Tuesday, July 17, 2012

Stockpiling strategy by Phil Town

Requirements:
1) 5 or 10 year average return on Invested Capital (ROIC) > 10%
2) 5 or 10 year average equity growth rate (Book value per share) > 10%
*Check current BV per share by dividing Total Equity by Total Shares Outstanding
3) 5 or 10 year average Sales growth rate > 10% 
4) 5 or 10 year average earnings growth (EPS) > 10%
5) 5 or 10 year average growth rate of cash from operating activities > 10%
6) Total long term debt/Total income < 3
7) Payback time < 10 years
- Find market capitalization of company
- Find ttm earnings
- Grow it forward at 5/10 year average earnings growth rate until the cumulative earnings exceeds market capitalization. 

Find the sticker price:
Sticker price of a business is determined by the kind of surplus cash it can produce for its owners in the future.
1) Earnings per Share (EPS) for the last twelve months(ttm)
2) EPS growth rate for the next ten years
- Use the 5 or 10 year average earnings growth rate
- Retrieve from analyst reports
3) Price to earnings (PE) ratio in ten years
- Find 10 year average PE ratio
- Double the estimated future earnings growth rate (Use analysts' average estimate of future growth of earnings or use 5 to 10 year average earnings growth rate)
- Use the lower figure of the two methods above
4) Minimum Acceptable Rate of Return (MARR) = 15%
5) Run the numbers through calculator on paybacktime.com

Find the Margin of Safety Price
50% of sticker price calculated above

Capital Allocation
Capital Number of businesses % of capital allocated to each initial buy
$1,000 - $20,000 1 25%
$20,000 - $40,000 2 25%
$40,000 - $70,000 3 25%
$70,000 - $100,000 4 25%
$100,000 - $100,000,000 5 25%

Note: Time purchases with the help of technical analysis using Floor and Ceilings.
*A price move of over 3 percent above the Ceiling or below the Floor, accompanied by 150% of the average volume, is a significant sign of a breakout that will last