Unveiling Investment Strategies: A Deep Dive into Valuation, Hidden Assets, and Red Flags

Now, yep, again, hard to complain considering that the stock went up, you know, thousands of percent, but it could have gone up even more.

And when you looked at it, Steve Jobs was at the helm when you bought it. Yes. Did you consider it like a sort of under the radar asset play because it has so much cash on its balance sheet? You know what I’m saying? Like it’s a, it’s like an unknown balance space, sort of like how McDonald’s has a lot of real estate on its books and no one’s valuing the real estate or how, what it could do if you unleash it.

Sort of. So there are ways to value the business. So one way to value business is by a market cap does not consider the assets that a copy has in its balance sheet. Another way is enterprise value does. So if you look at the company’s valuation on an enterprise value basis and adjusted for etc, cash balance, yeah, all of the metrics look even cheaper than you would have otherwise. But to me, that was, that’s not necessarily a hidden thing because every professional investor knows what enterprise value is. So it’s hard to hide cash. Cash is like a known thing on the balance sheet, and it comes out in enterprise value. So I wouldn’t call that a hidden asset. I would call that a known asset that wasn’t fully appreciated.

Yes, hundred percent. So like this reminds me like, well, I was looking at a company back in the 90s called King World Productions. I don’t know if you’re familiar with them. Have you heard of the company?

King Well, productions? I have not. King.

World Productions is a producer seller of TV shows like Oprah Winfrey, Jeopardy, Wheel of fortune. He was run by Roger Michael King, two brothers that inherited from dad. You know, they own 50% of the stock, blah, blah, blah. Long story short there, they were valued on the market at about 2, one and a half billion dollars like market cap app, but they had a billion dollars in cash in on their balance sheet. So the business was literally valued at half a billion dollars and they were making 1 hundred million a year. And everyone just said like, TV is all, no one cares about TV. Oprah is not gonna be around forever. She’s gonna like, you know, she’s getting up there and that’s how I bought my first stock and I only did that because of the insider ownership. I kind of really like people who eat their own cooking. And yeah, CBS bought the company because of that, of the reasons of the, of the having the cash and the book of entertainment that they had.

So what are some of the metrics that you look at when you look at a business? Let’s go from top to bottom, your most important metrics, you’re looking at a company, you don’t know anything about it. What are you looking at?

So are we talking specifically financial metrics? Are we talking just everything in general?

If you’re looking at a potential investment, what do you think? What do I do?

If you gave me an investment that I’d never heard of, the very first thing that I would do is I would go to Google and type that come stock symbol. Okay, you can learn a ton of information by going through. I might actually, I actually use finchat. It’s called Finchat. Io. That’s my preferred. Finchat is my preferred platform for doing immediate stock research.

But I quickly take a glance at the chart. I wanna see, has that company stock increase in value since it came public? So I’m gonna hit the longest chart that I can possibly look at and compare the company’s performance to the s and P 500. If a company has outperformed a, again outperformed, I view that as a positive sign. I wanna invest in companies that have already be in the market, not underperformed the market. That’s not a pure blanket statement. But as a general rule, companies that have beaten the market throughout their history have a higher likelihood of beaten the market going forward than those that have not.

So then, after I look at the company’s chart, I will look quickly at the key metrics for the business. What’s the market cap, what’s the enterprise value, how much cash do they have, how much debt do they have, what are their gross operating net margins? What is their free cash flow margin, what is their net income to free cash flow ratio, what is their debt to equity ratio, etc.

So let’s say all of those quick numbers and stuff that I look at are appealing to me and they are, they warrant a deeper look. After that, I’m gonna click over to the company’s investor relations page on their website and I am going to look for a presentation. A lot of companies have presentations that they make that kind of give you a gist of the business and why you should invest in like 10 or 20 slides. I’ll quickly thumb through there. And from there, I should be able to gleam what is the business, what is the market they’re in, what are their products, what is their operating history, what is their business model, what key metrics do they look at? How have those key metrics performed over the last couple of years? And then who is their management team.

Now you can’t necessarily get all that information because the way that companies do their presentation changes from business to business. But you should be able to glean more of a gist beyond the numbers for the business in a presentation, if they don’t have that information or even if they do, the next thing I will do is go over to the company’s SEC file. I will look up the company’s annual report, which is filing 10 dash K. I will scroll down to the business section, which is the business overview. And then I’m just gonna start reading from the top. In there, you will learn what the company’s mission is, what the products are, what the business model is, who the competitors are, what their operating history is, what their key metrics are, how the company has performed, what are the key risks that they’re facing, etc. And then after you’ve done this a couple hundred times, you get a sense for what’s important and what is not. But it’s amazing to me how many, how much information is available right there for free and yet how few investors actually open up annual reports?

Hundred percent. I think people spend more time shopping for refrigerator than they do putting down 10,000 on a stock.

Absolutely.

So this is a very deep dive. So I’m guessing as they clear each hurdle, you go deeper. What are some of the things that in the slideshow? Like let’s say it’s beaten the market. What are some of the things in the slideshow from the investor relation section that would be like, that sounds awful. That might be a red flag. Have you ever bumped into that where it looks good on the chart and then when you start looking in, you’re like, that doesn’t sound quite right.

Oh, there’s a bunch of red flags that you can look for when you start going through a company’s financial statements. To me, the reddest of all red flags is accounting irregularity. Meaning the company has to restate or redo its financial statements because of an auditor found something wrong with the business. Okay, or if a, yeah, so if a company is as effectively the next Enron, I’m out. So yeah, dead to me forever, right? If I can’t trust the numbers, how can I possibly make it decision?

Other red flags to me are concentration risks. So if a business gets the majority of its revenue or the majority of its account receivable are in the hands of just a few big customers. That, to me, is a big red flag. I do not want to invest in companies where a single choice by a single customer can blow up the business. That means an unacceptable amount of risk. Or I don’t want a company that is dependent on a specific channel for marketing purposes. For example, lots of companies state, right, in their SEC filings, Google is responsible for 80% of to our website. So that means to me that company is one Google update away from their business being born apart.

So I look for what are called concentration risks. I want to see that the company has diversified customer base, diversified customer acquisition channel and no single source, no single decision by another entity blows up that business. That to me would be a red flag to look for. Brilliant.

Another red flag that I look for is dependence on market prices for success. I don’t like it when a company sells a product or service that is dependent on a third market price for success. As an example, oil companies are dependent on the price of oil. The price of oil is not within the management team’s control. You could have the best oil management team on earth, but if the price of oil goes down, that stock is going down. So business is hard enough. I don’t also want to have to depend on some commodity price going in the right direction for that business to work out at as well. So I avoid companies that are dependent on market prices for, to sell and to sell their product or service, both directly and in indirectly up. Or said differently, I don’t like investing in financial companies that are dependent on interest rates. Companies, banks don’t control interest rates. Federal governments, too. So I don’t like investing in banks because banks make money depending on the actions of the federal government. That’s not something that interests me.