Get a clear view of what works with a stock market watch list.

The Importance of a Stock Market Watch List

The Importance of a Stock Market Watch List cannot be over-estimated. It’s hard to stay oriented without one. And that’s why using a watch list to manage your stock market portfolio and potential investing opportunities is a winning strategy used by successful stock traders and investors everywhere.

So…

In this blog post we’ll look at why a stock market watch list is so important. I’ll also share some ideas you can use to build your own stock market watch list. This way, you’ll be able to track opportunities and strike when the time is right.

Now on that note…

Let’s get into the benefits of a stock market watch list:

Why a Stock Market Watch List Can Improve Your P&L:

The reason you’re probably interested in a stock market watch list is because it can improve your profit and loss statements. In fact, in my experience, using a stock market watch list is truly the best way to consistently stack the deck in your favour.

Just think about it…

stock market watch list examples

Get a clear view of what works with a stock market watch list…

When you build, maintain and regularly update your stock market watch list, it’s like you have a dashboard of all the best trading or investing opportunities right in front of you.

Using a stock market watch list lets you be proactive. It lets you make a trading plan and be ready to exploit investing opportunities just when the time is right. And it puts you back in the driver’s seat.

Without a stock market watch list you’ll always be on your heels reacting to the latest financial news headline. On the other hand…

When you use a stock market watch list effectively you can start investing on your own terms and being proactive about where you choose to place your capital. A watch list makes sense for a lot of reasons.

But we haven’t even mentioned the best part about stock market watch lists…

The Best Part of Stock Market Watch Lists:

The best aspect of using a stock market watch list is that there isn’t really one single best practice version of stock market watch lists you should refer to.

Instead:

You can build a customized and totally personalized stock market watch list that shares the information you need most. That way, you only get the important facts – and you can see everything with one quick glance. Sounds pretty good, right?

What you include in your spreadsheet will primarily be a matter of whether you are a short-term trader or a longer term investor. If you’re a trader looking to track technical patterns then your stock market watch list will have a lot more information about price trend, volume and relative strength.

Whereas, if you’re a longer term investor looking for buy and hold opportunities your stock market watch list will contain fundamental measures and valuation metrics to help you compare different investing opportunities.

The beauty of a stock market watch list is that you can choose what to include. The only important thing is that it reflects your trading or investing style and allows you to compare different stock ideas against the same criteria.

Plus:

Getting started making your stock market watch list is really easy. All you have to do is it fire up your favourite spreadsheet program (be it Microsoft Excel, Apple Numbers or Google Spreadsheets). And then create a table to compare your favourite stock market characteristics. For example…

Here’s a screenshot of one of my stock market watch lists:

Stock Market Watch List ExampleAs you can see from my stock market watch list above, things don’t have to be that complicated. The left hand side contains information on the name and ticker of the company. Then I look at the current price, my ideal entry and a target price based on intrinsic value calculations. The rest of the spreadsheet is just about other fundamental criteria that I want to keep an eye on.

But do you know what the most important part of this stock market watch list is?

One Take Home Point for Building a Stock Market Watch List:

One of the things I find most useful about the stock market watch list example shared above is the ability to rank stocks based on their potential percentage gain (column G). Why is that so important?

When you catalogue your stock ideas and use objective measures to determine entry and exit targets then you can also get a critical look at your potential percentage gain if the trade goes right. By ranking your stocks based on profit potential you get valuable perspective on where you should put your money.

Seriously:

This approach works for both fundamental investors and technical traders. The only difference will be the factors that help you determine your price target and entry price. But at the end of the day…

When you can clearly see where your money can be earning the highest return it really helps you improve your portfolio returns. This way you’re focused on the highest profit opportunities, rather than the exciting news headline of the day or a recommendation from a broker or Twitter follower. Make sense?

And By The Way: Using a stock market watch list is just one of the tips I recommend to help you make the most out of your stock market investing. If you want more free tools and resources I encourage you to sign up for updates below. You’ll also get a copy of my free value investing/swing trading ebook. Check it out for free below!

agco your agriculture company stock analysis

Your Agriculture Company (NYSE:AGCO) Investment Analysis

Introduction and Overview – Analysis of AGCO:

Your Agriculture Company (NYSE:AGCO) is the world’s largest farm equipment manufacturer, selling tractors, combines, and all kinds of other farm equipment to customer all around the world. When this AGCO analysis was written AGCO had a market capitalization of $5.1B and shares are trading around $55.

So let me tell you what the AGCO investment case is all about…

AGCO has roots going back to the 1800′s. But it’s current form was founded in 1990 by the purchase of Deutz Allis Corporation from Kloeckner-Humboldt-Deutz AG.  Since then AGCO has continued to expand through organic market growth and strategic acquisitions.

Now luckily…

The AGCO business model is pretty easy to understand. I need to dig deeper into the specific sales channels and how the company retains customers. But despite competition from the likes of John Deere and CNHI, it seems that making and distributing farm equipment through a network of dealers  is relatively straightforward.

On that note, let’s take a closer look at the market AGCO operates in, and the products it sells.

AGCO Competitive and Market Analysis:

At first glance the farm equipment business might not be that exciting. But at the end of the day, everyone needs food. So learning where it comes from, and what’s changing in the farming industry is important to understanding the competitive advantage of AGCO.

So as an investor…

You’ll be pleased to know AGCO appear to be at the leading edge of farm productivity. They are innovators with their precision farming  platform. And while you might not think growing and harvesting crops is high tech business, agricultural output gains in productivity enabled by technology are impressive. From a recent interview with AGCO (emphasis mine):

“Frankly, we have a lot of customers who are looking for efficiency tools, and one of the advantage of new equipment is the efficiencies we build into these machines be it a baler or a tractor. You can talk about fuel economy, the ability to get more work done, the ability to make a bigger or more dense bale of hay; all of those things contribute to the farmers ability to make money, and they’ll prove their worth in a market like we have in 2014.”

See for yourself, from this AGCO analyst day presentation,

AGCO market opportunity analysis

AGCO sees a lot of opportunity in emerging and developing markets based on their ability to improve farming efficiency.

From the slide above you can see AGCO sees a lot of opportunity to have an impact and improve quality of life in emerging markets. AGCO is also investing aggressively in R&D to keep finding new solutions and innovative product offerings.

AGCO R&D Analysis

AGCO continues to grow their investments in R&D – driving their strong pipeline of new products.

In addition to actively exploiting the future of farming, AGCO management has built (and acquired) some leading brands over the years. You can read the full AGCO history here. Fendt, Massey and Valtra are all respected brands in their respective markets.

AGCO Product Line Analysis

AGCO has developed and acquired a competitive offering of brands.

So as you can see, AGCO is pretty well-positioned in the farm equipment business. And global population growth continues to drive demand for their products. Now that you have an overview of AGCO and the market they operate in, let’s start analyzing the performance of AGCO shares over the last couple years.

