Archive for January, 2010

There are three financial statements pertaining to measuring a company’s financial health.  They are the Profit and Loss, the Balance Sheet and the Cash Flow statements.  Today we will talk about the Profit and Loss statement.  The P&L measures and details a company’s revenues and expenses over a set time period such as quarter over quarter or year over year. 

The statement comprises four basic parts 1) Sales or revenues 2) Cost of goods or cost of sales 3) Gross Profits and 4) Expenses.  The Net Income or earnings is calculated by subtracting the total expenses from the total revenue.  The company creates top line revenue or sales and then subtracts returns and damaged merchandise to arrive at Net Sales.  Cost of goods is then subtracted from Net Sales resulting in Gross profits.  Operating Expenses are then subtracted to reveal the Operating Profit of the company.  Other income is added back in and then Interest, Taxes, Depreciation and Amortization is debited to finally arrive at the bottom line Net Profit.

From an investor’s perspective, the question may be asked, “What are we looking for in the Profit and Loss Statement”?   The answer is that the statement can reveal how healthy the margins are and whether or not the company is growing its earnings.  At some point in the future earnings will translate to stock price.  Each sector and industry will have a multiple of earnings that is generally attributed to those companies in that sector and industry.  When doing a comparative analysis of a particular company, an investor can compare the company to its peers and sometimes be able to pinpoint when a company appears to be undervalued.  The P&L statement can help uncover such opportunities.   Next week we will touch on the Balance Sheet.

The Dow Jones Industrial Average, SPX and the COMPQ all experienced increased volume on the move to the upside this week.  Our sense is that the move is not quality.  However, with that said, the market is always right and we are bullish until we’re bearish.  That means that the amount of hedge we employ is commensurate with our degree of bullish/bearish bias.  After the large upside candle on Monday, the INDU put in four very indecisive trading days with a Hanging Man, Doji, Hanging Man, and Hanging Man Tuesday through Friday respectively.  The index is currently at the upper Bollinger Band and at a long term resistance level.  We continue to be Trend Followers and are “Long the Market” but ever so slightly.  We are looking for a breakdown to occur soon.  When that happens, we will adjust our positions to take advantage of the move.  All of the indexes have room to move in the recent channel and we will not be definitively bearish until the broad based indexes break down out of the trading range with increased volume.

There is indication that as recently as late December, institutional money had been flowing into money market funds to the tune of almost $4.5 billion.  At the same time, retail investors have pulled out of money markets by nearly $2 billion.  One could speculate that this shift in allocation in the face of a rising stock market is driven by retail investors who may not be as savvy as the institutional money.  This may be a classic handoff from the smart money institutional investors to the less informed retail investors at the top of the market.  Please realize that we recognize that there are numerous very smart retail investors, but we also acknowledge that there are many who are not.  Those less sophisticated retail investors are many times the ones left holding the bag at the top of a move and “shaken out of positions” at the bottom only to see the market turn bullish.  So, buyers beware!

We continue to expect a retracement in the markets.  Even with the recent injection of volume this past week, the market is overbought and exhibiting signs of weakness.  The key is to follow the market and stay nimble enough to adjust when the trend changes.  Robin

-

-

• This is a rising and converging channel pattern.  It looks like a triangle with the trend lines converging as both the upper and lower trend lines are ascending.
• The pattern has bearish implications as the lower trend line’s slope is steeper than the upper trend line and usually breaks down out of the channel bearishly.
• The pattern can be found in both bullish and bearish markets.
• When in a bullish market, the pattern is defined as a reversal pattern.
• When in a bearish market, the pattern is technically a continuation pattern.
• The pattern is putting in higher highs and lows but the highs are slower to develop as the lows are more dramatically higher.
• Volume is diminishing as the stock moves higher showing less conviction on the move.
• When the stock breaks the lower trend line it should be on increased volume.

ECONOMIC REPORTS

MONDAY 1/11

None

TUESDAY 1/12

Trade Balance

WEDNESDAY 1/13

Crude Inventories, Fed Beige Book, Treasury Budget

 

THURSDAY 1/14

Initial Claims, Continuing Claims, Retail Sales, Retail Sales ex-auto, Export Prices ex-ag. , Import Prices ex-oil, Business Inventories

 

FRIDAY 1/15

 Core CPI, CPI, Empire Manufacturing Survey, Capacity Utilization, Industrial Production, Michigan Sentiment

 

 

EARNINGS OF NOTE

MONDAY 1/11

AA, HELE, WDFC

TUESDAY 1/12

 INFY, KBH, LLTC, SVU

WEDNESDAY 1/13

 None

THURSDAY 1/14

 BGG, INTC

FRIDAY 1/15

 JPM

 

The purpose of entering into business is to make a profit, so it only makes sense to keep a close eye on profitability measures.  This week we are going to touch on two such measures and they are Profit Margin and Operating Margin. 

Profit Margin is defined as Net Profits divided by Sales.  Another way to look at this measure is that it tells us how much of each dollar of sales is actually kept.  A high Profit Margin is an indication that the company is doing a good job of converting sales to bottom line earnings.  It is a measure of efficiency. If a company can generate a higher Net Profit on the same amount of sales, then they are more efficiently producing earnings.  For example, if “Company A” has a Net Profit of $20 million from $200 million of sales, then the Profit Margin would be 10%.  Let’s compare that with “Company B” that generated $30 million in Net Profit on $400 million of sales.  Even though “Company B” is generating a larger Net Profit, it is taking greater sales to do it.  “Company B” is less efficient than “Company A” and that is reflected in the Profit Margin.  “Company A” has a Profit Margin of 10% and “Company B” has a Profit Margin of 7.5%.

Operating Margin is defined as Operating Income divided by Net Sales.  Operating Income (Gross Income minus Depreciation) needs to be defined in order to arrive at Operating Margin.  Net Sales is defined as sales after returns, missing and damaged goods.  Net Sales is a metric that allows a more accurate picture of sales.  Operating Margin tells us the amount of resulting revenue after variable costs such as cost of materials and employees.  If the number is high, it is considered to be favorable.  It is best to measure the company over time against itself in quarter over quarter or year over year comparisons.  One time, nonrecurring expenses are not normally included in the Operating Margin calculation.

The DOW bounced off of the top of the sideways channel and is now poised to move down and retest the bottom of the channel at 10,200.  We are expecting a definitive breakdown out of the channel and to begin testing a series of swing highs and lows that have been put in since August.  However, until the index shows its’ hand, we will sit patiently and just trade the stock where it want to go in the channel.

The SPX made an attempt to break out to the upside last week only to be rejected by several DOJIs and then a Bearish Engulfing pattern on Thursday.  We suspect that the move back inside of the channel will result in a retest of the lower end of the channel at 1084.  If the index breaks down out of the channel, which is what we feel that it will do, the next stop should be 1020-1030.

The COMPQ has been the leader all year and its move the last two weeks in breaking out of the rising wedge to the upside was very impressive.  The index has also encountered several DOJI days and then a very convincing Bearish Engulfing pattern to end the trading for the week, month and year.  Our sense is that the index will move down to test the top trend line of the rising wedge at 2240.

Stay nimble and follow the market.  Trade what you see and define your levels of support and resistance.  Let’s make 2010 a very profitable year!! Robin