Potash!
Okay, my last entry on stock investing was a bit confusing, so I hope to make this one a bit more readable. In this entry, we’re going to be valuing a stock and determining whether or not it is priced correctly, overpriced, or under priced. For this we will be examining one of my core stock holdings for about 4 years. In that time, the stock has gone from 16.24 per share to a current value of 193.89. It is my single best investment that I’ve ever made in the primary stock market. (Let’s not discuss the secondary options until we’ve got some stock investing under our belts first!) In those 3 years, I’ve had an 1193% return on investment—or 298% annually. Not bad huh? But I’m not here to brag about past successes, I’m here to help you discover future successes.
So let’s examine Potash when it was just a little company and why it was such a good buy then and continues to be good to this day. First, what the hell does Potash do? To find out this information, you can use any number of Financial Websites. Yahoo! Finance is my favorite. If you scroll down to the bottom of the page after entering POT (Potash’s ticker symbol) you’ll see a business summary. It reads as follows:
Potash Corporation of Saskatchewan, Inc. (PotashCorp) engages in the production and sale of fertilizers, and related industrial and feed products in North America. The company manufactures and sells solid and liquid phosphate fertilizers; animal feed supplements; and industrial acid, which is used in food products and industrial processes. It also produces nitrogen fertilizers, as well as nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate, and nitric acid. PotashCorp's primary customers for fertilizer products include retailers, dealers, cooperatives, distributors, and other fertilizer producers. It sells purified phosphoric acid directly to consumers of the product. The company was founded in 1953 and is based in Saskatoon, Canada.
What? A fertilizer company? That’s what the most exciting thing you’ve invested in is? Surely you must be joking, you say. Such a boring company should have boring returns. Not so. If you take anything from this entry, let it be this:
The more “boring” the investment, the better. Investing in things that people NEED instead of just WANT is a way to curb your risk. When the tech bubble crashed, I did not lose any money because I was not invested at all in technology. I’ve always lost money when I’ve invested in tech stocks. Call me old fashioned, but I like my companies to have earnings and tangible products. It keeps me from losing my shirt!
That being said, when you look to buy a company you should not really be looking at it’s per-share price. Instead, think of it like this: You are going in on a business with a guy named Mr. Market. Every day, Mr. Market is willing to sell you a part of the company at a certain price, and he is willing to buy from you at that price as well. When Mr. Market gets overexcited, he’s willing to pay you more than the company is worth to buy those shares off your hands. When Mr. Market is depressed, he is willing to sell you his shares at a discounted value from what the business is actually worth. You should take advantage of Mr. Market as much as possible, because even though he’s an emotional guy, he doesn’t mind being used and abused for some reason!
Sounds like silly advice? Straight from the mouth of the richest man in the world, Warren Buffet.
Instead of looking at the per share value, you should look at a few other pieces of information.
Number one: The Market Capitalization. This is the most important. It is the value of the current shares multiplied by all the shares outstanding. This is the value of the company. So, if you were a billionaire and you wanted to come and buy the company outright, every single share of it and have the company all to yourself, the market cap is the price tag for that. The thing is, even though you’re only buying a fraction of the company, you should look at the whole price tag whenever you buy or sell. Is the company worth more than it should be? Is it worth less? Looking at the company as a profit producing entity as opposed to a quick trade in or out is a surefire way to success in the stock market.
Number two: The Company’s Growth Record and Predictions. Growth is like crack to a stock. Potash has been growing at around 95% per annum—that’s right folks, nearly doubling every year in size.
Number three: The Company’s management. These people will be running the company that you are part owner of, so they better be up to the task! Make sure that the people running the company have their heads on properly. Make sure they’re looking out for the shareholders, aka you, the owner!
Number four: The P/E Ratio. This number is important to compare to its competitors. The lower, the better. What this essentially is is how many earnings you’re getting per the price of the share. So if a company makes 1,000,000 profit and has 1,000,000 shares issued, it is earning 1 dollar per share. This is called the Earnings Per Share. If the stock is trading at 10 dollars, the P/E is 10—the price of 10 divided by the EPS of 1 equals 10. Compare this number to the company’s competitors to see if it is within the bounds of reason. If it is trading lower than its competitors, this may be a sign of a bargain but it may also be a sign of weakness—that is why I rate the P/E ratio lower than the other information, since it does not tell you very much on its own. More important than the current P/E ratio is the Forward P/E ratio—stocks trade based on what the future holds, and more in line with future earnings than current ones. That is why an analyst upset (earnings being much higher or lower than predicted) can be a very negative or positive thing!