Price Performance Analysis of AGCO Stock:

Shares of AGCO have had lumpy price performance over the last couple of years. Just take a look at the weekly chart below.

AGCO Long Term Weekly Chart Technical Analysis

AGCO Long term technical analysis shows lumpy price performance over the last couple of years. Keep reading to learn what this means to investors.

You should be able to see for yourself that shareholders of AGCO have been jerked around a little bit. The good news is, while AGCO stock has been slow to recapture prior highs, it isn’t overvalued either. And even based on conservative intrinsic value calculations I think AGCO has significant upside from here.

So although it’s not entirely smooth sailing from a technical analysis perspective, AGCO should be able to keep pressing higher. Just don’t expect any sudden explosions in price (upside earnings surprises not withstanding). Speaking of earnings, let’s look at the current valuation of AGCO.

If you’re a value investor like me, I think you’ll like what you find…

AGCO Fundamental Analysis – Financial Valuation

AGCO initially caught my eye because the stock appeared to be pretty well valued. At a glance, AGCO is appealing because it’s trading only about 25% above book value. And with a P/E hovering around 9 it’s hard to argue this stock is expensive relative to earnings.

The PEG ratio also comes in below 1, (0.94 to be precise), which is consistent with managements 2014 guidance of $6 EPS - showing future earnings aren’t being valued at a premium by the market. And I’m not the only one who thinks AGCO’s low expectations may make it a buy.

But wait. It gets better…

You see while these fundamental metrics are interesting, the long term performance of AGCO is even more impressive. Here are the key stats from Morningstar:

AGCO Key Financials Fundamental Analysis

AGCO has consistently grown revenue, earnings, free cash flow and book value. To a long term investor this looks like a pretty good track record. (Click to enlarge)

The fundamental picture for AGCO looks pretty good. Top and bottom line growth have improved quite a bit.  This boring old farm equipment company has a cap rate of almost 15%, which in this inflated stock market is a rare find. And operating margins have slowly improved due to factory efficiency upgrades.

AGCO is also throwing off large free cash flows. These revenue streams appear to be sustainable. And when FCF is discounted back to present value, future cash reflect an intrinsic value closer to $70 per share, even when using conservative growth rates.

I love finding investment opportunities that show a margin of safety even with conservative assumptions. I think AGCO is starting to fit the bill. But…

Even though AGCO might already be an interesting investment opportunity, let’s take a more in-depth look at the growth potential anyways.

AGCO 2014 Growth Narrative and Analysis:

AGCO has consistently grown over the years, so mid-single digit growth seems like a reasonable expectation going forward. Management has consistently said AGCO will continue to expand with an emphasis on slow profitable growth, rather than buying market share. As capital-conscious investors that’s what we like to see.

So where does the earnings growth come from? Interestingly enough AGCO has a nice global footprint driving revenue, as seen in their recent 4Q13 earnings results

AGCO global growth analysis

This large global exposure is nice to see in a farm equipment supplier because it provides some diversification against being exposed to nature’s whims in any one part of the globe. With operations on a number of different continents AGCO has some insulation from the hardship of farmers in one locality.

In the coming years, AGCO management is positioned to take advantage of market opportunities in Brazil, Russia and Africa.

That said, earnings for 2014 are expected to be flat compared to the year prior so there may be better opportunities to buy AGCO if there is a sustained stock market correction.

While management is doing a good job tempering shareholder expectations for growth this year, they’re trying to unlock value in other ways. Keep reading to see what I mean.

Analysis: Is AGCO Management Shareholder Friendly?

The AGCO management team seems to be increasingly focused on unlocking shareholder value. Not only are they advocating for profitable growth, but they’re also increasing dividends and authorizing a $500M share buy back. There’s a nice discussion of the merits in this AGCO Seeking Alpha article.

As an investor, it’s nice to see management actively trying to return cash to shareholders. While the dividend yield is still under 1%, there is lots of room for growth given the 7-8% payout ratio.

You might say this is just the beginning. And even more interesting to me…

A $500M share buyback is equivalent to 10% of the float of AGCO shares. This pretty clearly indicates that management thinks the stock is undervalued (as do I). By reducing the outstanding shares they can use their large free cash flows to further boost EPS. Interestingly enough, AGCO insiders are also buying shares at a frenetic pace.

With a management team focused on profitable growth, returning capital to shareholders and macroeconomic tailwinds it seems like the AGCO share price might continue to climb up. Of course, an investment in AGCO isn’t without risk.

Analyzing the Risks of Investing in AGCO:

It’s always hard to analyze the risks of an investment. And AGCO is no different. One risk to keep in mind is the opportunity cost of AGCO. After all…

agco farm equipment market analysis

Farming: Slow and steady wins the race.

The farm equipment market is a little bit boring. This is not a photo sharing app that Facebook will buy out tomorrow for $20B. But it’s also slow and steady. While year to year results might be a little lumpy due to market trends, AGCO has shown over the last 10 years that they can continue to deliver value to shareholders.

And to be sure: People will always need to eat.

But…

I guess there is some risk from Google growing hamburgers in a petri dish. That said, I’m not sure this is an immediate disruption investors need to realistically worry about. Plus, even if lab-grown protein really does take off, I imagine there will always be a higher end segment of consumers who want REAL animal protein that comes from a farm.

A lot of the risks you might think would face a farm equipment company, AGCO is relatively well insulated against. That’s because they have a diverse global footprint that helps reduce impact from regional events like drought or flood. They also operate at various levels of the farm equipment value chain – so in addition to just tractors they provide the answers to irrigation problems and food storage solutions after harvesting.

Management execution is another risk for AGCO, but again, the 10 year track record says “so far so good.” I wouldn’t blame you for being cautiously optimistic here. As long as AGCO management continues acting diligently and executing effectively with an emphasis on earning high returns on capital I think it’s okay to be a little bullish.

While this analysis is neither a recommendation to buy or sell AGCO or any other security, I hope it has educated you about this agriculture company and whether or not it’s worth further due diligence.

And By The Way: If you want to learn to improve your own investment analysis I encourage you to download my free ebook below. You’ll also get weekly tips and tools to help you improve your approach to the stock market.

Apple Inc (NASDAQ:AAPL) Investment Analysis

Read this Apple Inc. (NASDAQ:AAPL) Investment Analysis to see if AAPL is worthy of further investment research. Now let’s get down to business…

AAPL Investment Analysis: Overview and Introduction

aapl stock fundamental analysis

Read this article to learn if investing in Apple make sense.

AAPL is a premium supplier of consumer technology products. The company is well-known for it’s mobile, desktop, laptop and tablet devices, as well as the software products and offerings supported by these devices.

And as you probably know…

Apple generates a ton of cash by selling these devices and services on its website, app store and through retail stores. AAPL has a global foot print, but is headquartered in Cupertino California.

None of this should come as a surprise to you. So let’s start digging into what the market thinks of AAPL as an investment opportunity.

Have Investors Lost Faith in Apple?

