February Financial Newsletter Written by Alain Roy CEO LTI Long Term Investing February 7, 2011

February Financial Newsletter

The Newsletter Launch Behold the new LTI Newsletter Layout. Click on this link for the intro music and only then read the section below (turn you speaker volume to 8/10). Trust me its 1000% funnier with the music.

In this issue:
The Newsletter Launch Stock Market Review The Fed Effect The LTI Newsletter Survey Making the Gs with Chevron Is Target a good buy?

http://www.televisiontunes.com/Star_Wars.html

A long long time ago in a cold wintering town far, far away . . . . A NEW NEWSLETTER LAYOUT It was a period of financial uncertainty. It was 1979 and the US inflation rate hit 11.3 % and in 1980 jumped to 13.5%. A brief recession hit in 1980 in the US and affected many major industries such as automobile, housing and steel causing a downturn in the economy. This ultimately affected many Canadian families as well. The federal funds rates which was 11 % in 1979 skyrocketed to 20 % by June of 1980. It was at the peak of this highly inflationary period that the LTI President and Owner to be, was born, June 15, 1981. The doctors said he had the highest levels of financial and investing midi-chlorians ever seen from a baby born in Cochrane. Scientists believe this child was born partly from his parents and partly due to the influence of the investing midi-chlorians themselves. It was hypothesized that the financial and investing midi-chlorians came from the Aura Borealis and deposited in the most northern parts around Cochrane. Still no one really knows how this child was born with such high levels. Twenty nine years later this boy, now a wise and devilishly good-looking man, provided his LTI ites with the investment and financial knowledge that runs through his veins. Midichlorians have helped him earn a 33 % rate of return on his investment over the past two years and he wants to pass this knowledge on to others. He is very excited to introduce to you the new LTI Monthly newsletter layout. He hopes this monthly information will restore wealth and financial freedom to the galaxy . . . .. especially Egypt.

BFIG Stock Market Challenge LTI Book of the Month

Dont fight the fed! I jumped into the river of flowing money and am just letting the boat flow where the money is going
Dave Burch, P.Eng
25 years of Investing Experience Subscriber to the Strategic Value Management service by Ross Healy

STOCK MARKET REVIEW

January is the time of year for many of investors to receive 20 pages from their mutual fund company on how well or poorly their investments performed. Maybe some of you received a call from your financial advisor to review your portfolio performance. For the do-it-yourselfers you likely closely monitoring your results anyways and know how you faired. In order to know if your portfolio performed well you need to benchmark yourself versus a standard. The S&P 500 is often used as an investment benchmark. The table

below shows the growth rates of major indices in 2010.

Index S&P 500 (USA) TSX (Candian) FTSE 100 (Europe) Hang Seng (Asia) VWO (Emerging Markets) 2010 Rate of Return 12.7% 14.4% 9.3% 5.3% 17.3%

So how did you do in 2010?

Did you beat the S&P 500?

If not then you have a lot of

reason to be disappointed. You could have put all of your investments in an S&P index fund by Vanguard and achieved 12.7% and have done jack squat all year. Think about that for a minute or two.

If youre financial advisor has your portfolio looking something like the portfolio below and your returns are not higher than 10 % than you should be disappointed. Give him/her a call and say The CEO of LTI wants me to ask youwhat gives!! My returns are crap compared to the indexes. I coulda done better myself. eh: 25% in Canadian companies 15 % in US companies 30 % in Emerging countries 20 % in bonds 10 % in Precious metals How is it possible that markets did so well with ooooooo thats an interesting conversation

This leads right into the next section.

unemployment at the highest levels in years, countries going bankrupt, US housing in the dumps and no real sustained improvement in sight. Its easy. THE FED!!

