Gurus, Numbers and Excel Calculators

I am going to talk about some gurus, numbers and excel calculators. Everything you read is my opinion and some things I’ve learned.

A Great Teacher

Phil town is a bit of a guru that I follow. He is a “bit” of a guru because he isn’t required to file a 13F filing. He is great at teaching beginners how to invest. A few books of his are Rule 1, Payback Time and Invested. He also has the Rule 1 website, Rule 1 Finance Blog, InvestED podcast and the Rule 1 Youtube Channel.

His teachings are basic and you can definitely find more elaborate valuation models in other books like Margin of Safety or Security Analysis. I tried starting out with Security Analysis,  because it is considered one of the best books ever written on business valuation. That was a mistake. In my opinion, it is too complex of a book to start out with. At least it was for me.

After further research, I stumbled upon Phil. I haven’t found anyone yet that is as good at explaining complicated investing topics to people looking to learn about investing, but don’t know where to start. Although Warren Buffett simply gives out the best investing education you will find anywhere, he’s so smart that it can still be somewhat intimidating to a beginner.

The Art of Business Valuation

Margin of Safety by Seth Klarman is super expensive because he only had 5,000 copies printed. There is a PDF version of Margin of Safety floating around the internet. He doesn’t really care to print more books. Probably because he doesn’t need the money. Warren even suggested that Seth is the most impressive investment professional and that he could be considered the next Warren Buffett.

The single greatest edge an investor can have is a long-term orientation

Seth Klarman

Business valuation isn’t an exact science though. It’s more of an art. From my experience, Phil’s methods are awesome at finding wonderful companies. His valuation methods also do a pretty good job at reaching an intrinsic value somewhere in the same ball park as the gurus.

What I Look For in A Business

Phil teaches that when finding a company with a moat, to look at the growth rates for Book Value Per Share, Earnings Per Share, Sales Per Share and Operating Cash Flow Per Share. These rates growing greater than or equal to 10% signifies a historic moat.

He teaches that Return on Invested Capital and the Debt to Earnings ratio is great for determining how management has historically performed. A ROIC greater than or equal to 10% signifies that management is doing a good job at allocating capital. The least amount of debt compared to earnings is best, because you are less likely to get screwed from a company filing for bankruptcy. A company with a Debt to Earnings ratio of less than 3 is good, between 3-5 is alright and 6+ is not so good.

Only when the tide goes out do you discover who’s been swimming naked

Warren Buffett

He also teaches to look at the growth rates and ROIC on a 10 year, 7 year, 5 year, 3 year and 1 year basis. Looking at the numbers over these various time periods will show you if they are shrinking, remaining constant or growing. Whatever it is that the growth rates are doing, you have to keep that in mind when choosing a “Windage” growth rate for company valuations.

The Toolbox

I am subscribed to the Rule #1 Toolbox. I have learned a lot from reading Phil’s 3 books, watching his youtube channel, listening to his & Danielle’s podcast and reading his blog. Later, I am going to do this with all the guru investors that I follow. This is so that I can install into my brain the way they think. Phil just simplifies it better than anyone I’ve found so far.

Not only do I subscribe to his Toolbox as a way of giving back for everything I’ve learned, but I’ve found it to be a great tool for finding companies. It turns out that most of the “wonderful” companies that gurus pile into are usually some of the top ranked companies on the Toolbox. It also has 10 years of data, calculators, growth rates, regulatory filings, news, insider trading and analyst ratings. I believe it is worth the monthly subscription.

The only flaw I’ve found so far is in the growth rates. This flaw is that the growth rates are calculated from numbers of the most recent year. If the company is going through a temporary “event” that produces bad numbers or magnificent numbers for this most recent year, the growth rates will be flawed. If the event doesn’t really affect the numbers or there’s no event, then the growth rates work great. To combat this flaw, I created my own Microsoft Excel calculator.