AAPL shares used to be all the craze of stock market investors. In fact…

During late 2012 investors were so smitten with AAPL that shares climbed up to around $700 in price! But money managers are a fickle crowd. And after the enormous run-up, AAPL quickly fell over 40% in value. Without Steve Jobs, and facing increasing competition in the smartphone category, investors seem to have lost faith in the shares of Apple.

Just see for yourself:

Apple Price History Analysis

Apple’s share price has seen better days. Since peaking in 2012 AAPL stock has languished.

But is this market perception of AAPL share price overly-pessimistic? 

In this investment analysis of AAPL, we’ll look at why investors might be over-reacting to the shortcomings of AAPL. And what questions you should research to find out if AAPL presents the right investment opportunity for you. As you can see above…

Since the decline, shares of AAPL have bottomed out around $400, and slowly climbed back, before settling in to a trading range just above $500. So let’s look at what the market has priced in at this current price, okay?

Apple Fundamental Valuation Analysis:

Apple maintains a market cap of about $465B at time of writing (corresponding to a per share price of about $520). The company is in a strong capital position and does not have any liquidity issues or large amounts of short term debt. At this price, AAPL is showing a PE ratio of less than 13 and a free cash flow yield of just under 10%. And really…

That’s not bad for a best-in-class technology hardware company, right?

When we dig a bit deeper into an intrinsic value calculation, it becomes clear that the market isn’t expecting much of Apple. The good news is…

With such a low cost of capital and sustainable free cash flow, even if Apple earnings languish lower by a couple percent points in the coming years it is still worth about $550 per share based on the discounted present value of future cash flows. (And this speaks nothing of the 2.35% dividend.)

On the other hand…

If you look at AAPL’s key statistics from Morningstar, Apple has an impressive track record of growing revenue, EPS and free cash flow over the last 10 years. Check it out:

Apple Cash Flow and Revenue History Analysis

At the current price, the market is discounting Apple’s track record of growth. (All numbers in Mil USD)

To be fair:

Figuring out the intrinsic value of a company isn’t always easy – and the assumptions aren’t always straightforward. But by looking at the conservative growth case we can find opportunities that give us a low-risk option on profiting from future growth. In this case…

The market is currently discounting Apple’s track record of growth… and… that’s a bet I might be interested in taking the other side of.

Plus:

The case for investing in Apple becomes even more attractive when you start to look for catalysts to unlock shareholder value.

For example…

The Icahn Indicator – Do Activist Investors Present Value Catalyst for AAPL Shareholders?

carl icahn apple activist investor analysis

Do you want to partner with AAPL activist investor Carl Icahn?

Apple is a potential under-valued mega cap stock. This anomaly has attracted some of the most exciting activist investors to the scene. And these big players might just present a catalyst for Apple to unlock shareholder value.

Most notably…

Famed investor Carl Icahn has been showing an incredibly active interest in Apple, as of late. Icahn has a track record of building shareholder value, so having him as your partner isn’t a terrible thing. Icahn was originally demanding ever-increasing share buybacks from Apple (to put their large cash pile to use). But after tabling these demands and still holding $4B worth AAPL, investors might speculate Icahn is in it for the long haul.

But Icahn isn’t the only activist investor to voice support. Previously David Einhorn’s hedge fund Greenlight Capital called on Apple to institute a dividend and better manage capital for shareholders. Greenlight has remained an advocate of Apple into mid 2013, citing the dividend and share buyback programs as investor-friendly activities.

A more tacit endorsement comes from Joel Greenblatt’s Magic Formula Stock Screen, where AAPL is currently showing up as a “buy.”

But besides relying on others, what other catalysts are there for Apple?

New AAPL Product Launch Could Excite Investors:

google glass vs iwatch analysis

Will AAPL announce a new product to compete with technologies like Google Glass?

In the last couple of years, Apple CEO Tim Cook has taken the baton from the late Steve Jobs. But other than the iPhone 5C and a couple new operating systems, we haven’t seen any new products from Apple.

In the meantime, it seems like rivals Samsung and Google are diving deep into the world of high tech hardware.

These competitive pressures (especially in the mobile device market) might be responsible for eroding investor exuberance in shares of Apple.

While it’s a bit speculative to bet an investment strategy on a successful new product, such as an iWatch, any new device or compelling product extension could remind investors that AAPL is a growth-focused company with a track record of innovation. Were the stock market to price AAPL shares for growth, they could easily see 15-25% appreciation from current prices (which don’t seem to factor in growth).

Without the catalyst of an activist investor or new produce launch, AAPL shareholders might just have to wait for regularly improving quarterly earnings announcements to paint a picture of ongoing profitability and revenue growth.

Again, the good news for AAPL bulls is that not even low single-digit growth is currently priced in to AAPL shares; so, even without a catalyst there may be potential upside for those considering an investment in AAPL.

But what are the risks of holding an investment in Apple?

Analyzing the Risks of Investing in AAPL Stock:

There are a number of risks associated with investing in Apple stock. And no matter what your opinion on AAPL after reading this article I encourage you to do more of your own thorough due diligence. My interest in buying AAPL is not a recommendation in any way shape or form to you, especially considering the many risks of investing in Apple.

As for the specific risks of investing in AAPL stock:

To be sure: Apple isn’t exactly a small cap start-up anymore. It’s a massive mega-cap company with a strong cash position, established high margin sales channels and one of the most powerful brands in the world.

But the flip side is…

This also means that money managers, hedge funds and major institutional investors are jumping in and out of AAPL stock. This could mean that while AAPL is definitely liquid it’s also likely to be pushed around. If you’re investing AAPL you should be ready for some short-term volatility given the interest by these big players and the major financial news media. You might have to actively guard against getting shaken our of your position.

Additionally…

Even though AAPL isn’t going bankrupt any time soon, the market perception is pricing in relatively stable cash flow. If cash flows deteriorate significantly in the future, AAPL shares may continue to languish. This slow burn in the share price will be exacerbated if AAPL can’t excite investors with new or improved products. Without a catalyst (either in the form of a new product launch, an activist investor unlocking value or even improved earnings and sales growth), you might be stuck holding “dead money” for awhile if you invest in AAPL. Given the dividend and the margin of safety, this is a risk I’m comfortable with, but you should evaluate it for yourself.

Finally:

While AAPL has a lot of the same top talent it’s always had, some naysayers will undoubtedly proclaim that AAPL died with Steve Jobs. This is made worse because Tim Cook is perceived as a boring but efficient operator/logistician. I think the current valuation reflects this and it’s already baked into the price. But it’s something worthy of consideration.

AAPL Investment Analysis – The Final Word:

Based on the quick fundamental analysis above, I think AAPL presents an interesting opportunity for conservative long term investors, especially those who are fans of AAPL already.

