Archive for December, 2014

Broken Company, Broken Stock or Broken Market?

Tuesday, December 23rd, 2014


I get questions from readers on how to know whether its time to buy or sell a particular company. This is particularly the case when you have a company that investors see has good numbers but that their stock price does not reflect it due to the market not rewarding the company’s success.

I thought I’d share with everyone some of the things I look at when making a decision to buy or continue to hold a company in this situation. I picked a company that has a pretty ugly chart but one that I feel pretty strongly about as being one that should remain in client portfolios: Computer Programs and Systems, Inc. (Ticker: CPSI).

When looking at a company, I always make sure that there is a reason to either buy it or to continue to own it. I document an Investment Thesis for the company which is a good discipline to adopt for anyone that invests in common stocks. Remember, you are an owner of a company when you buy its stock – not just an owner of the stock. For CPSI, the Investment Thesis looks like this:

INVESTMENT THESIS: CPSI is the leading provider of electronic health record systems for hospitals. The company has over 30 years of experience in the community and rural hospital markets for healthcare IT and has a leading position in its market. The company focuses on Electronic Health Records, order processing, documentation, and picture archiving and communication systems. CPSI’s business has benefited strongly from government action over the past few years. First, ARRA both increased compliance requirements for electronic healthcare records and provided subsidies to help organizations attain IT products. Obamacare required digitization and electronic availability of patient records. As a leader in small/midsize markets, CPSI is in a strong position to benefit from these additional regulatory requirements put on health care providers.

To me, this thesis says the company is a leader in its field and that the market for its services is growing in a large way due to escalating governmental regulation that will ultimately increase demand. A pretty compelling thing in my book.

Next, I want to verify the company’s earnings growth and financial strength. Fortunately, I have a tool that none of you have access to – its our proprietary Earnings Growth Model and Financial Strength Model. These two models had their origin in my Master’s Thesis many years (who am I kidding, three + decades) ago. Back then, my thesis aimed to prove that there are specific combinations of analytic ratios that would lead to accurate forecasts of stock price movement. One model focuses on 17 different ratios that pick apart the earnings growth potential of a company and the other uses a dozen ratios to pick apart how safe of an investment the company is based upon the solidness of its balance sheet.

In the beginning, it was a very cumbersome task to acquire annual/quarterly reports for companies and make the calculations. Today I have an automated service that downloads the most current data on +6,000 publicly traded companies and using the ratios in each model ranks them on a bell curve from zero to one hundred, with one hundred being the highest score attainable.


As you can see from the above graphic, this company rates very highly in terms of earnings growth and financial strength.

Which leads me to think about whether this is the time to buy more shares of it or just to hold onto the ones we have. There are two analyses I make that guide me in this decision. One is to determine if the stocks is over or under valued at its current price level. The other is to determine within what range of values I’d like to be a buyer of this company, what range of values I’d just hold onto it, and finally what range of values would I consider selling it.

Lets look at the first issue: is the company over or under valued.


My analysis here involves looking at three standard valuation ratios from a historic standpoint. I take the average of the Price to Book ratio, Price to Free Cash Flow ratio and the Price to Earnings ratio over the past ten years and extrapolate a stock price based upon forward earnings estimates. This stock price basically tells me what this company would trade at if it were trading at the average valuation of the past 10 years. I then compare it to the current price and it gives me an over or under valued reading. In the case of CPSI, this reading says that the company’s stock price is 26% below its average historic valuation and we should consider buying more of it.

Now lets look at the other issue: what price level makes analytical sense to be a buyer of this company.


This graphic documents for me the analysis we perform to determine the range of prices that make sense to be a buyer, a seller or just an investor that should hold onto their shares.

This analysis starts with a calculation of the earnings per share the company should expect five years into the future based upon its earnings growth rate. It then multiplies that five year forward number by the high and the low Price to Earnings ratio of the past 10 years to give you a feel for the possible trading range of the company. It then stratifies that trading range into thirds, with the top third indicating that its time to consider taking profits, the middle third telling you to consider holding onto this stock, and the bottom third telling you its time to consider buying more shares.

In the case of CPSI, the current stock price for the company is nearly at the bottom end of the trading range and we should consider buying it. I also include a risk/reward calculation to help back-up the trading range calculation. As you can see from this graphic, the potential reward far outweighs the potential risk.

