So this week, I have been asked by some subscribers of both Moe-Knows and Magic-Markets about how I apply my macro lens to stocks specifically. Now, that’s a broad question so I will try and outline some useful tools as a starting point. Bear in mind, that everyone’s process is unique and must be crafted to fit your own risk tolerance and investment philosophy and temperament.

At heart, I remain fairly conservative and traditional in my approach. I like to think of the stocks I buy as businesses. I like to understand them, what they do and how they make their money.

Naturally, long time readers of this blog will know that I like to look at mega-trends and events to inform sectors I believe are well positioned for the economic cycle we are in at any time. However, there is so much to investment strategy that is more nuanced than YOLO’ing into the next or current hot thing. I have done that from time to time in my ‘speculative’ portfolio. The results are erratic and more orientated to ‘scratching the itch’ than to long term sustainable returns.

That’s where my longer-term portfolios are aimed. Making money sustainably over the long term and through the cycle. So, as part of assessing companies at a macro level and before getting into the ‘bottoms up’ research, here are a couple of neat perspectives and visualizations (courtesy of FinViz) to help readers contextualize some of the metrics.

Some large stocks don’t make money!

Firstly, there are tons of companies out there that DON’T MAKE MONEY! Yes. That’s true. Recently, we have even seen companies that have little to no revenue, listing for hundred of millions if not billions of dollars. That’s a hot market and one just has to look at how some of those stocks do after IPO to know that it’s a bit of a gamble.

Now, if a business is operating and you believe that through some catalyst, (like economies of scale or revenue growth) will turn a profit over a time frame, that’s fine. Netflix was a good example of this. For a long time, it was bleeding money, until it crossed the threshold and became profitable. But know what you are getting into in this context.

A picture is worth a thousand words

I am a big fan of graphical representation. I like intelligent charts that aggregate a lot of information into a useful snapshot or dashboard. Now, for the purposes of this article, I have only included a subset of 11 of the largest stocks on the S&P 500, simply because I am illustrating a point rather than providing a definitive piece on all stocks. Let’s start off with the first in a series of visualizations.

For the sake of simplicity, I will keep the overall format as follows:

The size of the bubble is the Market Cap of the stock. The colour corresponds with its respective sector as per the chart legend. The Vertical (Y) axis is the Forward PE ratio (Price to Earnings) based on expected earnings in the next reporting cycle. Lastly, on each chart we discuss, I have included a different fundamental metric as part of the series of screens I look at before the bottoms up fun begins.

The first chart is for context, to show the scale disparity (even among the largest stocks). Apple, Microsoft, Google and Amazon (Tech, communications and consumer cyclicals) are all several times the size of their competitors. The bubbles show you just how much! Ok, lets dig into the detail.

Track record vs. Track ahead

In the charts below, we explore the historic track record vs. the expectation of long term earnings growth going forward. Simplistically, you want to be in the bottom right cluster of most of the following charts.

In chart 2, I look at the Forward PE (effectively the number of years of earnings you would be paying for buying a stock today) vs. its own historic earnings growth over the last 5 years. This snapshot shows me how much ‘growth’ is priced into a stock vs. its own track record. If we fit a curve to the bubbles, one would see that TSLA (orange bubble at the top) is priced aggressively for growth. NVDA is a growth play too while something like an AMZN is priced richly, but below the curve of where it could be illustrating that perhaps growth is expected to plateau and slow vs. its history.

Now, I like businesses with track record but also need to be cognizant of the runway ahead. So in chart 3, we map the Forward PE against the expected EPS growth over the longer term going forward. To my previous points, again TSLA is priced for massive earnings growth, while AMZN for example, still expecting strong growth but at around 35%, well off the 5 year growth of over 100%. The same can be seen with expectations about Facebooks expected growth profile, previously above 50%, now around 20%.

So it makes money? How much?

So I wont go into the detail of each metric. I would look at cash flow, I would look at gross margins and operating margins to name a few. So lets pick operating margins. This is basically how much a company makes ‘in the ordinary course of its business’ in Chart 4 below.

Visa is a notable outlier, making substantial operating margins as done Microsoft and FB.

Infact, we have covered Microsoft and this week , we are covering Visa in detail in Magic Markets Premium for our subscribers.

We unpack the numbers in full detail and for only R99 per month (less than $7) you can unpack institutional level analysis. We provide a deep dive report and podcast in our quest to keep quality insights affordable to all investors! You can check it out as well as the current library of shows (incl. Microsoft, Intuit, US banks and more) here. If you aren’t already a subscriber, you are DEFINITELY missing out!

Its about ROE!

At the end of the day, it doesn’t matter what the company or underlying business makes if you overpay for it. Chart 5 maps the ROE. Again, at Magic Markets Premium, we do a deep dive, adjust for once offs. We also look at the underlying book value of a stock to determine how much of the ROE will accrue to you as an equity owner buying at current prices. However, even without the detail, the chart below shows you some interesting insights.

 

Apple has a crazy ROE but its also geared very aggressively. At the other end of the extremes, Tesla has a low ROE but is priced very aggressively, indicative of the dichotomy of how the market is pricing growth vs. value right now.

Shining a light

There is only so much one can share in a blog article. I hope that this post was informative and shed some light on how one can apply macro screens as a preliminary step to further research when looking at stocks.

As always for readers looking for more detail, I will point you to Magic-Markets Premium where my partner, the Finance Ghost and I share our detailed investment process and thinking on specific global stocks with our subscribers.

For those looking for macro analysis in detail, I also consult to corporates and asset managers. There is no question too big or too small, so if you’re not sure, reach out to see if we can help you and your team.

For now, the festive season is almost upon us, but we should sneak another note or two in before year end, so until next week! Ciao.

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Our content is intended to be used and must be used for informational purposes only. You must do your own analysis before executing any investments or strategic decisions, based on your own circumstances. We do not provide personalised recommendations or views as to whether an investment approach or corporate strategy is suited to the needs of a specific individual or entity. You should take independent financial advice from a suitably qualified individual who gives due regard to your personal circumstances. Whilst every care is taken, we accept no responsibility or liability for any errors or omissions in any of our content. The views, thoughts and opinions expressed in our content belong solely to the author or quoted individuals and/or entities, and not necessarily to the author’s employer, organisation, committee or other group or individual, or any of our affiliates or brand partners.

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