Investor Education Conference 2020: Value Investing: Diamonds in the Rough

Hello, and welcome to Value Investing– Diamonds in the Rough? My name is James Boyd Also along with me is Joe Mazzola And we welcome everyone here today I want to give you a quick reminder, as a part of today’s session, make sure you download the reference guide You’ll actually see that there For each one of our breakout sessions, there’s a reference guide Feel free to go along and maybe potentially also write down some notes as well as we go We’d like to, again, just welcome If this is your first time ever seeing anything from TD Ameritrade, we welcome you If you’re a return user, we welcome you again Look forward to actually talking about one of my favorite topics of value investing that a good friend here, Joe Mazzola is going to be actually teaching us as well As we get started, remember, we’re going to talk about educational examples They’re used for illustrative purposes only They’re not a recommendation or a solicitation to purchase or sell a security Remember that when we talk about examples, they’re just examples All investing involves risk Just real quick, a little bit about myself– I’ve been really investing since 1996 I started off being more of a short-term trader, didn’t know anything really about trend, or stocks, or options But I got started, OK? That’s so important Started with the company back in 2003, and really love to actually talk about this topic of fundamental analysis I believe, for this topic of fundamental analysis, this is maybe a void in many investors’, maybe, understanding As I’ve invested more over time, the topic of fundamental analysis is really important We always talk about follow the institutional money flow Well, understanding what might be the foundation for their decisions in terms of managing portfolio could be fundamental analysis We’re going to talk about that here today It’s a topic I don’t think is talked about enough So we want to really give proper time to this And I’ve actually started off, really, with technical analysis, started actually trading options, futures And really, I like to use all disciplines, especially when we’re talking about analysis of stocks in the market Currently live in Salt Lake City, but grew up in Ithaca, New York with four children Also alongside with us here today, we have Joe Mazzola Joe, could you actually introduce yourself? Tell us where you live, what your current assignment Tell us a little bit about yourself Hey, James Hey, everybody You mentioned people coming back to TD Well, that’s me in a nutshell So some of you I’ve had a chance to work with before And I used to be a Thinkorswim instructor back in the day, and then TD Ameritrade But now I am running trader education here at Schwab So it’s a real honor to get a chance to work with all of you And James, it’s good to see you again, as always Let me kind of piggyback on some of the comments that you made Because I think it’s important to understand why it is, maybe, some people get caught– you know, caught up in this idea where fundamental analysis is just too hard to understand I mean, there’s a lot of components, a lot of variables that go into it It’s not a matter of buying a breakout or looking for a close above the high of the low day There’s some of that that goes into it But I think when you look at fundamental analysis in its purest form, if you break it down to its smallest components, it really gives you an idea of what to buy, or sell, if you’re looking to play a short game And whereas technical analysis, you use that as more of the entry point– so I think using fundamental analysis to build that– build the book of stocks that you’re looking at, that lineup, if you will, that bench where you’re saying, this is the group of names that I’m looking at, because they fit within some characteristics that are important to me, or as you mentioned, important to money managers– And before I came over here to Schwab, that’s why I did it for a living I was a money manager with a group out of San Francisco And by the way, that’s where I live now, just outside of San Francisco in a town called Danville I am married with two kids And what we did was, basically, we did option overlay strategies on client accounts Either they would bring stocks to us that we would either do collars, covered calls, different type of strategies like that, or– and this is where the fundamental analysis comes into play– we would build a book of stocks for clients as well too So some of the things that we looked at in constructing those portfolios are some of the things that you and I are going to talk about today, and some of the things that we’re going to share with our users here today And that goes– that runs the full gamut Because I think right now, we’re looking at a market where fundamentals are particularly important We’re going to talk about value But one of the things that I really want to bring to the forefront here is that value’s really in the eye of the beholder And I truly believe that Because we can say, well, this is what we consider a normal value stock But those normal value stocks, they

will shift based upon where we are at in the economic cycle I’ll give you a perfect example, James If you look at December or January, and you saw some of those staples, and you saw some of the utilities, and you saw some of the real estate stocks out there, they were trading high 20s, low 30 multiples, which doesn’t really seem like much of a value in those so-called defensive and cyclical names So– or excuse me, non-cyclical names So this is some of the stuff that we’re going to talk about today And I think what’s really important is not necessarily looking at value in terms of what’s cheap, but looking in value in terms of, where can I get a good discount on a stock that is growing earnings, right, that’s growing revenue, and growing cash flow? And I think once you reference it like that, we’re trying to find that growth, but we’re trying to find it at a reasonable price And I think that’s a good starting point Perfect So a couple things as you were talking about that is getting the institutional mindset What is the criteria? You labeled it as the bench Let’s see what