Thomas Rice
October 25, 2000, 10:21 AM
Gordon,
It's clear from your post that you have a great mind for investing!
Being able to identify who is effected -- both directly, and indirectly through flow-on effects -- is an excellent way to find investment opportunities that others may overlook.
In your example, you've identified a clear supply chain where all companies in the chain may benefit from increased sales of foldable LCD screens. This information might only be seen in the share price of the most directly effected though, perhaps making it not that great a bargain already.
While looking at the others in the supply chain that you think will benefit from these increased sales, things you'd want to look at are:
- How solidly linked are they? Can the person they're supplying to go somewhere else, or perhaps later produce the materials themselves?
- What are profit margins like? If my volume of sales will go up, but my margins go down (perhaps due to greater bargaining power of the person I'm supplying to), perhaps the profit increase might not be as large as expected.
- What's the exposure of the supply company to the product I'm looking at?
By that last point, I mean... Let's say you have a plastics manufacturer and these new LCD screens will add $50 million to his sales. If his sales before are only $10 million, that's brilliant news.
But what if the manufacturer is a multinational corporation with sales currently at $2 billion. Clearly, in this case the increase of $50 million would have less of an impact on the bottom line, and on the future share price.
The manufacturer of the LCD screens, that owns the rights to them, will no doubt benefit from an increased surge, but the problem is, perhaps that's already impacted in the share price?
One was to get an indication is looking at the Price/Earnings (P/E) ratio.
This ratio gives you an indication of the market's expectations regarding future earnings growth of this company as compared to its earnings last reporting period.
A high P/E ratio indicates the market expects high growth.
A low P/E ratio indicates the market expects low growth compared to the last reported earnings.
The supplier that supplies the materials to this company will benefit provided there are certain safeguards in place to ensure it will keep the business. This could be contracts, a better technology, existing relationships, partial ownership by the other company, and so forth.
As you go down the supply chain, perhaps this level of certainty diminishes -- it needs to be looked into, in any case.
Let me deviate for a moment to talk about stocks that "arouse excitement".
Some stocks are exciting. Microsoft, Yahoo, Oracle, Redhat. Even Coca Cola to some extent. These are companies everybody knows about, and chances are, many analysts follow them closely. What this means for you is that, chances are, it will be harder to find bargains amongst these stocks. It's definately not impossible, but it is harder.
My preference, and this doesn't have much fundamental theory behind it, is to look at stocks that have between zero and two analysts looking at it. If none or only a small part of it is owned by institutions, great.
So definately, look closely at that penny stock. :)
- Thomas.
> Thanks Thomas,
> Bear with me on this...just thinking aloud.
> Compare a folding LCD monitor to a clear
> plastic bag with a few drops of oil in it.
> Then when the "charge" is sent
> through the oil, all the little pixels line
> up properly and you have a monitor screen.
> Now, lets say the "plastic bag"
> part of the monitor is made down the street
> and has a proprietary position on the
> bag...and is under contract to be the ONLY
> supplier to the folding screen company,
> which has a little (if there is any such
> animal) VC money behind it...
> The 'baggie' company is a small publicly
> traded but in the 'penny stock'
> category...doesn't arouse much excitement.
> OK...now in order for the baggie company to
> make their foldable monitors, before the
> Folding Monitor company pours in the
> "oil"...to make it work...
> the baggie company has to buy a certain high
> grade polymer that is used in making the
> baggie...
> that company is traded on the Tim Buk Tu
> market...and you can probably get a hefty
> part of it for the cost of a good dinner.
> Further back the chain is a chemical company
> that has to supply a certain dye to make
> sure the polymer is "clean" before
> it gets shipped to the baggie
> company...before they can send it along to
> the Folding Monitor company who will be
> supplying Apple and Compaq and HP and Sony
> (just as an example)...
> the folding monitors for the PDA's that we
> will carry around in our holsters ready to
> draw and "put or call" at a
> moment's notice...even on the 14th green,
> much to my annoyance..
> Anyhow, that is a "chain" of
> production.
> Analyzing the chain, you might discover that
> the least disturbed "link" might
> be the chemical company, which doesn't have
> to add people or expenses to meet increased
> demand...they just make bigger batches of
> the stuff they need...same people doing
> it...they simply make more of it...
> The other's up the chain, in ANTICIPATION as
> you say of striking gold have already (in
> this hypothetical example) begun capital
> expenditures to meet the demand, if it
> arises.
> So, in my uneducated investor mind...I'd
> want to put some "risk" capital
> NOT into the Folding Monitor company...but
> into the small Penny Stock Chemical company
> which has a 75 year history of supplying,
> first the Tire industry, and now the Polymer
> industry with first rate and MODEST profits
> service...
> But, if the chances of the Folding Monitor
> Company have a take over possibility and a
> stock split with preferences...and there is
> that opportunity too....might be wise to
> cover my assets throughout the chain???
> Thanks Thomas for helping out...I'll get the
> books you suggest and start studying.