That’s because the current stock price of AAPL is not pricing in any type of growth, and even mid-single digit growth could lead to double digit returns for patient investors in the years to come. Additionally, there is a small dividend of 2.35% and no immediate risks for permanent destruction of capital. For these reasons I encourage you to do more of your own research on AAPL and see if it’s a good investment for you (this article is not a recommendation to do anything in any capacity).

For full disclosure: I own a small AAPL position at a cost basis slightly above the current price. I’m interested in buying more shares of AAPL if the stock slides to 500 or lower.

And By The Way: If you want more information on how to analyze companies yourself, I encourage you to download my free eBook below. You’ll get interesting insight into how to improve your approach to the stock market. I’ll also send you free tools and tips each week to help you improve your long term investing returns.

The Little Book That Still Beats the Market Book Review

little book that still beats the market book reviewThe Little Book That Still Beats the Market, by Joel Greenblatt, shares a “magic formula” for investing.

And in case you didn’t know, the Author Joel Greenblatt is a very successful hedge fund manager. He also wrote the best selling book, “You Can Be a Stock Market Genius.”

So how does The Little Book That Still Beats the Market hold up? Well in this book review I’ll tell you why I believe The Little Book That Still Beats the Market is the best investing book you can read in less than 24 hours.

Plus, I’ll share my favorite parts of the book.

And just so we’re on the same page, I just finished reading this book yesterday. So the ideas presented in this best-selling investment book are still very fresh in my mind. Now let’s get down to business…

What Is The Little Book That Still Beats the Market?

The Little Book That Still Beats the Market is a very popular investing book written by Joel Greenblatt. And actually…

The book was originally published in 1006 as “The Little Book that Beats the Market.” The Little Book That Still Beats the Markets is the slightly updated 2010 edition, which is the book I’m reviewing here.

So with that in mind:

Greenblatt himself says The Little Book That Still Beats the Markets was created when he tried to condense all the most important knowledge he absorbed as a hedge fund manager into an easy to understand book that his kids could learn from. In this capacity, The Little Book That Still Beats the Markets definitely delivers.

The book is short, easy to read and  focused on a single (yet very powerful) investment approach. I’ve written before about magic formula investing. But this book gives the official outlook on how you can use the magic formula to outperform the stock market. So what’s the best part about The Little Book That Still Beats the Market?

Best Part About The Little Book That Still Beats the Market:

The best part about The Little Book That Still Beats the Market is how easy and actionable the approach is. The whole book is designed to give you a ready-to-use strategy that you can put in place today to start outperforming the market.

But The Little Book That Still Beats the Market doesn’t just give you the keys to success. This investing book also gives you a lot of context so that you have the conviction to believe in the magic formula contained within it’s pages.

And actually:

Understanding how the magic formula was devised and the basic principles behind it made a big difference for me.  felt the magic formula advocated in The Little Book That Still Beats the Market was much more credible after understanding where it came from.

And Greenblatt does cover the most important components of value investing – like why you should look for a margin of safety, and to be weary of Mr. Market.

Almost as soon as I picked up The Little Book That Still Beats the Market I wanted to finish it so I could put the magic formula into action for myself. Luckily it’s a really fast read.

But for some traders, therein lies the problem.

What The Little Book That Still Beats the Market Leaves Out:

The Little Book That Still Beats the Market is a really short book. It’s only about 180 pages (and the pages are very small – the book itself is literally little). So in some ways, this strength is a weakness. Since the book is so short it can’t cover everything.

While The Little Book That Still Beats the Market is a great easy to understand read for everyone, you’ll probably get more out of the book if you have some basic understanding of value investing. You don’t have to read The Intelligent Investor to benefit from The Little Book That Still Beats the Market. But if you love Ben Graham I think you’ll enjoy Greenblatt’s book too.

The Little Book That Still Beats the Market is a straightforward book that shows you the exact steps to apply value investing in today’s market. Since the book is so short it doesn’t talk about too much of the other principles of value investing. But it’s still a good read.

Now let’s wrap this book review up.

The Little Book That Still Beats the Market – The Final Word:

The Little Book That Still Beats the Market  is a great book that you can read in less than 24 hours. If you need a book for the beach this summer The Little Book That Still Beats the Market  might be the perfect book for you. It’s fast to read and easy to understand.

The Little Book That Still Beats the Market is incredibly actionable, and for that reason I recommend you buy The Little Book That Still Beats the Market on Amazon today. And if you still want a little more information, check out the short video book review below…

The Little Book That Still Beats the Market Video Book Review:

Fooling Some of The People All of The Time (Book Review)

Fooling Some of The People All of The Time Book Review

Read this Book Review of Fooling Some of The People All of The Time…

Fooling Some of The People All of The Time, by David Einhorn, is a “Long (short) Story” about Greenlight Capital’s battle against Allied Capital.

Fooling Some of The People All of The Time is an exciting and eye-opening read into the high intensity world of event-driven hedge funds. The book is a factual recount of a true story. And once you start reading it’s a hard book to put down.

So in this book review of Fooling Some of The People All of The Time I’ll tell you a little bit more about what this book is about and why I liked it so much. By the time you finish reading this book review you should have a very good idea whether or not Fooling Some of The People All of The Time is the right investing book for you.

Since I just finished reading this book all the details are very fresh in my mind. And I can’t wait to share this exciting story with you.

The Story of Fooling Some of The People All of The Time:

Fooling Some of The People All of The Time is a book about David Einhorn’s hedge fund, Greenlight Capital, and it’s battle against a publicly traded stock called Allied Capital. Here’s how it goes down…

The book starts out giving you a little background information on Einhorn and his hedge fund. You get a pretty good feel for how he got into the business and why he was successful from the outset.

This introductory context is actually really inspiring in it’s own right – as Einhorn took a $900,000 investment and turned it into a multi-billion dollar fund. Once you realize how successful he’s been it’s hard not to be interested in what he has to say.

From there…

Fooling Some of The People All of The Time quickly moves forward into Einhorn’s short thesis about Allied Capital and why it became so public. The book quickly moves forward into a riveting tale. It’s a 400 page battle between short sellers and management of a popular publicly traded company. And each page is better than the last

Fooling Some of The People All of The Time moves at a very quick pace and covers a lot of information. Luckily Einhorn’s writing style is easy, enjoyable and injected with a sense of humour. The book has just the right amount of details to keep things moving while still giving you a thorough picture of what’s going on.

Speaking of…

Here’s What I Liked Best About Fooling Some of The People All of The Time:

The story of Fooling Some of The People All of The Time is actually almost unbelievable (even though it’s completely true). The things that happen as Einhorn and Allied duke it out are actually insane.

There were many points in the book where I wanted to tear my hair out in frustration. But ironically. That was the best part of the book.

You see…

Fooling Some of The People All of The Time gives an incredibly in-depth portrayal of how things actually work for high-conviction short sellers. I  never appreciated the intense pressure, scrutiny and downright disdain that these major-league short sellers have to overcome.