these institutional investors might be looking for We’ll talk about that The other thing is maybe how are some of these companies comparing to their peers? Are they some of the top companies in their industry groups or sectors? Definitely going to be something we talk about here today So without no further ado, let’s just hop right in, Joe And so first off, when we discuss our agenda here today, we want to really break it down into four main pieces Number one is company types, OK? Talk about sectors and industry groups Number two is we’ll talk about characteristics of value stocks, OK? Third is going to get into a value stock search Joe will actually take us through, show us a way to find what we call growth at a reasonable price And then we’re actually going to– from that watch list, we’re actually going to talk about intrinsic value We’re going to look and see what is the fair value of potential stocks, or intrinsic value, what stocks are trading at a discount to that value, or at a premium, and discuss the psychologic– the psychology of really why Just real quick, when I first– what pushed me– or I felt like I kind of put up some resistance on fundamental analysis And my friend pushed back And he goes, well, James, let me ask you something You’re more of a technician, right? And I said, yeah, I’m a technician I don’t do that much fundamentals He goes, well, let me ask you something James And he goes, when you married your wife, Amber, did you want to meet the parents? Yeah Did you want to see where she lived? Yeah Did you want to actually see, maybe, a history of trend analysis of where your wife had been in your life, and her– and she would ask you the same questions? Yeah Did you want to do, maybe, an income statement, see how much money was coming in and how much money was going out? Yeah Did you ever want to actually see, maybe, the balance sheet, assets and liabilities? Yeah And he goes, well, James, if you did that, you just– you did not get married just for the looks, and vice versa, OK? You did technical analysis, but you also did fundamental analysis So we do it all the time in our life And now what we’re going to do is instead of just looking at a graph, we want to actually make sure, as Joe mentioned– we’re going to look for stocks that are– maybe potentially, we’re going to try to find the strongest bench and then look for setups from that bench Now as we get started, actually, here today, when we think about value, OK– I want to take a look at this teeter totter And we see that price is high, OK? And sometimes we think when price is high that there’s no value whatsoever But is that really true? Sometimes we actually think there’s the highest value when there’s the lowest price Joe, I’d like to bring you in on that I mean, is that always true, that the value can only be found when the price is low? In your past history, have you found that? Or maybe is there maybe a perception change we need to go through there? No, no, you’re absolutely right I mean, look, price is relative, right? You can’t– you can’t– I heard you talk about Apple earlier And so people are probably blue in the face hearing about Apple But it’s an Apple to Apple comparison, right? I mean, if I say that company X, because there’s $150 stock, is expensive relative to company Y, because it’s a $50 stock, that really negates doing all the additional research that you need to do And so one of the things that I think is important is to understand that some of the multiples that we’re going to look at today– price to earnings, price to sales, price to cash flow, PEG ratios– these are all different techniques for us to look at a company versus another company They’re good for comparison, the sake of comparison Now I will say this though– don’t get caught up in this idea about what is the market P/E, or what’s the market multiple And I know that sounds foreign, especially to people that are saying, well, wait a minute,

isn’t this class about value? I bring this up because– think back to 2002 and 2003 If I were to tell you that the value stocks in that market were really the tech stocks– and people don’t normally think of tech as value But what happened to some of those names, the price had fallen so far And the earnings and the sales had stabilized that, basically, you saw compression And so at that point, if you look at that relative price to earnings of a tech stock relative to some of the other names in some of the other sectors that we would normally– are conditioned to think of as value, tech became a lot cheaper relative to some of the other names out there, or some of the other sectors out there So I think you have to put it in context And I think, especially given what we saw this past week– because I think this week was a fascinating study in getting in that value trap Here’s the reason why What we saw the week before, and what we had seen a couple weeks leading up to, was this idea that, OK, if there’s a blue wave, if that occurs in the election, then what are some of the likely outcomes that might occur for the market? Well, let’s think about this You’re probably going to have a pretty big stimulus bill that’s going to happen relatively quickly That’s going to involve works projects and infrastructure, all that So you saw a ton of money flooding into financials Why? Because, well, that tends to signal inflation If inflation goes up, that tends to– that tends to move the interest rate curve up And as that steepens, that’s usually good for financials You saw materials do really well, right? Why? Because if you’ve got works projects, you’re going to need things like lumber You’re going to need materials You’re going to need all that stuff You sell materials, do really well And then as– after Tuesday night, you just started to recognize that, wait a minute, we might not see this blue wave What happened? That whole trade rotated back into buying growth again, right? I mean, we saw it between Wednesday, Thursday, and Friday The money that was moving in, especially Wednesday and Thursday, was moving into the heavy growth names Why? Because those are the names that investors look at and said, OK, we don’t know what’s going to happen with the stimulus bill But what we do know, and