THE FED EFFECT On October 15, 2010 Ben Bernake said he would start up the printing presses to jolt the economy. I did not fully catch the importance of this at the time. Starting in November of 2010 the Federal Reserve started purchasing $75 billion per month of US Treasury bonds on the open market. This is in addition to the $35 billion a month it is spending to buy back mortgage bonds. Ben is printing $900 I billion to buy back treasury bonds.i

caught a picture of him in action in November. stressed out. Check him out. He looks

One

of

my

top

ten

resources

for

investment information is the Goatmug. He is the man. Read this post for more

information on the Feds effect of Treasury bonds buying. http://goatmug.blogspot.com/2011/01/economic-warfare-part-1-inflation-bombs.html The Fed Effect: 1. Printed money works its way to the big US banks 2. The banks dont lend it out as intended by Ben 3. The banks instead buy stocks and precious metals like Gold and Silver and whatever suits their fancy 4. Stock markets advance, especially commodities, even though fundamentals are crap, and Bens hope is that this will make people feel wealthy again 5. Feeling wealthy hopefully causes people to spend and asset prices get dragged up 6. Hopefully the economy gets dragged up with them 7. End result: Stock markets move up and fundamentals remain bleak This has caused my investing buddy, Dave Burch, to pull out his hair and yell out Dont fight the Fed! He decided to jump in the river of flowing money and just decided to let his boat float to

where the money is going. Dave is depicted here by the donkey in the boat. What a run since early

September. 22% return months! in four

What is the take home message here? When the Fed is pumping so much money into the system nothing makes sense and there is a good chance markets will drift upwards. The $70 billion per month in Treasury buying will continue until June of this year. After that

there will probably be a Quantitative Easing III which could have the same effect. Well see. Proceed with investing caution and dont get greedy!

LTI NEWSLETTER SURVEY

On the week of Jan 31st I sent out a survey to all the LTIites out there.

The

purpose is to get your feedback on what you what to see in this newsletter and to help shape the future of LTI. At the time of this writing the participation rate is 18.5%.

Anything above 10% or above is considered good. Ill have to tell my mom and my wife Nikki to fill it out to help move the average up

My plan is to share the results of the survey in March issue. For those who took the time to fill out the survey I really appreciate your feedback. So far there are some great ideas and feedback I will be definitely using them in future issues. MAKING THE GS WITH CHEVRON I couldnt wait for future issues to write about this idea that one of the survey responders mentioned. This dedicated LTIite wanted to hear about success stories of the LTI CEO himself and stories from other successful LTIites after implementing some of the A one information provided in this newsletter. It was late 2008 and I had just developed my 5 Steps to Investing in Stocks. I had analyzed over 50

companies after using a Globefund on filter revenue and

based growth

profitability. I had my sectors picked out based on the following business cycle. The recession was En Vogue and I decided to buy the best companies under the Expansion column as this was the next

natural business cycle. I had moved all of my RRSPs out of crappy mutual funds and into a self directed brokerage account. I was ready to Do-it-myself.

Then I just flew around high above the earth and just waited around like a shit hawk waiting for a good buying opportunity. I new

which companies I wanted to buy, I had my buy P/E multiples calculated. I just

waited and flew around waiting to pounce. Then something so spectacular occurred. A modern day stock market meltdown filled with panic, fear, failing banks and blood on the streets; March 2009. In hindsight this was one of the best buying opportunities of our time. It is hard to climb the wall of fear during times such as these. You gotta Back up the Truck like my good investing friend Dave says. yelling at me from the pier. Truck Al.Back up the Truck!! Dave was Back up the
Back up the Truck!

Here she was; March 2009. What a beautiful sight.

I swooped down and bought some Chevron (Ticker symbol CVX) near the 2009 low and bought the again at low.

2010

Round one was at $65 and round two was at around $68. And running $100. whopping return investment of 43% share. Good thing I bought 1,000 shares :O !! now up Thats its to a

average on

On top of that Chevron has increased their dividend payment since I bought it in 2009. Chevron has a good solid history of raising their dividends over time. I am still holding all the Chevron stock I bought. returns have Its a good solid company and the been tremendous. Two

obviously

purchases, 50 % return and an increasing dividend payment. That one deserves a cold one!

IS TARGET A GOOD BUY A fellow LTIite and I were sharing a few emails. I asked him how his investing was going. He said pretty good and that he was eyeing Target as his next investment. I asked him if he wanted me to perform a Fundament Analysis on the company. A Warren Buffet style analysis? Absolutely was his reply.