That’s it for now. I’ll post more later!
So let’s examine Potash when it was just a little company and why it was such a good buy then and continues to be good to this day. First, what the hell does Potash do? To find out this information, you can use any number of Financial Websites. Yahoo! Finance is my favorite. If you scroll down to the bottom of the page after entering POT (Potash’s ticker symbol) you’ll see a business summary. It reads as follows:
Potash Corporation of Saskatchewan, Inc. (PotashCorp) engages in the production and sale of fertilizers, and related industrial and feed products in North America. The company manufactures and sells solid and liquid phosphate fertilizers; animal feed supplements; and industrial acid, which is used in food products and industrial processes. It also produces nitrogen fertilizers, as well as nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate, and nitric acid. PotashCorp's primary customers for fertilizer products include retailers, dealers, cooperatives, distributors, and other fertilizer producers. It sells purified phosphoric acid directly to consumers of the product. The company was founded in 1953 and is based in Saskatoon, Canada.
What? A fertilizer company? That’s what the most exciting thing you’ve invested in is? Surely you must be joking, you say. Such a boring company should have boring returns. Not so. If you take anything from this entry, let it be this:
The more “boring” the investment, the better. Investing in things that people NEED instead of just WANT is a way to curb your risk. When the tech bubble crashed, I did not lose any money because I was not invested at all in technology. I’ve always lost money when I’ve invested in tech stocks. Call me old fashioned, but I like my companies to have earnings and tangible products. It keeps me from losing my shirt!
That being said, when you look to buy a company you should not really be looking at it’s per-share price. Instead, think of it like this: You are going in on a business with a guy named Mr. Market. Every day, Mr. Market is willing to sell you a part of the company at a certain price, and he is willing to buy from you at that price as well. When Mr. Market gets overexcited, he’s willing to pay you more than the company is worth to buy those shares off your hands. When Mr. Market is depressed, he is willing to sell you his shares at a discounted value from what the business is actually worth. You should take advantage of Mr. Market as much as possible, because even though he’s an emotional guy, he doesn’t mind being used and abused for some reason!
Sounds like silly advice? Straight from the mouth of the richest man in the world, Warren Buffet.
Instead of looking at the per share value, you should look at a few other pieces of information.
Number one: The Market Capitalization. This is the most important. It is the value of the current shares multiplied by all the shares outstanding. This is the value of the company. So, if you were a billionaire and you wanted to come and buy the company outright, every single share of it and have the company all to yourself, the market cap is the price tag for that. The thing is, even though you’re only buying a fraction of the company, you should look at the whole price tag whenever you buy or sell. Is the company worth more than it should be? Is it worth less? Looking at the company as a profit producing entity as opposed to a quick trade in or out is a surefire way to success in the stock market.
Number two: The Company’s Growth Record and Predictions. Growth is like crack to a stock. Potash has been growing at around 95% per annum—that’s right folks, nearly doubling every year in size.
Number three: The Company’s management. These people will be running the company that you are part owner of, so they better be up to the task! Make sure that the people running the company have their heads on properly. Make sure they’re looking out for the shareholders, aka you, the owner!
Number four: The P/E Ratio. This number is important to compare to its competitors. The lower, the better. What this essentially is is how many earnings you’re getting per the price of the share. So if a company makes 1,000,000 profit and has 1,000,000 shares issued, it is earning 1 dollar per share. This is called the Earnings Per Share. If the stock is trading at 10 dollars, the P/E is 10—the price of 10 divided by the EPS of 1 equals 10. Compare this number to the company’s competitors to see if it is within the bounds of reason. If it is trading lower than its competitors, this may be a sign of a bargain but it may also be a sign of weakness—that is why I rate the P/E ratio lower than the other information, since it does not tell you very much on its own. More important than the current P/E ratio is the Forward P/E ratio—stocks trade based on what the future holds, and more in line with future earnings than current ones. That is why an analyst upset (earnings being much higher or lower than predicted) can be a very negative or positive thing!
That’s it for now. I’ll post more later!
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