what we can count on, is that some of these names that had gotten bit up a little bit and gotten punished the previous week, they’re growing sales They’re growing earnings They’re growing cash flow And relatively, a fairly cheap– maybe not cheap, but at least in terms of relative value, going back to what we were talking about– they don’t look as expensive So I think that is one of the keys that we need for our audience to understand today is that value is relative Value will change And if you look at the market and say, well, there’s– the P/E of the market is x, well, here’s another thing to think about too If you guys– if you guys think about the CAPM model or something like that where you price in an interest rate into that component, what happens? As the interest rates go to 0%, or basically where we’re at right now, fairly close to that, what happens is that that multiple expands So people are willing to pay more for these names, because it looks relatively cheap So it’s not just a– it’s not just a one or two– one or two instances where you can say, here’s where it perfectly aligns You really have to look at the whole environment that you’re in And I know that makes it tough Because everybody wants that silver bullet and say, here’s the one thing to look at It’s not that easy But James, what we’re going to do today is we’re at least going to provide some of those tools for the toolbox, if you will, that can help out Absolutely But one of the main key– the key main– the key main takeaway that you said is– number one is value sometimes could be your perception, right? And sometimes we can find value in growth We could also find value in, actually, what we call income stocks, or even value in value stocks The key is to being able to spot those, OK? So Joel Greenblatt actually says, “The secret to investing is to figure out the value of something and then pay a lot less.” So I know when everyone went to college, you probably had a class I mean, if you took 120 credit hours at University of Colorado, or USC, or wherever we went to school, you probably had at least two to three classes on how to value companies, right, out of 120 credit hours? No, we didn’t have any class on really how to value companies So that’s actually going to be something that we really talk about here, really, today is how to spot that value, what should be potentially the price, and then also, maybe how to identify stocks that might be below We have some stocks we can look at to show a little variety here today Now as we talk about, let’s say, company types– and Joe led us there and said, hey, value can be found in different areas, whether it’s staples or discretionary So when we take, actually, a look at, let’s say, different sectors, OK– so we’re going to label it as non-cyclical consumer staples, OK? When we– this is typically what people think

is value stocks, or income stocks And sometimes my perception of this historically was, well, I don’t want to be in any of these, because these are boring But that doesn’t mean they don’t trend up That doesn’t mean they don’t pay dividends That doesn’t mean that sometimes they can’t do well So my perception was wrong, OK? And I take ownership for that But I just didn’t know So when we talk about, let’s say, certain sectors, we would say utilities And you look at utilities, they’ve actually been quite strong lately You take a look at the health care sector, biotechnology and drugs I mean, you look at the COVID-19 environment, there’s obviously a mad scramble to figure that out, and also the effects on health care And also when you take a look at, let’s say, consumer staples sector– and I’m going to show just a quick couple stocks here But when we look at, let’s say– it could be brewers It could be food distributors, household products It could be super centers, soft drinks, and/or tobacco So let’s just show, just briefly– by going to the Thinkorswim platform, let’s just show a couple of these stocks And I’m going to have a little fun with you guys, OK? So I’m going to bring up a stock we’ve never heard of before We’ve probably never gone to that store And this is the chart of Costco When I go to Costco, probably once every quarter, I do not take a cart in Because I’m trying to spend less than $100 And it’s very hard You have to literally put things down before you go to the cash register Your spouse– by the way, notice I didn’t say wife It could be him too Take ownership So the spouse says, I just need a couple things And then they come out with two flat bed carts, OK, roped together So what you’re going to see is some of these charts that people think these are the boring stocks– Joe I don’t know about you, they don’t look so boring in terms of trend here, OK? When we also take a look at, let’s say, a company like CL Colgate-Palmolive, you actually take look at that, that doesn’t look so boring Matter of fact, from a trend perspective, it’s been one of the stronger stocks and has even eclipsed where it was pre-COVID Now the COVID-19 environment has definitely put pressure in different ways But if you go back and look at a small company called Boston Beer, and you take a look at it prior to COVID-19, it was actually sitting at $400 And now it’s at $1,062 Now if you took a look at, let’s say, one more of these– and maybe, what about a utility company, maybe something like NEE that just went through a four for one stock split? Now this should burning up one of the main points Should someone really be just in growth stocks? Well, maybe not Maybe that’s where a lot of the exposure or the risk is in someone’s portfolio Maybe they want to diversify into some businesses that maybe are potentially more consistent So when we talk about these consumer staples, utilities, health care, and these– utilities, health care, and consumer staples, why do some portfolio managers or investors like these businesses as a way to diversify within their portfolios? Well, number one is the products or business lines, they tend to be more in continuous demand, OK? And you think about, even if there’s a COVID-19 environment, it still doesn’t mean that someone curbs their expenses in certain areas They might need even more of it Look how much water was