The Calculator

With this calculator, I am able to go back to whatever year was “Normal” and see what the growth rates were leading up to that year before the event. I created a calculator for all the growth rates: BVPS, EPS, SPS and OCPS. I also added Return on Invested Capital and the Debt to Earnings ratio.

Phil has an Excel Formulas PDF Document on how to calculate the growth rates in Excel using the “Rate” function. It is on the Resources Page of his website. I think you have to put in your email to receive it though. I just took his quick instructions and applied it to every year that can be calculated with all previous years for 10 years of data. This allows me to see what the numbers looked like without an event.

The other reason I created the Excel calculator is because I don’t want to be dependent upon a website. With my calculator, I can go directly to the annual reports filed by a company and record the data I need. As I start filling in this data, other parts of the calculator will automatically be filled and calculated for me.

The Usefulness of My Calculator

Let’s take Texas Roadhouse (TXRH) as an example. TXRH is in the restaurant industry and was forced to shut down their business for some time in 2020. This obviously affected earnings in a negative way big time. Earnings Per Share grew from $0.84 in 2010 to $2.50 in 2019. Then it went from $2.50 in 2019 to $0.45 in 2020. This is what a negative event looks like in the numbers.

That Makes the EPS Growth Rate 12.9% for 9 years, 13.7% for 7 years, 14.9% for 5 years, 14.6% for 3 years and 10.1% for 1 year at the time of this writing. I have all 10 years on my calculator, but just chose these for the example. If I were to base my growth calculations off the most recent year, 2020, the growth rates would have been -6.1% for 10 years, -12.5% for 7 years, -20.2% for 5 years, -38% for 3 years and -82% for 1 year. This is because of the event Texas Roadhouse experienced in 2020. The event was Covid-19.

We can take Alpha Pro Tech Ltd. (APT) as another example. APT is in the business of disposable protective apparel, building supply and infection control products. As you can guess, their earnings were affected in a positive way from the same event.

EPS went from $0.27 in 2018 and $0.22 in 2019 to $2.01 in 2020. Earnings per share grew from $0.10 in 2010 to $0.27 in 2018. That makes the EPS Growth Rate 13.2% for 8 years, 12.5% for 5 years and 8.3% for 2 years. If I were to base my growth calculations off the most recent year, 2020, the growth rates would have been 52.1% for 8 years, 90.6% for 5 years and 172.8% for 2 years.

Why The Calculator is Useful

If I were to choose a windage growth rate for my business valuations based on the numbers from the most recent year, my valuations would be flawed. The valuation for TXRH would be way too low and the valuation for APT would be way too high.

The event for both companies was the Coronavirus pandemic. It affected Texas Roadhouse negatively, because they were forced to close their restaurants temporarily. It affected Alpha Pro Tech positively, because they make infection control products. I consider 2019 the most recent “Normal” year for TXRH and 2018 the most recent “Normal” year for APT. I will use these “Normal” years for all my valuation calculations.

A cheap price alone is not sufficient reason to invest. If something is forever cheap, then it has no recognized value, and its stock may very well remain a worthless piece of paper. For a bargain to soar in price, there has to be a catalyst, and from an investment perspective, that catalyst is change

Jim Rogers

The reason I am comfortable going back a couple years to make a valuation on a business is because I know the event is temporary. As soon as this Coronavirus is in the past, I’m confident the numbers will go back to the level they were at before the event.

Use It If You’d Like

I’m not perfect and there are probably flaws in the calculator that I haven’t found yet. I’m also not an expert in Microsoft Excel. I literally had to research how to create everything in the calculator and it took up no less than 20 hours of my weekend. You are welcome use this calculator if you’d like. If you find it beneficial, feel free to make a donation and support me on my path.

This is a quick overview of some of the more detailed numbers I look for in a company. I will get more detailed later. If you’d like a broader view of my investment style, check out my previous post “This is an Overview of My Investment Style”.