And to be honest…

The inside look at “the system” was absolutely enlightening. And it acts as a stark wake up call to optimistic investors who are predisposed to taking management at their word. I seriously couldn’t believe the fight Einhorn had to put up, and the things that management of a publicly traded company were doing to keep the “status quo” in tact.

Fooling Some of The People All of The Time really drives home the lesson that if you want to invest you are taking the risk. And you shouldn’t rely on regulators or analysts to fill in the blanks for you. You need to be accountable for your money or you’re likely to be the next person that gets fool.

But while I really enjoyed Fooling Some of The People All of The Time, I don’t want you to buy this book for the wrong reason. So you should know…

What Fooling Some of The People All of The Time Leaves Out:

Fooling Some of The People All of The Time is a really great account of Einhorn’s battle with Allied Capital. It’s truly a gripping tale that will leave your jaw hanging open in disbelief. But Fooling Some of The People All of The Time isn’t entirely actionable.

While Fooling Some of The People All of The Time definitely taught me to be more skeptical of management, and identified some accounting tricks to be aware of… the book feels more like a cautionary tale than an instructional guide on how to short sell stocks.

To be honest, I’m quite happy with the allegorical warning. And it makes for a really interesting and entertaining read. But if you’re looking for something along the line of Stan Weinstein’s How to Profit in Bull and Bear Markets, you’re barking up the wrong tree with Fooling Some of The People All of The Time. Make sense?

So is Fooling Some of The People All of The Time an investment book worth reading?

Fooling Some of The People All of The Time – The Final Word:

Fooling Some of The People All of The Time is an excellent investment book. I really enjoyed learning about the battle between Allied and Greenlight. At multiple times throughout the book I almost couldn’t believe what I was reading. And it definitely serves as a valuable warning tale for optimistic investors. So…

For these reasons (and all the others listed above) I recommend you buy Fooling Some of the People All of The Time on Amazon. I think you’ll enjoy it. And if you’re still a little curious you can check out the video book review below.

Fooling Some of The People All of The Time – Video Book Review:

International Business Machines (IBM) Stock Analysis

International Business Machines Inc (NYSE:IBM) is one of the world’s biggest technology companies. So of course we’re going to do a quick IBM stock analysis here at StockIdeas.org.

Now keep in mind…

IBM hasn’t really gone anywhere for the last year. But don’t take my word for it. Just look at the IBM long term weekly chart below:

ibm long term chart

As you can see from this long term weekly chart, IBM had a nice run. But has traded sideways for the last year (Click to enlarge).

Yet when you zoom in a little bit, you’ll find IBM is starting to show some nice relative strength, And it might have even put in a short term bottom. Now could it be on the verge of breaking out above previous resistance?

See for yourself…

ibm daily chart april 2014

On the daily chart above you can see IBM is starting to trend higher, and even holding above the shorter moving averages. (Click to Enlarge)

As you can see from the technical analysis above, IBM stock is starting to see more buying. RSI is trending up. And IBM is holding above the short-term moving averages. So since IBM looks like it might be setting up for a push higher, let’s look at whether or not the fundamental analysis of the IBM stock supports this potential technical set up.

Now to be sure…

IBM is a massive and multi-faceted company. So it’s necessarily difficult to analyze it comprehensively all in one article. But this blog post will identify some of the more pressing fundamental factors influencing IBM.

And of course, since IBM is such a popular blue chip company, I’m not the first one to try and analyze it. Others have have indicated a $255 price target based on a 5 year dividend discount model. Others point to shareholder friendly IBM management. While my personal favorite, Crossing Wall Street, says to buy IBM up to $197 per share

IBM Fundamental Analysis – Financial Valuation:

IBM is a company at an interesting point. When you look at IBM’s financial stats, Revenue growth has slowed over the last 18 months, and this has been reflected in the stock price. But don’t despair…

This international technology company has continued to grow book value. And Mr. Market may have over-reacted. IBM is currently selling for about $200B in market cap and 11 times earnings, paying a 2.3% dividend.

ibm stock analysis

Does IBM stock present an enticing investment opportunity?

As for the balance sheet, IBM has just shy of $19B in net assets and around $6B in net current assets, with most of it in cash and receivables.

While IBM doesn’t have any immediate balance sheet risk, most of the valuation comes from strong cash flows and (until recently) consistent revenue growth.

Last year’s full-year free cash flow was $13.35B, or $12.10 a share (and $14.94 EPS). So what does that mean?

With a basic intrinsic value calculation, using a conservative 0% growth rate, I determined that IBM is fairly priced around $200/share. That means at these prices, the market is not really pricing in any future revenue growth. If IBM can grow earnings over the next year or two, IBM’s fair value could easily move 10% higher or more.

So that lead’s us to the next question… can IBM grow earnings and shareholder value?

IBM Fundamental Analysis – Growth Narrative:

IBM is definitely a global leader and a world class organization with a track record of execution. But that doesn’t mean it’s smooth sailing ahead. IBM’s hardware business has languished and it’s divesting these less profitable business units. In the meantime IBM is trying to aggressively grow the cloud computing aspects of it’s company.

But that might be a bumpy road…

The cloud services space is competitive, with companies like Amazon (NASDAQ:AMZN), Oracle (NASDAQ:ORCL) and Microsoft (NASDQ:MSFT) also making plays for the corporate cloud. And arguably IBM still has somewhat of a fragmented cloud services offering. Plus, while IBM is more globally diversified it’s still struggling against declining sales in international growth markets.

Nonetheless, IBM management seems staunchly committed to growing earnings and delivering value to shareholders. They’ve even staked their bonuses on it!

From their January 2014 earnings release:

IBM CEO Analysis

IBM CEO Virginia Rometty is tying her bonus to share price. Can she pull it off?

“We continued to drive strong results across much of our portfolio and again grew earnings per share in 2013. While we made solid progress in businesses that are powering our future, in view of the company’s overall full year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” said Ginni Rometty, IBM chairman, president and chief executive officer.

”As we enter 2014, we will continue to transform our business and invest aggressively in the areas that will drive growth and higher value. We remain on track toward our 2015 roadmap for operating EPS of at least $20, a step in our long-term strategy of industry leadership and continuous transformation.”

The second paragraph is especially illuminating. And if IBM management can capitalize on their plans, shareholders are sure to benefit. But again, nothing in the future is promised. Not even to IBM. So don’t stop reading yet.

Potential Risks to Investors Identified by IBM Stock Analysis:

While it’s tempting to paint an optimistic picture of IBM, it’s important to be aware of the risks as well. As we said above, the growth story is far from assured, – especially in international markets. And remember how competitive the cloud market is for IBM.

So although management’s track record provides some re-assurance, achievement of the publicly stated targets is not guaranteed. Rumor in the comment’s section of IBM’s Seeking Alpha page is that IBM has an old-school sales force that’s not going to be able to keep up (take that with a grain of salt). And luckily, at the current stock price this appears to be priced in.

