normalized earnings

For cyclical firms, the easiest solution to the problem of volatile earnings over time and negative earnings in the base period is to normalize earnings. When normalizing earnings for a firm with negative earnings, we are simply trying to answer the question: What would this firm earn in a normal year? Implicit in this statement is the assumption that the current year is not a normal year and that earnings will recover quickly to normal levels. This approach, therefore, is most appropriate for cyclical firms in mature businesses. - Prof Aswath Damodaran

How this can be done (by Jae Jun)

ROE method:

1. Get the past 3 years and TTM ROE ratio
2. Take the average
3. Multiple the average ROE to the latest shareholder’s equity figure from the balance sheet to get the normalized net income
4. Divide by shares outstanding to get normalized earnings

Profit margin method:

1. Get the last three year net margin and TTM
2. Take the average
3. Mutiply the average net margin to the TTM revenue to get normalized net income
4. Divide by shares outstanding to get normalized earnings

Investing in the apocalypse

Investing in the apocalypse

book by: James Altucher, Douglas Sease

3 principles of apocalypse investing -

• Fade the fear - buy the fallen index when others are selling in panic; works for stocks too, but when drop by more than 10%
• back door investing- buy large cap strong companies involved in solving the problem, best when crisis will end quickly
• front door investing -buy speculative companies specifically involved in solving the problem, suitable for long-term, slowly developing crisis

E.g. pandemic
fade the fear - buy the falling markets
back-door - companies with involvement in vaccines e.g. GSK, PFE
front-door - companies focusing on specific vaccines e.g. BCRX

management

Vishal Khandelwal :

• A management that has a history of borrowing money to grow its business will keep borrowing. A CEO who is a serial acquirer will keep acquiring companies left, right, and centre. Someone who has a history of going overboard with future plans will continue to go overboard with future plans.
• until you as an investor get demonstrated proof of the management’s change in behaviour (from bad to good) – not just language but a real change – just smile and nod and not believe a word they say.
• You must assess or talk to a company’s management to understand its past behaviour – capital allocation record, business ethics, and shareholder friendliness…and to assess whether they are the right people to guide the business in the future.