We all have different styles of investing and you have to find one that works for you. I am a value yield investor; Im a fundamental guy. I like to look at the long term

fundamentals of a company by analyzing five to ten years of financial statement information. This helps determine if the company is indeed a good company to put my hard earned money in.

Over time Ive developed and updated a Financial Statement Analysis Spreadsheet that is part of my Five Steps to Investing in a Stock. The Fundamental Analysis step being the most

important step by far. Step 3 of the 5 Steps to Investing in Stocks is: Fundamental Analysis

Start by compiling five years of key financials from the companies financial statements. Here is what Targets information looks like (use http://money.msn.com/ to get this info): On this table I look at: 1. Are revenues increasing? 2. Are EPS increasing? 3. Do they have enough cash to cover their long term debt or are close? 4. The most important one: Are their retained earnings growing? 5. Are they buying back stock?
Item Income Statement Net Sales (Revenue) Cost of goods sold Gross Profit SG&A Research and Development (exploration) Depreciation Interest Expense Operating profits before interest and taxes Income Taxes Net income EPS Diluted 2010 65,357 45,583 19,774 13,078 0 2,023 707 3,872 1,384 2,588 3.30 2009 $64,948 $45,766 $19,182 $12,954 $0 $1,826 $727 $3,536 $1,322 $2,214 2.86 2008 $63,367 $43,766 $19,601 $12,670 $0 $1,659 $669 $4,625 $1,776 $2,849 3.35 2007 $59,490 $41,073 $18,417 $11,852 $0 $1,496 $665 $4,497 $1,710 $2,787 3.21 206 $52,620 $35,703 $16,917 $11,185 $0 $1,409 $650 $3,860 $1,452 $2,408 2.71

Balance Sheet Cash Marketable Securities Inventory Accounts Receivables Property Plant and Equipment Goodwill Long Term Investments Total Assets Accounts Payable Short Term Debt/Notes Payable Long Term debt Due Long Term Debt Total Liabilities Preferred Stock Retained Earnings Treasury Stock - Common Shareholders Equity Cash Flow Statement Capital Expenditures Issuance (Retirment) of Stock, Net Cash Flow from operations

$2,200 $7,179 $7,882 $25,280 $59 $0 $44,533 $6,511 $0 $1,696 $15,118 $29,186 $0 $12,947 $0 $15,347

$864 $6,705 $8,753 $25,756 $60 $0 $44,106 $6,337 $0 $1,262 $17,490 $30,394 $0 $11,443 $0 $13,712

$2,450 $6,780 $8,651 $24,095 $60 $0 $44,560

$813 $6,254 $6,757 $21,431 $60 $0 $37,349

$1,648 $5,838 $6,226 $19,038 $60 $0 $34,995 $6,268 $0 $753 $9,199 $20,790 $0 $12,013 $0 $14,205

$6,721 $6,575 $0 $0 $1,964 $1,362 $15,126 $8,675 $29,253 $21,716 $0 $12,761 $0 $15,307 $0 $13,417 $0 $15,633

$1,729 (376) 5,881

$3,547 (2,772) $4,430

$4,369 (2,267) $4,125

$3,928 (720) $4,862

$3,388 (1,025) $4,451

These are the raw numbers that are used in my Financial Statement Calculator.

This

calculator produces ratios which you can use to compare similar companies and their financial performance. Here is what this would look like for Target: When you compare two spreadsheets like this of two companies you can tell right away which one has a better competitive advantage.
Item 2009 2008 2007 2006 2005 Average Stdev Comments
GPM> 40 % = GOOD (D.C.M), GPM < 40 % = Highly Competitive market, GPM < 20 % = fiercly competitive market < 30 % = fantastic. Companies with SG&A in the 20 % to 80 % range are ok. If > 100 % then its likely in a highly competitive industry where no one entity has a sustainable competitive advantage Companies that have to spend heavily in R&D have an inhenrent flaw in their competitive advantage that will always put their long term economics at risk, which means they are not a sure thing The lower the better < 15 % is good. Want to see consistency here If >20 % there is a good chance it has a competitive advantage. If less than 10 % then likely in a highly competitive industy with no durable competitive advantage Decreasing is a red flag Decreasing is a red flag >12 = good # years to pay off equipment Higher not necessariily better. Higher means they are more vulnerable to entry of business by competitor. The higher the capital to get in the game the harder it is for the competitor # years to pay off LTD with Earnings Less than 0.8 and there is a good chance they have a competitive advantage. Remember share buybacks make this number bigger < 25 % means D.C.A. Historically using 50 % or less of earnings is a good

