Mad Money Machine

Alerts: Stock Mashup Action Plus More

Recognize any of these stocks? I have run them all through the Rule #1 formula and highlighted in bold the ones that are either under the Sticker price or both it and the Margin-of-Safety price.

There are three that are under the Margin-of-Safety price: BHP, HAL, and YHOO. There are five more that are under the Sticker price: INTC, MSFT, OXY, QCOM, and UNH.

Where available, I have used estimated EPS from (in cases where Current EPS is negative, I just bumped it up to $0.10)
http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=YHOO

and I estimated PE ratios from past averages available from (I removed abnormally high outlier PEs from computing the averages).
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=yhoo

Disclaimer: I own MO, PG, MSFT, QCOM, PCU. And I may buy some others soon.
Also: Before you believe and trust any of these numbers PLEASE DO YOUR OWN HOMEWORK!

Mad Money Machine on StreetIQ

The Mad Money Machine is happy to announce that we’ve been added to the StreetIQ.com directory of business podcasts.

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You’ll find enough business content there to fill your mp3 player all day long!

Ahead of the Crackle

Did you catch the two stocks that were requested recently during Lightning Rounds that Jim Cramer said, “I was thinking about featuring that earlier this week?” Well of course your Mad Money Machinist has them for you: (CBIZ) and (DGIN).

Yep. March 24th he said of CBIZ, “A terrific play. Seven dollars goes to 10. You got my blessing and I even give you a triple buy.” But he also said that he was thinking of making it a featured stock.

Then on March 31st a caller asked about Digital Insight (DGIN). Jim said,

“I really don’t understand how this company is able to make as much money as it is [sic]…. It’s like an arms merchant to digital banks. But its workin’… You know this is kind of an amazing company. Another company that I wanted to profile earlier this week. You must be inside my head with another 20 other people. I’m callin’ the fire marshal!”

So if Jim does come around and feature one or both of these stocks, it would be an excellent opportunity to get AHEAD of the Cramer Crackle.

Set your default competition

Click this link http://simulator.zacks.com/MyProfile/SetDefaultGame.aspx to set your default competition
to the MadMoneyMachineCOM contest.

If that link doesn’t work, do the following:
1. Login to the Zacks simulator
2. Click ‘Settings’
3. Click ‘Click Here To Set Your Default Competition’

MadMoneyMachineCOM Investment Guru Challenge Starts Today

Today is the first day of trading in the 2nd quarter of 2006 and the MadMoneyMachineCOM Investment Guru Challenge is underway. It is never too late to sign up and play.

I have added a “benchmark” account in there called ETFPortfolio. It will hold the 9 ETFs that are in the Portfolio Smackdown. We can use it as a benchmark for comparing our performance. I intend to just buy and hold the ETFPortfolio through the duration of the challenge. I have set it up in the following way:
20% Vanguard Total Market (VTI)
10% Vanguard Mid-Cap (VO)
10% Vanguard Small-Cap (VB)
10% PowerShares Micro-Cap (PZI)
10% Vanguard REIT (VNQ)
10% Vanguard Materials (VAW)
10% Vanguard European (VGK)
10% Vanguard Pacific (VPL)
10% Vanguard Emerging Market (VWO)

I have placed market orders to purchase the appropriate amount of shares of each to total $100,000. But if something weird happens and I can’t fill all orders, I may have to adjust the amounts soon after market open to make it work.

Of course while this ETFPortfolio and the ETF Portfolio in the Portfolio Smackdown will be similar, they each started at different times with their $100,000.

And I gotta say, hey, the ETF Portfolio performed fantastically in the 1st quarter: up a whopping 9.6% to $109,584.39. The Cramer portfolio struggled (victim of the Cramer Crackle a few times) and only gained 5.6% to $105,591.98. It will do better this next quarter, won’t it?

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.

—————————————————

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

MMM-016: Guru Smackdown

Guru Smackdown pits two heavyweights with their magic forumulas against each other. Breaking down Value Investing. Enter the MadMoneyMachineCOM Investment Guru Challenge. Special Tools in the Crib. Register to win the Bull!

Play show #16 Right Here, Right Now!
[audio:MMM-016.mp3]

Listen to this FREE SHOW thru iTunes!

• Enter the MadMoneyMachineCOM Investment Guru Challenge and see if you can become an Investment Guru. Winners get added to the Guru Roulette wheel.
• Breaking down Value Investing. XYZ grows at 14% per year for the next 10 years. It had $1.89 in earnings last year. So in 10 years at 14% growth it should have $7 per share in earnings. Then we estimate the PE ratio at 20. Then take 20 times $7 to get an expected price in ten years of $140 per share. We want to get 15% growth on our investment per year. When something compounds at 15% per year, that means it doubles twice or goes up by 4 times. So divide the $140 by 4 to get $35 for the stock price today. And since we want to pay only 50 cents on the dollar, we take that in half again and get $17.50. We’re pretty confident we can get 15% a year and we have a big margin of safety.
• The great Bull giveaway. Winner to respond by adding a comment into the show notes.
• Lots and lots of Tools in the crib on this show!
• The Guru Smackdown pits Greenblatt against Haugen. Read the Barron’s article from Haugen’t web site at http://www.quantitativeinvestment.com/Barrons.pdf
• WHEN to buy a mutual fund.
• Buy the Rule #1 Book
• Buy the Little Book that Beats the Market
• Got art? I need a new logo for the Mad Money Machine. Send something, anything, my way.
• If you like the show, please write a review at iTunes by clicking the Subscribe with iTunes button.
• I thrive on your feedback. Send me email at feedback@MadMoneyMachine.com
• Or call me at 20-mp3-4-iPod

Music from the Podsafe Music Network:

Runaway Train by Under Feather
Facsimile by Briareus
the one by The Woodshedders aka The Hot Club of West Virginia
Money by Theory in Motion
The Pop Culture by DJ Top Shelf
Soundtrack by Blackout Gorgeous
Goof by Binärpilot
Groove IT by Denis Kitchen

download the show directly MMM-016.mp3

GOT MOT. Dividend update

Hey what a day. Got our Motorola (MOT) at $22.25 at 10:30 this morning as promised for the Portfolio Smackdown. Then it rose 2.3% by the end of the day. Not a bad days work!