Another common critique of IBM is that the company is using debt and selling assets to pay out dividends and bolster revenue. While investors are right to be skeptical, this “might” make sense. Maybe IBM management is taking on long term debt now, when interest rates are good. And so far, their asset sales have been limited to divesting low margin business units.

But skeptical investors are right to keep an eye on these developments. And it’s definitely something I’ll pay attention to going forward. And finally…

The biggest risk with an investment in IBM might be the opportunity cost. While IBM appears to be a reasonable investment, there might be other companies worthy of your capital. AAPL, MSFT and ORCL are also tempting investments at these prices.

I currently don’t own any shares of IBM. I might buy a small position. But this blog post is not any sort of recommendation to buy or sell IBM or anything else. What do you think about IBM as an investment opportunity?

And By The Way: If you want to get more stock market analysis feel free to download my ebook below. You’ll learn how I developed my market methodologies. And you’ll get weekly email updates sharing the best stock market tools and tips to help you become a more intelligent investor.

Free Online Stock Market Analysis For April 2014

weekly stock market analysis april 2014

Read this post to learn if you should fill up on stocks in April 2014…

I just finished reading David Einhorn’s “Fooling Some of the People All of the Time.” I really enjoyed reading it. And I’ll try to get a book review up soon. But for now…

I’ve moved on to reading more actionable market analysis. And that’s what I want to share with you this morning.

So here are some of the best stock market market analyses from around the web, to prepare you for the first full trading week of April.

Instead of turning on CNBC you’ll be much better served to browse these free stock market resources and get a more accurate view of what the stock market is saying.

Stock Market Weekend Video Analysis:

iBankCoin’s ChessNWine has been spoiling us lately with his weekend stock market video analysis. And this weekend’s video market analysis gives valuable insight into why you might want to be skeptical, even though the S&P 500 is only a few percentage points of all time highs. So if you’re looking for a concise video walk through of what to make of the stock market heading into this week I encourage you to watch this stock market video analysis.

If you’re inclined to pay for perspective, the Weekly Strategy Session provided by ChessNWine can give you even more insight.

The Fat Pitch Weekly Market Summary:

fat pitch stock ideas april 2014

Is April 214 the time to be swinging for the fences, or not?

The Fat Pitch provides an in-depth and objective look at the stock market. And this weekend’s stock market summary is definitely worth reading. Why’s that?

Not only does the technical analysis help shine a light on what’s really happening in the stock market, but it also helps put the current stock market action in greater historical context. So…

While the past isn’t always prologue, it’s nice to know where you are relative to where you’ve been in order to better calibrate your odds of success. I highly recommend reading this weekend’s weekly stock market summary.

Is The Nikkei Topping Out?

Our favourite ForEx gorilla has an interesting post about what’s happening in the Japanese equity markets. To be totally honest I don’t *totally* understand all the correlations. But keeping an eye on other global markets makes a lot of sense for the modern equity investor – especially a market (and central bank) as relevant as Japan.

And the other wonderful thing is that ForexKong consistently calls it as he sees it, which you’ve got to respect. So if you’re looking for a little more information on what’s happening oversees read this post declaring the Nikkei Has Topped, and what it means for you as an equity investor.

Of course…

If you want to follow any of the above trading and investing experts in real time I suggest you check out their Twitter feeds’ where they are always sharing excellent information.

The handles are ChessNWine, Ukarlewitz and ForexKong respectively. While I cherry picked the information above to share with you this weekend, these sources of stock market information are one’s that I’m always careful to keep attuned to. 

And By The Way: If you’re looking for insightful information right now, check out my free ebook. You can download it below just be entering your email address. I’ll also share free tools, tips and resources with you on a weekly basis to help you improve your approach to stock trading. Have a great weekend!

How Individual Investors Can Take On High Frequency Trading and Win

Flash Boys Michael Lewis HFT Book

Do individual investors really have a chance against HFT?

By now you’ve obviously heard about high frequency trading, (at least in passing). It seems you can’t turn your head without hearing about HFT these days.

For example…

In his new book Flash Boys, Michael Lewis depicts how the deck is stacked against individual investors and self-directed traders. And before that…

Les Leopald also complained about high frequency trading in his illuminating book How to Make a Million Dollars an Hour.

And ZeroHedge makes it pretty clear how home-gamers can’t compete with 1237 winning HFT days in a row. Meanwhile:

hft trader
The Wall Street Journal is actually trying to say HFT is really not so bad. But then just try watching 12 seconds of this HFT portfolio in action and tell me the cards aren’t stacked against you.

At a glance, it doesn’t seem like individual investors can take on high frequency trading firms and win. 

Can they?

Especially since their goals are so directly opposed…

Goals of Individual Investors and Goals of HFT:

Individual investors and HFTs are at opposite ends of the investment universe. Right?

dark pool hft trading

HFT dark pools: adult swim only.

If you’re an HFT firm your goal is basically to  make money every second by using dark pools to front-run institutional orders (or something like that).

On the other hand…

If you’re an individual investor, your goal is probably to accumulate wealth and build your net worth gradually over time. You don’t have any fancy tricks and you’r just looking to earn solid returns without taking on too much risk.

So given these diametrically opposed goals, how can individual take on high frequency trading and win?

Step 1: Accept HFT is Real – And Invest Around It

The good thing about HFT being in the news, is that individual investors can learn more about it. While it sucks to learn the deck is stacked against you, it presents a real learning opportunity.

Individual investors should accept that HFT exists, and learn to trade around it. The easiest way to do that is by being realistic and honest about where you are weak compared to an HFT firm. So…

  • Be realistic about your trading execution. Even if you have Level 2 quotes how quickly can you get filled? If you’re scalping pennies on quick trades you’ll be playing in the realm of HFT. Don’t rely on your execution as the core of your strategy.
  • Be realistic about your time frame. If you want to make a lot of trades trying to scalp pennies you’re going to be battling an HFT firm or two. And the more you trade the more you expose yourself. If you can hold stocks for longer and target bigger moves, HFT isn’t such a big deal.
  • Be realistic about your edge. How are you making your trading decisions? If you’re trading on gut feeling or ill-defined indicators you might get ground to dirt by HFTs. You’ll need an impressive trading system or a fundamental edge.

It should be getting clear that HFT and individual investors operate in completely different worlds. But that’s a good thing. Seriously.

And if you’re realistic with yourself…

You might even realize HFT isn’t that big of a deal for individual investors.

By understanding how high frequency trading firms work you can position yourself around them. Just remember…

You need to be honest with yourself. Appreciate that HFTs are out to get you. And be skeptical of anyone who says great things about HFT firms… Like their alleged “liquidity”… (from zerohedge)

hft liquidity myth

HFT proponents say they provide liquidity. But is it really there when you need it most? Don’t count on those empty HFT promises as an individual investor.

The good news is when you’re skeptical of market structure and careful in your approach, you can start to use these HFT strengths to your advantage. The key is being proactive, having a plan, and knowing when to pounce on HFT-induced irrationality.