bought, wipes, hand sanitizer We could go down the list Number two– the profitability of these companies depends less on the strength of the overall economy These might have been businesses have been around for a while, already have the infrastructure They already have the scale And they dominate their competition Now also, they have the staple sales and earnings And this is so critical, as Joe and I will talk about Companies could even be bid up if the companies have a greater likelihood to hit their earnings, or hit their sales, and maybe even take market share from their competitors Guys and gals, this is so important And also, with that, these companies also pay dividends Now if someone overlooked these three areas, that might have been a mistake Now if we go to, let’s say, consumer cyclicals– and I think this is where a lot of those growth investors, they like these areas They like these stocks These stocks in cyclicals or consumer discretionaries, they would be restaurants, home furnishings, apparel So when you think of restaurants, you might think of Darden’s Restaurant, DRI When you think of apparel, you might think of that Nike swoosh I mean, just look at what Nike’s done When you think of autos and maybe a little technology, you might think of, maybe, the Tesla, or maybe GM When you think of hotels, you might be thinking of, let’s say, Marriott or Hilton And if you think of cruise lines and maybe airlines, OK, you might think of Royal Caribbean Cruise It could also be, maybe, Love, Southwest, or even Delta Airlines These areas, back in March, were probably, percentage-wise,

more hit Because they’re not in continual demand Look at the airlines Look the cruise lines, the hotels They were smashed And so these products or business lines, they tend to fluctuate in demand And they’re also more linked to, really, the strength of the overall economy So when things are good, they could be very interesting But when the economy or certain things happen outside that, not as great And they could have a lot of variability in their sales and earnings And these companies don’t tend to typically pay as high as on dividends They tend to actually use all of their earnings, retain it And they try to buy other companies– their peers– or they actually try to actually maybe innovate new products and services So someone buys consumer discretionaries if they’re really mainly bullish on the sector in general or the overall economy Now sometimes when price goes down like we saw in March, or like we saw maybe about two weeks ago, 10 days ago, sometimes price can knock companies’ charts down and make them look really bad in a very short period of time And if someone is not familiar with how the company stands in terms of its sector or industry, they just look at the price, and they think that that’s truth Well, it might be the perception at that time But underneath the price of where the car was smashed, the company was beat up by the market or sector itself– underneath that what looks like to be junk might be something that might be very valuable if the investor is trained to see it, OK? And I know that’s actually something that Joe and myself, we’ve actually invested the time, not just in technical analysis, not just in options strategies, but to really understand what is really driving or creating value within these companies itself Now what I’m going to have Joe do is he’s going to walk us through, so how we find some of these potential cars– “companies”– that might appear to be a little beat up, potentially on price? What also might be, let’s say, some companies that might be overlooked where people don’t see the value? Now have you ever had something in your life where maybe you didn’t see the value, but somebody else did? And then you said, man, I wish I would’ve bought that I remember back in 2003, a friend of mine said, Apple is overvalued at $13 a share Now I cannot find my friend anymore I’ve tried to call him repeatedly I think he sees me calling him He won’t pick up So the biggest thing as an investor, we got to take ownership of us being able to see what that value is and what portfolio a manager’s– “institutional money”– what are they really looking for to see the value? So Joe, what I’d like to do now is I want to turn the time over to you Walk us through that mentality and maybe also how, on, we can actually find some potential value that might offer some attractive potential trend as well Now one second here All right Let me switch this over Yep And Joe’s just going to take– yep And I’ll tell you when we’re seeing the screen All right Looks like– OK And one more second here, guys Sorry about this You let me know when it’s sharing, here Because I’m– I will I will OK, thank you Yep It’s not allowing me to– OK, here we go Gotcha Sorry about that OK, no problem And I will let you know when we see it I think we should be good now Here we go Yep, starting to see it now All righty Perfect My apologies to everybody Yeah James, you showed some interesting names all right Especially when I was looking at Costco, I look at that, because that’s really– it’s a staple It could border– it can borderline discretionary, but it really is a staple People go there for groceries in mass quantity, of course And if you’re able to walk out of there with one cart, then you are doing something well, my friend And the thing that I– the thing that I really like about that stock– and look, it’s not a recommendation But what I like about the company is the fact that they have a built-in annuity into that stock price You have to pay money to walk into that store I think it’s a brilliant concept You’ve got to be a member to utilize that facility So even though every year, they might fluctuate in terms of what their sales are, they pretty much have a good grasp in terms of what their revenue stream and cash flow stream is going to be, really, based upon how many users are coming into the store And as we’ve seen–