All of these calculations are simply tools that I use to help me make informed decisions. Ultimately, the decision to buy, sell or hold is made based upon analysis of the company, analysis of the market, and analysis of extraneous factors that could impact the future that are not part of any financial analysis of the company’s current operations – things like the likelihood that government regulatory over-reach will continue in the future.

Ultimately, based upon my use of these tools and analysis of the extraneous factors, I believe I will be a buyer of this stock after the first of the year once I take time to analyze the various technical indicators that I’ve discussed on the blog several times in the past which will help me determine the timing of the purchase. And to answer the question posed in the title, I’d say its a broken market for not recognizing the investment potential of this company.

All of this takes a lot of time – but that is important if you are going to be successful as an investor.

If you don’t want to put the time into investing your own money, why not make a New Years Resolution to give us a call here at BankChampaign (351-2870) or drop me an email ( and open an investment account. We can then use our time-tested systems to manage your portfolio as described above.

Have a Merry Christmas, Happy Hanukkah, and Prosperous New Year!

I hope you enjoy this selection of music for the season…


Year-End Financial Checklist

Monday, December 15th, 2014

As you start to think about all of the things that you need to do in the next two weeks before we see 2014 in the rear view mirror, you may want to review our Year-End Financial Checklist.

You can download it from our website here:

This Year End Financial Checklist will give you some helpful hints and reminders of matters to check and address prior to December 31st. The checklist covers a variety of financial and planning topics including, but not limited to, tax, investments, and giving.

BankChampaign offers full service, fee only financial planning services covering the areas of General Financial Planning, Investments, Insurance, Employee Benefits and Retirement Planning, Tax Planning and Estate Planning, so if this checklist elicits questions or planning needs, please do not hesitate to contact John Clausen at (217) 351-2870 or John is a Certified Financial Planner and can help you set a financial course for the future.


There is No Forever in Portfolio Management

Monday, December 8th, 2014

Double Click for an Enlarged View

The image above is adapted from an article Barry Ritholz wrote in 2012 that discussed Forbes Magazine’s forever portfolio – in a Forbes article from 2000, they postulated that you could buy the ten stocks in the list using a buy and hold strategy for at least a decade.

As you can see from the list, only one of the companies stock price is actually higher than it was in 2000 (Viacom) while there are two bankruptcies and two takeovers at prices well below the 2000 prices.

The point of this exercise is to think about what active portfolio management gets you. A portfolio manager’s job is to review the holdings in a portfolio and ensure that the companies in the portfolio are operating efficiently and effectively.

With a buy and hold strategy like described by Forbes, what you risk is that while you are not watching your holdings, the companies can deteriorate and under-perform (or worse as four of the above did).

Another strategy that gets a lot of play as anti-active management is indexing. Indexing can be a fine strategy if you simply want to aim for average. Take a look at the graph of the S&P 500 below:


This is a graph that shows a 13 year view of the index, from April 2000 to April 2013. The index returned exactly 0% during that 13 year period of time.

It has performed very will recently, and there are always periods of time when indexing outperforms active management due to the structure of how the index is weighted. Apple being the largest company has the biggest impact on the performance of the index as you can see in the graph below that shows Apple and the S&P 500 Index plotted together:


Also positively impacting indexing the past couple of years has been the easy money policy of the Federal Reserve called Quantitative Easing which credited the big investment banks with newly created money for the purchase of bonds. These investment banks purchased billions of dollars of S&P futures contracts, moving the companies in the index higher. One statistic shows that the 50 largest companies in the S&P 500 have accounted for nearly all of the index’s performance over the past couple of years.

As we move into 2015, the Fed’s QE activities are ending and they are contemplating raising interest rates. Those forces will act in the opposite manner as the easy money forces acted, putting pressure on the index. Also of concern is that Apple’s comparative numbers in 2015 will be difficult because of the complete revamp of the iphone in 2014 and its huge impact on 2014 earnings. Apple also has no similar revamp of its ipad line planned, so it will likely not have the huge impact on the index that its had recently.

Active portfolio management will be increasingly important as the next stage in this market cycle unfolds – corporate earnings growth and valuation will again matter, making stock picking based upon those factors critical to portfolio returns while portfolio managers that rely on indexing for their returns will likely be losing their cool.

As we move into 2015, I will begin to share with you some of our analysis that shows companies we like because of their earnings and valuations. Until then, enjoy this video from REM that plays upon the South’s colloquial version of losing your cool.