The Daily Dose: Back to Basics

 | Jun 10, 2014 | 9:00 AM EDT
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I'm not too sure where the time has gone in a financial services career now going on 12 years. I mention that as I am giving a speech on investing and financial media to TheStreet's enthusiastic and super-helpful new summer interns. While I will touch on topics that I guarantee are not in hardcopy or digital books, there is one section that may be. That is the basics of investing, which I feel most investors have forgotten in their chase to trade a headline or match the strategies of wealthy money managers. No matter what your age or experience level, it's always good to return to the basics of investing to stay grounded. I can't tell you how many times I thought I knew everything in this business, only to be surprised by a bad quarter from a company that then destroyed the stock price. The only thing guaranteed in investing is that the NYSE will open for trading at 9:30 a.m. ET and close at 4 p.m. ET.

Here are a few of the basics I intend to cover with future investing pros. Ask yourself while reading when was the last time you thought about this stuff.

Conventional & Stealth List of Investing Dos & Don'ts

There are two components to a company's sales, price and volume. They can't be ignored because you have to think critically about how a company grows its sales. Ideally, you want to invest in a company that is growing both price and volume. If only price is growing, ask yourself if it's sustainable. Will consumers buy less, therefore decreasing volume? If volume is growing but not price, are the company's products really top quality? More volume at a lower price could mean what we call on Wall Street an earnings warning, where a company's profits slip below what big VIP investors expect. When that happens, the stock price usually gets pummeled.

Consumer packaged-goods companies such as Tyson Foods (TSN) and Hillshire Brands (HSH) are seeking to join forces as they are having trouble increasing both price and volume, so they must seek to extract cost synergies to generate healthy long-term profits.

You want to be looking for the companies with the best sales growth rates year over year in their respective sectors. If you want to be a real rock star, look for companies with the worst sales growth rates and then research whether they have a new product or service on the way that may catapult them to ultimate success. If so, the stock may be undervalued as others in the marketplace were not as crafty as you to research the apparent losers in the sector.

Slowing sales growth rates over a stretch of a few quarters is a red flag. Do a little research on Coach (COH) to see what I mean.

Slowing profit-margin expansion over a stretch of a few quarters is another red flag. Pull up recent quarters on Michael Kors (KORS) as an example. You want to calculate basis points. Let's say Company A has a gross margin of 40%, but last year at the same time it had a gross margin of 41%. Its gross margin fell 100 bps in a year, likely due to more competition in the marketplace that caused management to discount products or services.

Social media has become a great resource to the investing community. Keyword search any company you are interested in into Twitter and Facebook to see what may be hot. Also, don't forget to check at least the first 10 pages of Google search results on a company being researched. Picking stocks and then managing your decisions must include an understanding of what's going on each day at the company.

Yes, some companies will make interesting videos of their operations in action and put them on YouTube. Industrials like Fastenal (FAST) and Snap-on (SNA) are nice examples. Look for the videos and watch them; pictures are important when writing and thinking through an analysis.

McDonald's Madness

I want to understand why McDonald's (MCD) stock has outperformed since April. In my view, McDonald's U.S. is failing and lacking indications that new management initiatives consisting of greater promotions and increased coffee marketing are working. The U.S. business has produced negative or flat same-restaurant sales for six consecutive months. Why is this bothersome? Turning a ship as large as McDonald's around doesn't occur overnight.

Keep an eye out for developments from Chipotle (CMG) and Starbucks (SBUX) at their analyst events this week. Chipotle's stock has surged 13% in the past month. Our research suggests strong traffic following the pre-summer menu price increase, hence the market may be positioning for a blowout second quarter.

Source: Yahoo Finance

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