Mad Money Machine

Some Cramer vs. Rule #1 Mashups

Here is a first attempt at mashing up some of the recent Jim Cramer picks with the Rule #1 metholology of finding stocks at a margin-of-safety price.

Note that two numbers are subjective in this table: 1) the Estimated EPS growth rate for ten years, and 2) the estimated PE ratio in ten years. And of course they make a HUGE difference in the outcome. And the other number that makes a HUGE difference is the Current EPS. You really should check the history of the company’s annual EPS to see if they are smooth or if they bounce around a lot. And you can check that here:
http://moneycentral.msn.com/investor/invsub/results/statemnt.asp?lstStatement=10YearSummary&Symbol=EPL&stmtView=Ann

I got the estimated EPS Growth rates from http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Page=EarningsGrowthRates&Symbol=EPL
(Note that they are actually only for FIVE years.)

and I got the estimated PE ratio by averaging the past PE ratios from
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=EPL

And from there it is just Excel formulas for Future Value and Present Value.

So if you really believe EPL will grow at 21% per year, then the latest price for it is below the MOS price. All others are overvalued with SFD and OO being closest to “Sticker Price.”

Disclaimer: I am neither long nor short any of these stock at the time of this writing. But hey, I’m going to do more homework on EPL and might get some!

Jim talked about EPL on his show 28 March in the context of the natural gas “contango.” Remember?

I’d love it if someone else would take a look at some of these numbers to verify that what I’m doing here is accurate according to Rule #1. Just make sure I’m doing it right ONCE, so that if I keep doing it, I’ll be on the right path.

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Future Value = Current EPS grown at Estimated EPS growth rate for ten years multiplied by the Estimated PE ratio

Sticker Price = Present Value of Future Value grown at 15% per year

MOS Price = Margin Of Safety = 1/2 Sticker Price