we’ve seen not only the footprint go up in terms of but store traffic, but you’re also seeing the footprint go up in terms of how many people are actually paying the annual subscription So any time you can get somebody to pay you money to walk into your store, that’s a pretty darn good gig if you can get it All right, I want to start off with taking a look at what we call characteristics of value stocks All right, you know, I talked about this a little bit earlier when we were– when we were prefacing price to earnings, price to sales, price to cash flow, all that good stuff And you know, they’re gauges, right? They’re comparative tools And I think that you have to start off by looking at it that way Once you have narrowed it down– and it always– to me, James, it’s always a 30,000-foot view You start off by saying, what’s happening in the macroeconomics, or the macroeconomy in the world? How is that going to influence certain sectors? Within those sectors, what are some of the industries or industry groups that I want to participate in? And then once you’ve determined that, once you’ve built that bench, like we were talking about, that’s where you start to use some of those comparative tools, some of those gauges, if you will, that will help you determine where that value might exist Some of those tools– fairly common ones I think a lot of you are familiar with– price to earnings, price to sales, price to cash flow, price to book Price to earnings, basically, it’s just how much are you paying for every dollar of earnings from a company Price to sales– how much are you paying for every dollar of revenue? I like to look at price to sales I think that’s pretty important Because while I’m not worried– well, maybe you have to But maybe– while I’m not saying that there’s something nefarious going on out there, I think you do need to be aware that it is much more difficult to manipulate a revenue component than it is to manipulate earnings And that doesn’t necessarily mean nefarious Like I said, one of the things that we’re going to look at the moment is the enterprise value to EBITDA ratio And the reason I like looking at that is because all that stuff that gets pulled out when you get into earnings, the debt, the taxes, the amortization, it puts all that back in there And once that puts all that back in there, then you’re really looking at companies, from a capital structure, apples to apples at that point as opposed to where can we move all this stuff on the balance sheet to maybe make it look a little bit better So I do actually like that ratio quite a bit We’ll talk about that in a little bit here Price to book, I think, is important, especially when you’re looking at financial companies Book value, guys, is really just assets minus liabilities And if you want to take a step further, look at price to tangible book Because that pulls out some of that goodwill that people put on the asset side Basically, what it’s goodwill? It’s maybe some technology or something like that that is built in that is specific to that company that they can put on the asset side that’s not really tangible It’s not something you could really sell if you needed to So i think it’s important to look at price to tangible book as well as just price to book And when you are looking at financials, look, one of the things that we’re going to look at in a moment is what are some of these levels that you might want to consider A lot of times, people like to look at price to book of 1, you know, sub-1 Doesn’t necessarily mean that that’s the best measurement out there I’ll give you an example One of things you need to be careful of a little bit when you just start taking everything, and pigeonholing everything, and saying, well, I just want to look at stocks with a price to book below 1, or just one look at financials with a price to book below 1– what you need to think about is, basically, what you’re doing in you’re paying– how much are you paying for every dollar of asset is what that really comes down to But there are some companies out there that, they might have real low price to book But at the same time, maybe their growth component’s not there either And I think we’ve probably seen that in some of the financial names, especially some that reported recently I’m not going to break those down You can look at those on your own to figure that out But just because you see a price to book below 1 doesn’t necessarily mean that that’s a great candidate I want to make sure that you also look at the earnings, sales, and cash flow growth as well too Bringing this up to the price to cash flow– basically, how much are you paying for every $1 in cash flow– this is important Why? Because cash flow is the lifeblood of every operation, every company A couple reasons why– number one, what can you do with a company that’s very cash-rich? There’s a couple things you can do, right? Number one is, if you’re a manager of that company and you see that opportunity when you have a ton of cash on your books, you might be able to scoop up some of your competitors at a lower price You might be able to keep people on staff if you’re in the middle of an economic downturn when some of your competitors don’t have that same flexibility Always like to look for cash-rich companies And I think that when you start to make that analysis, as you start to look at the balance sheet, that is something that is very helpful to keep in your tool box, if you will Did mention this, the enterprise value–

so EV– to EBITDA Basically what that means is the enterprise value is really the measurement of the total company value Basically, another way to look at it is, what would it cost if I wanted to acquire that company if I have everything built into that measurement of that company? It’s not necessarily looking just at earnings, it’s looking at that entire company And so when you take that and you divide that by the EBITDA, which is your earnings before your interest, taxes, depreciation, and amortization, it really gives you what I like to consider more of a way to just value the company as a whole And I think what’s important about that is it gives you the ability, when you’re looking at a side by side comparison, to look at, what are you paying for a company’s core operations? And I think that that’s an important component when you are doing that valuation, especially if you’re looking at companies that have different capital structures, right? Because now that that’s stripped all that back out, now that that’s