Individual Investors Can Win by Embracing What HFT Does Right:

Even though HFT firms might not make things easier for you, there are a couple of lessons individual investors can learn from HFT firms.

For example…

  • Be algorithmic in your trade execution. Don’t be naive in your approach to the stock market. Get clear on a trading plan. And have a clear plan for buying and selling your stocks. Make your if/then plans before the market opens.
  • Focus on making money! You have to give credit to the HFT firms – they make money pretty much every single day. They are 100% focused on extracting profit from the market. That’s almost a little inspiring. So instead of making ego-based decisions be serious about targeting returns.

So now it should be getting clear to you:

Individual investors can really improve themselves by (1) getting more granular with their trading rules and (2) actively looking for opportunities to make money. Even if you’re a long term investor you can still use stock trading techniques to compound your investments.

Now here’s the real secret about how individual investors can take on high frequency trading firms and win…

“Two Investment Strategies Diverged in The Woods”

Throughout this post we’ve talked about the difference between individual investors and HFT firms.

So do you know what the take home lesson here is?

HFT short term speculating

At the end of the day, can you really beat HFT firms at their own game?

Well…

You can choose to obsess over your portfolio every second, and try rolling the dice against the currents of HFT…

OR

You can make smart investment decisions based on calculating intrinsic value of a stock.

In one situation, you’re going to be hopelessly headed off at every turn. And in the other circumstance you’ll have a clear roadmap and nobody in your way. In fact…

The latter scenario might even allow you to use short term market irrationality to your advantage!

So:

Here’s the truth about building wealth as an intelligent individual investor:

Some people can make a living gambling on momentum stocks. But in my experience it’s much less stressful when individual investors focus on finding good businesses at a discount. It’s really the only game you have a fair shot at winning.

Now with that in mind, let’s look at the specific best practice items you can focus on to win in the markets, despite all the high frequency nonsense.

Individual Investing Best Practice to Beat HFT…

individual investing sell target against hft

Learn to pick a sell target and finally get conviction in your stock picks.

If the HFT scare of 2014 has taught us anything, it’s that there are large swaths of the stock market you can’t control.

Instead:

As an individual investor you must focus on what you CAN control, (and try to factor in in a margin of safety for the unknowns).

Next…

Instead of speculating on frothy momentum stocks, learn to calculate intrinsic value of a stock. This is how you get long term conviction in your stock picks and ideas.

Even if all you have is a simple sell target, you’ll be much more oriented to the big picture. And you’ll be able to zoom out from the day-to-day grind of the HFT and hedge fund populated stock market.

Finally:

When you have a solid investing plan based on real fundamental value, you can really be proactive with your investment decisions. Disadvantage becomes opportunity. And that’s how you really win against HFT.

You wait in the weeds. And strike when the ebb and flow of short-term irrationality goes in your favour. You take advantage of illogical price jumps to cash in on quick capital gains. And you use unwarranted pullbacks to lower your cost basis in your favourite long term stocks.

Of course: Investing like this isn’t always emotionally simple. But it’s not exactly complicated either. Just focus on what you can control and don’t confuse random noise with something meaningful. If you have trouble with keeping your cool, check out a book like Trading in the Zone.

The truth is: You probably know more than you think.

So take a step back. And re-evaluate where you are relative to the high frequency trading firms. If you’re an individual investor diligently trying to build your wealth you already might be better off than Flash Boys would have you think.

And By The Way: If you’re still a little unsure about how to get high conviction stock picks you might enjoy my free ebook. You can download it for free using the form below. And you’ll see exactly how I developed an Intelligent Investor style approach, with swing trading techniques to exploit HFT-induced irrationality. You’ll also get free tips and tools each week to help you make smarter stock picks. What’s not to like?

NetSol Technologies (NTWK) Investment Analysis

netsol technologies ntwk stock analysis

Is the Netsol Technologies (NTWK) team worth investing in?

NetSol Technologies Inc. (NASDAQ:NTWK) provides IT and enterprise application software and solutions for the global financing, leasing and lending industry.

NTWK was founded in 1997 and is headquartered in California. The company also has significant operations in Lahore, Pakistan, as it conducts the majority of it’s business in Asia.

Despite a micro market capitalization of only $42.70M, NTWK works with Dow Jones 30 Industrials, Fortune 500 manufacturers and financial institutions. The company’s operations are primarily centred in Thailand, China, Pakistan and Australia – though it also has offices in London and California.

This article discusses the merits and risk of a common stock investment in NTWK, given current conditions and market perceptions.

NetSol Technologies (NTWK) Background Information and Products:

Netsol Technologies Inc. helps companies use IT solutions to streamline their business. The main product offered by NTWK is NetSol Financial Suite (NFS). NFS drives cost reduction in client businesses by providing end-to-end management of their credit portfolio. This flexible web-based product has helped companies like BMW expand their operations into new markets, and scale for continued global growth (especially in Asia).

On October 24 2013, NTWK announced the soft launch of their next generation platform NFS Ascent – the most advanced platform in the industry.

NTWK’s portfolio also includes the Smart Open Catalogue Interface (SmartOCI) which is an innovative search engine technology that allows corporate buyers and shoppers to browse multiple supplier catalogs within the SAP CRM system. In addition to the products listed above, NTWK also offers a wide array of support services.

Going forward, NTWK’s success depends on the company’s ability to grow revenue and improve profits, capitalize for growth worldwide, penetrate North American markets and continue to streamline sales and marketing operations. Per management’s commentary in their 12/31/13 quarterly filing, they remain optimistic about this progress and are aggressively pursuing their growth goals (more on that later).

Management states most risks to NTWK are macroeconomic in scope. And while investors are wise to consider these risks, they are not company specific. Regional geopolitical risks in Pakistan are also worth mentioning.

But let’s look at Netsol Technologies in a little more depth…

NTWK Competitive Advantage:

NTWK is a globally integrated company with offices in London, Bangkok, Beijing, and Lahore. NTWK leverages this global footprint using a “Best Shoring” approach to help clients and potential customers find the best possible solution and price for their unique situation.

Their 30 years in the business and glowing customer reviews speak to their ability to work with clients to reach an ideal solution. For example:

NetSol Customer Review

NTWK combines this domain expertise with competitive cost blended rates from its “center of excellence” in Pakistan, and other global offices. This unique and cost effective global development model adds value by keeping costs low for global clients without compromising quality.

Another determining factor that makes NTWK’s offerings more appealing to customers are the ISO 9001, ISO 27001, and SEI CMMI Maturity Level 5 (V1.2) assessments; a distinction shared by fewer than 140 companies worldwide (reference). This further establishes market credibility for the relatively small technology company.

NTWK’s release of NFS Ascent in October 2013 is also notable, because this offering is the most technologically advanced solution for the auto and equipment finance and leasing industry. The n-tier service-oriented architecture allows the system to scale quickly.

The company also claims this advanced technology has helped it attract top talent, who are eager to work on the complex software engineering challenges that accompany these advanced offerings. It’s encouraging that attracting top talent while keeping head count costs low is a priority for management.