Gross Profit Margin

30%

30%

31%

31%

32%

31%

1%

SG&A/Gross Profit

66%

68%

65%

64%

66%

66%

1%

R&D/Gross Profit Total SG&A and R&D/Profit Depreciation/Gross Profit Interest Expense/Operating Profit Income Taxes Paid/Income Before Taxes

0% 66% 10% 18% 36%

0% 68% 10% 21% 37%

0% 65% 8% 14% 38%

0% 64% 8% 15% 38%

0% 66% 8% 17% 38%

0% 66% 9% 17% 37%

0% 1% 1% 3% 1%

Net Profit Margin Operating profit Margin Return on Sales (ROS) Return on Equity (ROE) Net Receivables/Total Sales Prop/Plan & Equip/ Earnings

4% 6% 6% 17% 12% 9.77

3% 5% 5% 16% 13% 11.63

4% 7% 7% 19% 14% 8.46

5% 8% 8% 18% 11% 7.69

5% 7% 7% 17% 12% 7.91

4% 7% 7% 17% 12% 9.09

1% 1% 1% 1% 1% 1.63

ROA (Return on Assets) Short Term Debt to Long Term Debt Long Term Debt/Net Income Adjusted Debt to Shareholder's Equity Capital Expenditures/Net Income Cash Return on Sales Cash Ratio Fixed Asset Leverage Ratio R&D as % of sales Inventory Turnover Ratio Accounts Receivables Turnover Days Payable Long Term Debt as a % of capital Current Ratio

6% 0.00 5.84 1.90 67% 9% 0.34 2.56 0% 56 38.77 51.44 0.34 0.3

5% 0.00 7.90 2.22 160% 7% 0.14 2.61 0% 54 37.89 52.07 0.39 0.1

6% 0.00 5.31 1.91 153% 7% 0.36 2.78 0% 54 37.54 55.44 0.36 0.3

7% 0.00 3.11 1.39 141% 8% 0.12 2.94 0% 54 37.10 57.07 0.30 0.1

7% 0.00 3.82 1.46 141% 8% 0.26 5.53 0% 30 20.25 32.04 0.30 0.3

6% 0.00 5.20 1.78 132% 8% 0.2 3.5 0% 47.9 33.2 49.2 0.3 0.2

1% 0.00 1.87 0.34

38% place to be 1% 0.1 1.4 0% 12.1 8.6 11.6 0.0 0.1

Tells us efficiency of sales into cash. If Return on Sales is lower than Net Profit Margin this is not good. Decreasing is a red flag. Bigger the better. Means more cash to cover liabilities The bigger the better If this drops and profits inch up it could be because they are cutting R&D. Decreasing is a red flag Increasing is a red flag. Mean not sellign enough Increasing is a red flag. Mean not getting paid quick enough Increasing is a red flag. Means not able to pay Increasing is bad Bigger than 1 is good. Decreasing is bad

To make this a big easier, as this can get very confusing to someone who has never seen a financial statement before, I summarized the Target ratios into a 5 year average

Lets go back to my initial questions: 1. Are revenues increasing? a. Yes by 6% on AVG 2. Are the EPS increasing? a. Yes by 6% on AVG 3. Do they have enough cash to cover their long term debt? a. No: Cash ratio is 0.22 4. Are retained earning growing a. Yes by 2 % 5. Are they buying back stock a. Yes, according to their cash above Okay so far not bad. Lets look at flow statement

other key ratios before comparing them to Walmart: 1. Gross Profit: over 40%) 2. SG&A take up 66% of profit. A bit high 3. Net Profit Margin is 4 %. This is low. 4. Return on Equity must be over 12 or else toss the 31% (we want

company in the garbage. Target has an ROE of 17 % on Avg. Pretty good. 5. Adjusted Debt to Shareholders Equity a. You want this to be below 0.8 They are 1.8. Yikes! 6. Capital Expenditures/Net Income a. 132% ! Fairly high b. 50% or less if where you want to see a company. 25% or less is the best.