> Gordon Alexander
It's clear from your post that you have a great mind for investing!
Being able to identify who is effected -- both directly, and indirectly through flow-on effects -- is an excellent way to find investment opportunities that others may overlook.
In your example, you've identified a clear supply chain where all companies in the chain may benefit from increased sales of foldable LCD screens. This information might only be seen in the share price of the most directly effected though, perhaps making it not that great a bargain already.
While looking at the others in the supply chain that you think will benefit from these increased sales, things you'd want to look at are:
- How solidly linked are they? Can the person they're supplying to go somewhere else, or perhaps later produce the materials themselves?
- What are profit margins like? If my volume of sales will go up, but my margins go down (perhaps due to greater bargaining power of the person I'm supplying to), perhaps the profit increase might not be as large as expected.
- What's the exposure of the supply company to the product I'm looking at?
By that last point, I mean... Let's say you have a plastics manufacturer and these new LCD screens will add $50 million to his sales. If his sales before are only $10 million, that's brilliant news.
But what if the manufacturer is a multinational corporation with sales currently at $2 billion. Clearly, in this case the increase of $50 million would have less of an impact on the bottom line, and on the future share price.
The manufacturer of the LCD screens, that owns the rights to them, will no doubt benefit from an increased surge, but the problem is, perhaps that's already impacted in the share price?
One was to get an indication is looking at the Price/Earnings (P/E) ratio.
This ratio gives you an indication of the market's expectations regarding future earnings growth of this company as compared to its earnings last reporting period.
A high P/E ratio indicates the market expects high growth.
A low P/E ratio indicates the market expects low growth compared to the last reported earnings.
The supplier that supplies the materials to this company will benefit provided there are certain safeguards in place to ensure it will keep the business. This could be contracts, a better technology, existing relationships, partial ownership by the other company, and so forth.
As you go down the supply chain, perhaps this level of certainty diminishes -- it needs to be looked into, in any case.
Let me deviate for a moment to talk about stocks that "arouse excitement".
Some stocks are exciting. Microsoft, Yahoo, Oracle, Redhat. Even Coca Cola to some extent. These are companies everybody knows about, and chances are, many analysts follow them closely. What this means for you is that, chances are, it will be harder to find bargains amongst these stocks. It's definately not impossible, but it is harder.
My preference, and this doesn't have much fundamental theory behind it, is to look at stocks that have between zero and two analysts looking at it. If none or only a small part of it is owned by institutions, great.
So definately, look closely at that penny stock. :)
- Thomas.
> Thanks Thomas,
> Bear with me on this...just thinking aloud.
> Compare a folding LCD monitor to a clear
> plastic bag with a few drops of oil in it.
> Then when the "charge" is sent
> through the oil, all the little pixels line
> up properly and you have a monitor screen.
> Now, lets say the "plastic bag"
> part of the monitor is made down the street
> and has a proprietary position on the
> bag...and is under contract to be the ONLY
> supplier to the folding screen company,
> which has a little (if there is any such
> animal) VC money behind it...
> The 'baggie' company is a small publicly
> traded but in the 'penny stock'
> category...doesn't arouse much excitement.
> OK...now in order for the baggie company to
> make their foldable monitors, before the
> Folding Monitor company pours in the
> "oil"...to make it work...
> the baggie company has to buy a certain high
> grade polymer that is used in making the
> baggie...
> that company is traded on the Tim Buk Tu
> market...and you can probably get a hefty
> part of it for the cost of a good dinner.
> Further back the chain is a chemical company
> that has to supply a certain dye to make
> sure the polymer is "clean" before
> it gets shipped to the baggie
> company...before they can send it along to
> the Folding Monitor company who will be
> supplying Apple and Compaq and HP and Sony
> (just as an example)...
> the folding monitors for the PDA's that we
> will carry around in our holsters ready to
> draw and "put or call" at a
> moment's notice...even on the 14th green,
> much to my annoyance..
> Anyhow, that is a "chain" of
> production.
> Analyzing the chain, you might discover that
> the least disturbed "link" might
> be the chemical company, which doesn't have
> to add people or expenses to meet increased
> demand...they just make bigger batches of
> the stuff they need...same people doing
> it...they simply make more of it...
> The other's up the chain, in ANTICIPATION as
> you say of striking gold have already (in
> this hypothetical example) begun capital
> expenditures to meet the demand, if it
> arises.
> So, in my uneducated investor mind...I'd
> want to put some "risk" capital
> NOT into the Folding Monitor company...but
> into the small Penny Stock Chemical company
> which has a 75 year history of supplying,
> first the Tire industry, and now the Polymer
> industry with first rate and MODEST profits
> service...
> But, if the chances of the Folding Monitor
> Company have a take over possibility and a
> stock split with preferences...and there is
> that opportunity too....might be wise to
> cover my assets throughout the chain???
> Thanks Thomas for helping out...I'll get the
> books you suggest and start studying.
> Gordon Alexander