put all that back on the table so you can see what that looks like, now you have a chance to make a much better comparison, in my opinion, my humble opinion All right, profitability measures– I’m sure you guys have heard a lot of these before– gross profit margins, operating profit margins, net profit margins, ROE, and ROA Basically, what we’re going to be looking at for some of these names as we’re starting to do some of these scans and starting to look for some of these potential names to add to that bench is, how much am I paying for some of this growth, right? If I’m seeing gross profit margins from, basically, my cost of goods sold– from what I’m generating in dollars, and I take out that cost of goods sold– how much is left, right? And that’s important to me as an investor Because I want to see, what is the company doing? How much does it cost in terms of there– in terms of them producing a product? And then everybody goes in, you take another step down and look at the operations Now once I start adding back some of the other components to it, how much does it cost for this company to generate a dollar of earnings for every bit of dollar that they’re putting back into the operation? So that’s important to me as well And then I think most of us are familiar with the net profit margins And what that really mean? That means, how are we maximizing our dollars for profits? And that, once again, it’s– in and of itself, it’s a really helpful starting point But it’s much better when you’re doing a comparison That’s where you get the real value That’s where you get the real truth from these Return on equity– basically, how much are you getting for every dollar of equity? Now remember, you own a company, you’re an equity holder, right? You are an owner of that company So you do have equity in that company You might be a small owner, but you are an owner And so you want to know, is management maximizing your dollar, or your dollars, that you have involved in that company? And then return on assets, ROA, is basically, how are they generating profits from those assets? Are they maximizing their ability to turn their assets on the balance sheet into profits for you as a shareholder? All right, liquidity measures– these are fun ones I like these There’s a current ratio and a quick ratio What’s the difference? Well, they both really look at current assets and current liabilities, right? So how much assets do I have relative to my liabilities? You really want to see, more than likely, in the current ratio, something north of 2– so basically, twice the assets for the liabilities Basically, why? Think about this in your own life, right? Do you want to have more assets on your own balance sheet than you have liabilities? Do you want more money coming in than you are paying out? That’s pretty– that’s a pretty easy one to think about But quick ratio, I think this is an important one Quick ratio, I think, often gets forgotten– or overlooked is maybe a better way to put it Because I think what people consider assets– when they look at that balance sheet, they say, OK, here’s my A, here’s my L, here’s the assets minus my liabilities, or in this example, assets divided by liabilities And this is what the company is doing in terms of their turnover But when you look at the quick ratio, what does it do? It pulls out– pulls out– the accounts receivables Or excuse me, it pulls out the inventory Why is that so important? Because inventory– it could take a while for them to turn that inventory into cash It could take a while for them to sell that inventory So looking at that in and of itself, pulling that out, and just looking at the marketable securities, the cash, and then the receivables probably makes more sense in terms of the quick ratio than the current ratio You can look at both But I think the quick ratio is helpful, because it does strip out those inventories And I think, James, we’re going to look at this in a side by side comparison as we start to look at some of the names that we’re going to be able to pick apart from some of the screens that we have One thing I really want to point out, guys, is we have a list here of some suggested thresholds And they’re suggested

I mean, I think that’s critical And I think that’s very important Because remember, we talked about this P/E is a relative term P/E, right now, might seem kind of high You might look at the market and say, whoa, wow, 24 to 26 based upon where earnings are right now– that seems really high for the overall market But you’re not looking at a market like it was 20 years ago Why? Because interest rates are basically 0% So when interest rates are low, that usually affords a higher multiple to the market So once again, don’t– I wouldn’t use P/E as a starting point from the overall market I would use P/E, and I would use a lot of the measurement tools that we’re going to look at today, when you’re comparing stocks within a certain industry, stocks within a certain sector Because that way you’re really getting a better comparison Or another way to look at it is, is this stock cheap relative to where it was before? That’s another way to look at it too So even though the price might be going up in that name, if earnings– right? If earnings– or in the example of price to sales, if revenue is rising at a faster rate than the price, even though that price might be going up, that stock might be looking more attractive even as the price goes up So we’re just finishing the earnings season right now And so the nice thing is, for a lot of the companies that you’re going to be able to see in some of these screens, you’ve gotten some of that information within the last couple weeks to kind of get an idea of what some of these companies have done with their earnings, and their sales, and the cash flow And that goes back to, James, what we we’re talking about at the beginning, where, look, you had that rotation from some of those cyclical names back into growth Why? Because the companies that had sold off– your Facebooks, your Apples, your Amazons– they sold off after the earnings numbers came out But actually, those earnings, and sales, and revenue numbers, and cash flow numbers were pretty darn good So when you had a chance