're drowning in data. Fortunately, advances in plain old vanilla computing power offer the ability to move that data.
A screen, a lovely screen
I'm talking screening. The ability to look through the 6,000 stocks publicly traded on the major U.S. exchanges and find stocks that meet your criteria. If you are a mechanical investor, screening may be the start and finish of your work. But if you are not, investing by screening alone is a way to ruin. Screening is the starting line, not the tape. (What is screening? How to do it? This column starts you off.)
An example. In A Red Flag to Watch, I screened for a familiar accounting warning of business troubles -- accounts receivable growing faster than sales. All the great quality of earnings gurus -- Thomas O'glove, Howard Schilit, Kathryn Staley, and Charles Mulford -- put this one front and center. I generally bow to their experience and learning, depending on the state of my back.
So if you want to begin some bear or shorting research, A/R versus sales is a super place to start. But you can't end there, or with any other red flag.
The screen I ran yielded four companies: Multimedia Games (Nasdaq: MGAM ) , Atlantic Coast Airlines (Nasdaq: ACAI ) , bebe stores (Nasdaq: BEBE ) , and ESS Technology (Nasdaq: ESST ) :
Q1 v. Q2* Q1 v. Q5*Company A/R Sales A/R SalesMultimedia Games 141% 7% 242% 22%Atlantic Coast Airlines 188% 11% 138% 21%bebe stores 229% (31%) 133% (3%)ESS Technology 181% (7%) 119% (64%)*Q1 = most recent quarter, and so on.
I cautioned against shorting or selling based on this screen alone and asked anyone to email me with explanations. Many did. They proved that in each case there's more than meets the screening eye.
Investing in gaming-equipment companies definitely requires industry-specific knowledge. One thing the online number aggregators -- the sources of data for most screening tools -- miss is that total revenues aren't helpful. You want net revenues after gambling payouts. When you do that for Multimedia Games, you find that net revenues climbed 47%, not 22%. Quite a difference.
Yet accounts receivable still grew faster -- a wild 242% -- so we continue. You don't find the explanation in the latest quarterly report, but in the company's earnings conference call (which I reviewed through a transcript from CCBN Streetevents at www.streetevents.com). Company execs explain that the receivables increase comes from a huge sale of Class III gaming machines in the State of Washington. Provided the money shows up in a timely manner, there's no problem.
Atlantic Coast Airlines
Hold the font presses! You may know that Atlantic Coast is ending its relationship with United Airlines, through which Atlantic provides United's United Express commuter service and plans to start a low-fare airlines with a hub at Washington, D.C.'s Dulles Airport (As a D.C. metro resident, I was excited.). But yesterday Mesa Air Group (Nasdaq: MESA ) offered to buy the carrier in a stock deal valued at $512 million. Read our take for the details.
Meanwhile, receivables may be less exciting than a buyout offer, but let's take a quick look. Many shareholders, including several pilots, wrote that the receivables jump is a one-timer due to the restructuring of the United-Atlantic pact that's going to end. True enough. It's in the notes to the financial statements of the most recent quarterly report -- and data providers just give you the line items, not the fine print.
If Atlantic Coast sells to Mesa, then case closed. But if it remains independent, it's a speculation on whether it can succeed as a low-fare operator. With $220 million in cash (that's twice debt), the company could make a quite a try.
One reader pointed out that retailing receivables require a different lens. "In order to make your analysis complete, you really need to understand whether receivables relate at all to sales. In bebe's case, receivables relate to landlord-tenant allowances, which relates to the number of new stores completed and the allowance not yet collected from the landlord. The other fallacy of your comparison is that it ignores the magnitude of the actual numbers and only focuses on percentages. You are comparing percentages on $80 million in sales versus $1-2 million in receivables."
Great points all. Retailers receive their cash quickly through our credit cards, and the relative size of receivables and sales matters too.
Do note that this most excellent and thoughtful reader refers to "analysis." Screening is not analysis.
Many company shareholders, as well as the CFO, wrote me that the accounts receivable increase stemmed from a one-time litigation payment to ESS. Kerry Chase went farther and put it all in context, showing the thinking that happens after screening:
"In re ESST in your article 'A Red Flag to Watch' receivables ballooned due to a $45 million licensing agreement with Taiwanese competitor Mediatek on June 12. Mediatek agreed to pay ESST $45 million to settle ESST's patent infringement claim from last fall.
On its income statement for the quarter ending June 30, ESS booked the $45 million as "Other income and expenses," turning a 14 cent loss per share into a 40 cent gain. However, ESS had not yet received payments, so receivables jumped almost $49 million.
While there are indeed causes for concern at ESS, the $45 million receivables probably isn't one of them. ESS gets the money plus future royalties for alleged (but unproven) infringement of a chip that is yesterday's technology. Once paid, ESST will have $4.50 per share in cash with no debt -- even after having spent $68 million the last five quarters to cut shares outstanding 18%.
The big question is: Will its new Vibratto chip get big design wins with DVD manufacturers ramping up for the holiday season? And in the long run, will it invest its cash wisely to make inroads into other digital media?"
Thanks so much, Kerry, for sharing your keen investing mind at work.
It doesn't matter whether you're screening for good news or bad news, you have to hit the financials, read them line entries, and consult the notes. All sorts of one-time events can skew your results. Let's say you were screening for a positive rather than a negative -- healthy free cash flow but a low enterprise value to free cash flow multiple (EV/FCF). You might miss companies that had an anomalous cash payout in the most recent quarter, such as a one-time litigation settlement payment, but that still generated healthy cash from operations that quarter in excess of capital expenditures. Their EV/FCF would rise for that quarter only and miss your screen.
Screening? A great tool, but only one of many. Thanks again to the readers who proved that very clearly.
Alternative energy company American Superconductor (Nasdaq: AMSC ) (subject of Power Play) issued stock instead of its planned debt offering. Management made the smart call -- dilution from the stock offering is better than adding debt service at the rates it could secure.
XM Satellite Radio (Nasdaq: XMSR ) -- and I'm listening to Fine Tuning (Station #104) as I write -- took another step to improve its price-to-dream ratio when it placed $150 million in stock. Though dilutive, it puts the company on firmer footing if it has more insurance skirmishes over one of its two current satellites it must replace.
Biotech drug maker QLT (Nasdaq: QLTI ) received positive news that a Medicare advisory panel recommended that the agency reimburse more broadly for QLT's Visduyne eye treatment. The company also raised $173 million through a convertible debt offering, bolstering its ability to fund cash-eating drug research and development. I made the quick double case for QLT in April. The stock closed at $9.91 that day, $17.36 in July and $17.80 in September, and is scraping $17.00 in trading today. If Medicare adopts its panel recommendation, Visudyne revenues may well accelerate, but that must be balanced against the threat of competition still in development at other companies.
Finally, over the summer, diagnostics and protein manufacturer Meridian Bioscience (Nasdaq: VIVO ) lowered its projected EPS growth for 2003-2004 to 8%-12% from 15%-20%. More recently, the company filed a shelf offering for $60 million in debt and equity. The case for this double may still be there, just not as quickly.
Have a most Foolish week, and thanks for reading!
Tom Jacobs (TMF Tom9) is guest analyst in the latest issue of Motley Fool Hidden Gems. Get a free trial today! He owns shares of XM Satellite Radio and Meridian Bioscience and others you can find in hisprofile. Check out The Motley Fool'sdisclosure policy.