Now that you’re familiar with the product, let’s talk about how NTWK makes money.

NTWK Business Model Overview and Analysis:

NTWK is a global software company that derives revenue from software license fees, maintenance fees and service fees. Total revenues for the 3 months ended December 31 2013 were $8.7M, with the majority of income coming from services.

Investors may be wary that this recent revenue number is a 26% decrease from the year prior. Why the shortfall?

NTWK management claims this decrease is because current customers are delaying licensing renewals to wait for the official launch of NFS Ascent. If this is true, NTWK will realize a significant revenue backlog in the coming months. To be sure, NTWK still has a large number of customers using the old NFS platform and it expects to continue to collect some revenue from the old platform for a few more years to come.

In the most recent conference call, management indicated it expects maintenance revenue to trend steadily higher and for service revenue to remain steady. The company is well-capitalized for this transition period, while NFS Ascent is rolled out to existing and new clients.

The capital position is important to note because NTWK is under some margin pressure as it grows headcount to support rapid growth goals.

NTWK Market and Niche Characteristics:

NTWK is riding the software-as-a-service trend, providing web-based tools to help companies streamline their operations on a global scale. NTWK is far from the first company to deliver this type of IT solution. And management still sees exciting opportunity ahead.

From their recent 12/31/2013 quarterly report, managements goals are:

  • Achieve double digit revenue growth for the next 5 years
  • Achieve 50% to 55% gross margins in 2015 and maintain 60% or better for the next three years
  • Ramp up license revenues for NFS Ascent™

All this talk is great. But can NTWK back up the numbers?

NTWK Customers, Economics and Financial Performance:

NTWK is a relatively small company, but it has been in operation for over 30 years. And during that time it has developed a robust client base, including “150 satisfied clients in over 30 countries and 250 implementations globally.” These clients include companies such as IBM, Baxter Healthcare and a number of other globally recognized brands. More information on customers is available in the NTWK company profile.

Given the complexity and advanced functionality of the NFS platform and the five applications contained therein, NTWK customers are inclined to renew their software license, rather than shifting providers. The complex integration and deployment of enterprise software solutions means that once NTWK wins an account they are likely to continually generate revenue from that client for years to come.

While NFS earned a modest per share loss of ($0.18) in the last quarter, this is unlikely to reflect the long term prospects for the business. Additionally, although NTWK is suffering a short-term revenue drought owing to the transition between old and new software platforms, it remains under-valued and in a strong financial position.

Notably, NTWK is trading at a market cap of around $42M, with around $30M in net current assets. NTWK is trading at a 40% discount to book value, and even at these depressed earnings levels it is still trading at a price to earnings ratio below 20.

Here is a more detailed look at NTWK’s financial performance over the last 10 years:

NTWK Financial Performance 2014

Via Morningstar

Per the table above the steady growth in operating income and revenue growth should give long term investors confidence, even though EPS and net income have been lumpy. How these trends play out in the next few months will be incredibly telling.

That said, from a very basic discounted cash flow analysis perspective, I believe that even in the current scenario, NTWK is still undervalued. The following simple spreadsheet assumes an inflated cost of capital, and an annual growth rate of only 3%. Based on the earnings history and the narrative from management I believe these assumptions to be very, very conservative.

NTWK Simple Discounted Cash Flow Analysis

The above analysis shows that even if cash flows only grow at 3% a year and WACC is inflated the stock still has an intrinsic value closer to $10, presenting approximately 100% upside from the current price. Even if you reduce the exit multiple by 50%, NTWK would still be about 30% undervalued.

But you must be wondering…

If NTWK is so under-valued, why haven’t investors gobbled up these shares? Good question…

Variant Investment Perspective of NetSol Technologies:

The consensus view on NTWK seems to be “we’ll believe it when we see it.” The market is discounting NFS Ascent revenues because the transition to the platform has been slower than anticipated. In fact, NTWK has been developing NFS Ascent for over 4 years! No wonder market participants are getting a little impatient.

From my perspective, this inability to quickly roll-out the new software program has caused revenue to come in shy of expectations. The CEO indicated as much in the November 8, 2013 earnings report. The revenue contraction along with higher operating costs (due to headcount growth) was seen in decreasing margins and was a catalyst for underwater investors to dump the stock, as evidenced in the chart below.

NTWK Stock Chart 2014

As you can see the stock price of NTWK has taken a bad hit, declining from over $13 dollars to a low of around $4.25. It seems quite possible the selling in NTWK was exacerbated by end of year tax-loss selling, in addition to the November earnings miss.

Over the last few months however, it seems that NTWK has attempted to carve out a bottom. While this bumpy process is far from over (and the stock is still dealing with declining major moving averages), bulls should be encouraged the stock is not moving lower. Insiders of the company also own almost 10% of the stock, and insiders and institutions alike have continued to accumulate share of NTWK (reference).

It is my contention that patient investors who are interested in small cap opportunities may benefit from an investment in NTWK. Of course patience is required, and this bottom might not be THE bottom. But if the company can effectively roll out the Ascent platform revenue should grow according to management’s plan, and shareholders might see capital appreciation as well. Even if the growth plans come up short, our analysis above shows even with very modest revenue growth NTWK is still significantly undervalued.

Of course, an investment in NTWK isn’t without risk. For full disclosure’s sake I am  long a small position of NTWK from around current price levels. I am keeping my position size modest due to the following risks.

Risks of Investing in NetSol Technologies:

NTWK has a strong track record of performance over the last couple of decades. And it seems dedicated to further servicing customers with quality products and custom-implementations. But this investment doesn’t come without risk.

The slow deployment of NFS Ascent remains a large red flag for many investors. If you’re looking for a really quick return you may want to pass on NFS Ascent. Because while it’s possible the company will begin rolling out the new platform with success, you should also be prepared to wait a quarter or two in case these operations take longer than expected (as has historically been the case). That’s a big reason I haven’t stepped up my investment.

Another one of the risks facing NTWK is an inability to penetrate the North American market. Currently, the company  generates around 80% of revenues from operations in Asia. Unfortunately, NTWK faces increasing competition from low-cost competitors in China putting further pressure on margins. Management is planning to drive growth in North American markets to improve margin performance. But we’ve yet to see much in the way of results there.

Finally, especially skeptical readers will note the company recently changed CFO’s. This is likely due to an accounting irregularity which has been covered in-depth here and here. I think this is a case of a small company outgrowing it’s books. But diligent readers will want to review this information for themselves.

In conclusion, NTWK presents an interesting opportunity for patient investors looking to see capital appreciation in the next six-twelve months. This is not a recommendation to buy or sell any security mentioned in this article and I encourage you to do your own research if you’re interested.

And By The Way: If you’re curious to learn more about how I analyze companies, I encourage you to sign up for my free ebook below. You’ll also get weekly updated with tips and resources to help you improve your approach to the stock market.