to look at them after the fact, after that sell-off, there might have been a pretty good opportunity for some of those names to look at in terms of their relative value But like I said, these are all suggested thresholds You got the P/E relative ratio of 50 or lower You’ve got a book value growth rate of 5% or lower You guys can go down this and look One of the things that I would say is I do like that enterprise value to EBITDA of 10 or lower You look at somebody like a Howard Marks, this is something that he would talk about as something that’s important to him when you’re looking at company valuations And so these are all– like I said, these are all suggested thresholds, but something that can help us as we’re looking for some screens Now the other one I do like to look at is more along the lines of, like, a PEG ratio And I’m going to bring this one up real quick, James I’m taking everybody, right now, to Con you guys see my desktop here? Let me– I’ll let you know– I’ll let you know when we see it Still seeing the slide We’ve got about– yeah, we’ve got about 10 minutes to actually run the search And Joe is going to walk us through, actually, how to find some of these stocks with this type of criteria Just going to move this over here That’ll be easier All right, can everybody see it now? I see it now, yep All right, perfect So here’s what I want to do One of the things that– for some of you who are not familiar to the website, we actually have a lot of pre-built screens in here So underneath Screener here, you can just click on that And it’ll show you some of these pre-built screens that are in here So what I want to do real quick is just show you some of the ones that we’re going to be talking about Because we are looking at growth at a relative price And here we go, we’ve got it right here– growth at a reasonable price, right? So it depends on how you want to use that semantics, right? But if you click on that, it’s going to show you a couple names Now what I have done in this one, because I wanted to get a few more names, I’m actually taking off the price to book component in here, OK? And watch what happens It expands the list a little bit more It’s a little bit less constrictive this time And some of the names, James, that I think we were going to take a look at might be Applied Materials– Yep –and DHI So with both of these, what I think is kind of helpful is just to look at some of the components that are making up this growth at a reasonable price scan So let’s start off with the PEG ratio So a PEG ratio is basically, what are you paying for your estimated growth rate over the next five years, right? So if your expectations are that you’re going to grow at x, and you’re paying less than 1, then that means that you’re paying less than a dollar for every dollar of expected growth over the next five years That is something that somebody, as a value investor, might look at and say, that is an opportunity for me to pay for growth But I’m paying for it without paying through the nose, so to speak, on that one Same thing with DHI, D.R. Horton– like I said, not a recommendation But it is a way for us to at least get– build some of those starting blocks there I’m going to turn it back over to you, James And we’re going to maybe walk through some of these Yeah, sure

So let me actually just take a look, Joe Let’s see if we can’t take that back Just give us a moment Yep, so I’m going to go back to my screen share And let’s take a look So one of the things we want to bring out– so Joe mentioned, actually, right on, there is actually a pre-built search for GARP– Growth At a Reasonable Price Now, one thing we want to do is we’re going to take those two stocks, DHI and AMAT, OK? And what we want to do here is I’m going to show you that right on the TD Ameritrade website– and not a lot of investors really might know about this But now this is where we want to identify– once we actually have a list, we know what are some of the filters that we can use What I’m going to do now is I’m going to be on the TD Ameritrade website And I’m going to go right to where it says Education Now I am logged in, OK? Many of you are familiar with the site Most of you know that these tools are there You might have not touched them completely But let’s show how they work And so what I’m going to do is I’m going to go to where it says Education And on the left-hand side, you’re going to see where says Stocks, OK? So everything that Joe talked about– a majority of it at least– is actually found underneath this stocks fundamental analysis course So just know that what we’re referencing– when Joe talked about price multiples, or enterprise value to EBITDA, right, things like that– that is actually found in the course, OK? Highly recommend that you go through that course That way you get an understanding of really what we’re actually discussing We’re going to click on where it says continue Now let’s just make sure we’re all on the same page– Education, OK, and then Stocks Now if I click on Education and Stocks, we’re going to get to this page Dead center of the page, it’s going to say Course And I’m just going to now click on Continue Now when you find stocks– and Joe mentioned the bench, right? We’ve got a couple of stocks that might be interesting Let’s look and see, what are they trading at relative to their intrinsic value? Now what you’re going to notice is we have the lessons right here And as a part of the lessons, there is in the third lesson where it’s called estimating the intrinsic value, OK? And what you notice is, down right below– kind of right below that orange there where it says resources– it will say sample investing plans This is huge, OK? I know a lot– when a lot of investors get started, they’re like, I don’t know where to get started I don’t know what criteria to use, things like that Well, if you click on sample investing plans, what you’re going to notice is a lot of things that, actually, Joe mentioned is written down in a sample plan What’s the objective? Watch list criteria– what could actually be considered some potential entry and exit rules? Know that you don’t have to start from zero Know that there’s a sample plan written out that you could actually look