Here’s an update on some dividends recently paid out:
Vanguard Total Market (VTI) paid 0.526 per share or $85.21 to us
Vanguard Small Cap (VB) paid $0.01 per share (whoo hoo!) or $1.68 to us
Vanguard REIT (VNQ) paid $0.404 per share or $67.87 to us

Altria (MO) will pay $0.80 on 4/10/06
optionsXpress (OXPS) will pay $0.05 tomorrow
Sara Lee (SLE) will pay $0.198 on 4/7/06
Paccar (PCAR) paid $0.25 per share or $40.25 to us

I have decided to take the dividends as cash (to simplify the accounting) so that is where the money shows up. Also note that the %Gain of each stock does not therefore factor in the dividend paid by that stock.

Hey accountants: I’m open to ideas on how to make this all better!

Survey Says…

Here are the results in the MMM Poll which asked, “Which segment(s) of the Mad Money Machine show do you like?”

There were 82 votes total

1. 65% Tools in the Crib (53 votes)
2. 46% Mad Money Review (38 votes)
3. 43% Guru Roulette (35 votes)
4. 39% Portfolio Smackdown (32 votes)
5. 30% New Money (25 votes)
6. 5% I don’t like the MMM! (4 votes)

Thanks for voting!

Let’s pick up some MOT

The Cramer Portfolio has an empty slot for a technology company. We sold iRobot (IRBT) perhaps a little too soon but for tax loss reasons. Should we buy some Motorola (MOT) at this level? Earnings per share: $1.81. Estimated growth rate: 12%, average PE: 17 works out to a sticker price of $23.62. The closing price was $21.81. I’ll watch it tomorrow and if it hasn’t rocketed up by 10:30 we’ll add some to the portfolio. Or if it looks like it is headed straight down for awhile, then we’ll wait for it to settle. But we will try to pick up about $9500 worth or so tomorrrow.

MOT shows up in the magicforumulainvesting.com site. It gets a StockScouter rating of 9 out of 10.

Last one to fill is the speculative play. Any ideas?

Best way to buy Cramer stocks.

I would like to thank Jim Cramer for stressing recently and repeatedly to us viewers not to pay premium prices for the stocks he recommends. He made it clear in no uncertain terms on Monday that viewers should not pay up for stocks he recommends. It really helps reconfirm that he is on our side.

Now I’m in a quandry about how to measure the performance of his stocks. From our perspective the performance should be measured from the first price at which we can buy it. From his perspective the performance should be measured from the closing price of the day he mentions it. I’m starting to wonder if measuring performance even makes sense at all. He said Monday that “the timing isn’t set in stone, in fact it’s flexible.”

Perhaps a greater service I can provide to you, dear reader and listener, than measuring performance would be for me to add additional information about the companies he is educating us about. For example, when he mentions a company like The Andersons, Inc., I could do a little additional homework and summarize for you some of the key statics about the stock’s valuation. Here’s what it might look like:

And if you’ve read Rule #1, you’d know what the numbers mean. I’ll explain them in my own way at another time.

But the bottom line here is that The Andersons, Inc. doesn’t look particularly cheap at $71.60 if we assume a growth rate of its earnings at 15% every year for 10 years and an average PE ratio of 20 then. (Its historical PE average is 10.) The sticker price works out to be $67.80 and Rule #1 says we should buy $1 stock for $0.50.

Or I could point you to other sites that have a different rating on the stock.

So that may be a better service that I can perform instead of just talking about the “Cramer Crackle.” Whaddya think?

—–
So what about buying Jim’s recommended stocks?

I think the best way to buy Jim’s recommended stocks is to watch his show then completely forget you watched it. I’ll explain. When we watch his show, he is so energetic and evangelistic that we’re ready to fall on our knees and ask for the shares at any price. But by the next week, do you remember what stock he was high on? For example, do you remember last Monday’s stock MSPD? Probably not.

So the way to watch Mad Money is to be entertained by it and to be educated by it, just like Jim says at the beginning. Don’t try to make money off of it hastily.

But here’s the follow-through: Find a stock on your own through some other venue. THEN, go back through the archives at thestreet.com and see what he said about it on his show. If he liked it, then that’s another arrow in your quiver.

And here’s a tip (and the way I keep track of what he says about companies): Download a copy of Evernote from evernote.com (it’s free!). Install it. Then every night at about 9 or 10PM Eastern time they post the show notes. Go to thestreet.com and click “Mad Money Recap.” When that page comes up, click on “PRINT THIS STORY” (but don’t print it) Then right-click the browser page and choose “Add to Evernote” This will copy the text of the recap into Evernote and you’ll have it in your own personal archive.

At the top right of Evernote then you can type in your favorite ticker symbol and get instantly Cramer-icized!