Author Topic: Companies with Mustachian fundamentals - what financial metrics to look for?  (Read 1762 times)

blackomen

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Disclaimer: I'm more of a passive investor with the vast majority of my wealth invested in diversified index funds.  However, from time to time, I like to play with the idea of investing in individual stocks for speculation.  Here, I'm figuring out how to identify "Mustachian companies."

1) Cash Flows

I look at cash flows as a proxy for earnings.  While earnings may indicate how profitable the company is, cash flows are less likely to be manipulated.  If possible, I look at Free Cash Flow (FCF).  The closest analog to Free Cash Flow in your own personal finances is the money that's left over after all of your monthly recurring expenses are paid.

Instead of the popular "profit margins", I look at FCF to Revenues (as high as possible) and instead of the popular but misleading P/E ratio, I look at Price to Free Cash Flow (want it as low as possible but must be a positive number.)

2) Debt to Equity

MMM has been harping about avoiding as much debt as possible to minimize the financial strains we need to overcome in the long run.  Although businesses tend to take out "good debt" (to grow their operations), too much of it can also spell trouble.  I'd look for a D to E ratio of no more than 1, preferably as low as possible.

3) Mergers and Acquisitions

Although on paper, the synergies of mergers and acquisitions are a great asset for the combined company, in practice, many companies are weakened after they've merged or acquired with others.  Usually the company dynamics change with the larger size and it becomes more difficult to manage which leads to lower revenues than expected.  Too many mergers and acquisitions in a relatively short period would be a red flag.

Got any other crucial financial metrics that I've missed in finding Mustachian companies to invest in?  Please share them here!
« Last Edit: July 18, 2014, 01:34:02 PM by blackomen »

Khan

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I don't understand your idea, like the government, companies are not at all like households, so what holds for individuals does not hold for business. For instance, as far as debt is concerned, there could be 2 very good reasons that companies take it out.
1. Large amounts of profits overseas, and so it pulls out debt stateside to, through some loophole magic, not repatriate it's profits and incur tax charges
2. Lending/financing business, such as GE or Ford.

I just... I don't see a mustachian component to investing. Following tried and true, strong "moat" businesses a la The Intelligent Investor is one thing, but I disagree with painting a broad brush on companies as "mustachian" or not via financial metrics. The best thing for investor's is often walking a fine line for the company. A stock buyback when the stock is beaten down, is usually one in which the company is on shakier than normal ground.

milesdividendmd

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One reasonable approach, that might be more likely to succeed would be to select a stock picker with mustachian ethics. Warren Buffett fits the bill. Then just buy the stocks that he buys.

His top 10 holdings can be found here:

http://www.insidermonkey.com/hedge-fund/berkshire+hathaway/1/

(there is data to suggest that an equal weighting of his top 10 holdings has performed very well relative to the S&P in the past.




NorCal

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I would strongly advise against investing this way.  Investing in individual stocks without a true DEEP understanding of the industry and metrics for financial success is a recipe for failure.  And there are no universal financial metrics that apply across the board.  A "good" debt profile of a mining company will be very different from the profile of a software company.  Always.

Also, don't overestimate your ability to understand an industry.  It's always more complex than you think, and you are competing on the basis of your investment knowledge being greater than that of people who follow stocks full time.

If stock picking is something you truly want to do, you should treat it like a career (even if you have another job).  You need to learn how to identify undervalued stocks and be disciplined about it. 

Personally, this sounds pretty miserable to me.  Truly undervalued companies take a ton of work to find, you won't always be right, and you won't make much more than you would make by investing in simpler investing strategies.