Overall Target seems to have some investing potential. competitor; Walmart.

Lets compare them to a

Lets compare Walmart and Target head to head. Line by line:

Conclusions from the Fundamental Analysis of Target and Walmart If this was a boxing match Walmart would have won all five rounds Fundamentally based on five years of financial performance data Walmart is the clear winner here An investors next step would be to read the latest

Quarterly and Annual Reports of each company to get a better picture of where each company is heading Target just bought out Zellers and plans to expand could into be

Canada.

There

growth opportunities there Walmart just bought a large consumer staples retailer in South Africa. Africa is the fastest growth market per capita in the world right now. Zellers is expanding into the most competitive environment in a developed country and Walmart is expanding where the most growth per capita in the world is happening.

To my fellow LTiite the PMP himself, Dustinatrix, I do not recommend buying Target. I would rather see you buy the # 1 in the Consumer Staples Category; Walmart. Dont settle for # 2.

In addition the growth in the Walmart dividend is at a higher rate that than of Targets Walmart is one of my nine holdings I own. I like to buy Walmart when it has a P/E of 13 or under. The lower the better obviously cause you get more bang for your buck.

More long term financial information can be found here. This is the best website ever:

http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=US:WMT
Walmart Ticker Symbol = WMT Target Ticker Symbol = TGT

I will dedicate a newsletter this year to my Five Steps to Investing in Stocks and will provide a step by step guide with links to resources you can use.

BROCK FINANCE INVESTMENT GROUP (BFIG) STOCK MARKET CHALLENGE

The President of Brocks Investment Group (Eric) and I have been sharing emails on their upcoming Stock Market Challenge. This is a great opportunity for all of you LTIites that want to practice investing. Here are the deets: 2nd Annual Investment Challenge for Charity The cost is $20 per account You will receive $100,000 fantasy dollars online Five grand prizes for the person with the highest portfolio value after a six week period: Feb 28, 2011 to April 8, 2011 Six weekly prizes for weekly growth 60 % of the proceeds go to a Childrens Fund with the Niagara Community Foundation There is a $200 pledge prize for the person who gains the most pledges Information on how to take part: o

http://brockinvestmentchallenge.com/tutorials.html
http://www.facebook.com/event.php?eid=143595492365673

Facebook Event page:

o

I have already signed up for this as LTI Long Term Investing; CEO LTI.

So the major question is: Can you beat the CEO of LTI?

If you join this Investing contest and beat me I will honour your name on the cover Junes Newsletter issue as a Master with the ability to beat the LTI CEO. You will be showered with love and affection and be adored by all other LTIites out there. This is a perfect chance to practice without any consequences.

$20 for a great cause and a chance to say you beat the CEO of LTI. If you get lucky buying Gold or junior mining stocks Ill kick you off the distribution list lol. LTIS BOOK OF THE MONTH I read a lot of books on value investing and financial statement analysis prior to reading this months recommended books. I really wish I read this one a long time ago because it is SO

good.

If you plan to buy stocks in companies in the future then this book is

absolutely a must. This book tells you exactly what to look for in a company that has a durable competitive advantage and how to calculate important financial ratios

February Book of the Month: A must on your bookshelf Warren Buffett and the Interpretation of Financial Statements: The Search for the

Company with a Durable Competitive Advantage by Marry Buffet $16.46 on Amazon.com. Dont be a cheap skate. Order it now!

http://www.amazon.com/Warren-Buffett-Interpretation-Financial-

Statements/dp/1416573186

Have a great February. Remember dont fight the Fed! Alain Roy, P.Eng, MBA Candidate 2014 CEO of LTI Long Term Investing almroy@gmail.com

Disclaimer: The content of this newsletter is to increase your financial intelligence and is intended as general information only. Any action that you take as a result of this

information and analysis is ultimately your responsibility. I will not be held responsible for any negative outcomes of any kind as a result of this information. information responsibly. decisions. Please use this

Consult your financial advisor before making any investment

http://emptysuit.wordpress.com/2010/11/03/fed-to-boost-economy-by-buying-600b-in-bonds/