to consider maybe using Or maybe, are there things that you might consider in adding? Now the other thing I want to point to you that we’re going to do right now on the two stocks that Joe mentioned is we’re going to go down to what’s called the intrinsic value calculator Now I want to– before we show this, I want you to think about, have you ever bought or sold a car before, ever, OK? Now if you’ve ever bought or sold a car before– let’s just say if you sold a car– you probably actually said, jeez, I wonder what I could sell this car for? Or what is this car worth, OK? So you had to type in some criteria And the criteria might have been the year It might have been the make of the car, the model of the car, how many miles, and what’s called the trim And once you typed in those five inputs, it spit out like a– if you were going to sell it private, if you were going to sell it to a dealer, et cetera, and if it was in various different conditions It gave you a ballpark It did not mean that someone absolutely was going to pay that price But it gave you an idea of what that car could be worth The same goes with that intrinsic value calculator What could these companies be worth? And is there some potential value? Are people actually buying that stock at a potential discount? Or are they willing to pay a premium, and why? What I’d like to do here is let’s take a moment, and let’s show this I’m going to– so down at the bottom where it says intrinsic value calculator, let’s click on that, OK? Now if I click on that, it’s going to bring up an Excel sheet And i like to– for example, at the very top, this is what it’s going to show Think of this as a worksheet It’s walking you through some questions and instructions And then it’s just going to spit out what the intrinsic value is Now the intrinsic value is really the value of the company giving complete understanding of the fundamentals Doesn’t mean that someone has to pay that price They’re just saying, theoretically, this is what the company should be worth based upon the metrics currently and going into the future So I like to start down at the bottom

Now one of the stocks that, actually, Joe mentioned– and let’s start here I’m going to go on the TD Ameritrade website And I’m just going to type in AMAT– A-M-A-T. Now on the Excel sheet, I just– I like to start at the bottom and work my way back up And I’ll just tell you why So the first thing it’s going to ask us is, well, what’s the stock price? And some of the things it’s going to ask us is going to be very basic, OK? Well, it’s $70.53 So all I’m going to do is I’m just going to actually type in the stock price, $70.53 The next question it’s going to ask us is, what is the stock’s earnings per share, the trailing 12 months, TTM? And what I’m going to need to do here is, if I said, well, I don’t know where this is, over to the right, it will show the instructions It says it’s found on the Summary tab, OK? So if I go back, you’re going to see the EPS trailing 12 months is going to be right there And it says 3.44 OK? Now I’m going to– we’re going to show what these numbers are So I’m going to type in 3.44, OK? And what I’m going to do initially– and we’ll talk about it when we go to Q&A– I’m going to say the years of this projected growth is three That’s what we like to start with We’ll talk about why, OK? Now what you’re going to notice is it says CAPM Joe, he said those– that acronym The CAPM is the Capital Asset Pricing Model It’s using one main factor to see what should be the equity risk premium, so to say And what you’re going to see is the single factor it’s using is beta And beta is really just saying, how is the stock moving relative to the market? A beta of 1 is saying it’s moving, typically, historically, with the market If the beat is greater than 1, it’s, say– historically, it’s been a little bit more volatile And if the beta’s less than 1, it tends to be something that’s less volatile than the market historically And what you’ll find is the beta is actually really found right on that same page And you’re going to see it’s really 1.3, OK? So by the way, is that something that’s more volatile, historically, than the market, or less volatile? Well, if the beta’s greater than 1, this has been a stock that’s been typically more volatile than the S&P Now this next– so I’m going to type that in By the way, we’re almost done It’s going to ask us two easy questions What is the current VIX value? And the second question it’ll ask us is, what is what’s called the risk-free rate? The risk-free rate you could look as TNX, the 10-year rate You can look at this as the 30-year rate Nevertheless, we could use both, OK? We’re just going to say, well, what is the current VIX value? Well, if we type in the current VIX value– let’s bring it up Well, you’re going to see that the VIX– if we look at a daily chart of the VIX– some of you who maybe benefited from this recent drop, you’re saying, show it to me one more time– well, it’s 24.86 So all I’m going to do is type it in So I type in 24.86 And now what I’m going to do is I’m going to type in TYX That’s the 30-year, OK, yield And so now what you’re going to see is I’m going to type in the TYX, OK? And you’re going to see that this is going to show us the– Joe, tell us, how do we read this? It says, over to the right, 15.99 What number are we– what is that really saying? How do we read that? You got to move that decimal point over one to the left Because basically, it’s a 1.6% yield So basically, you’re giving your money away for 30 years to make 1.6% That’s really what that’s telling you Thanks for the depressing note there I’m just joking All right, so here we go So we’re just going to type it in Now we’re going to type it in the way we see it, 15.99 There it is And now what you’re going to see is it’s only going to ask us two more questions Now once we do this, we’re done We’re going to see what’s the intrinsic value And then, is it trading at a discount or a premium to that intrinsic value? So the EPS growth rate can be found on– and if someone said, well, I don’t know where to find it, over to the right, you’ll see the instructions But simply, if you want to see the EPS growth rate, we’re just going to go right to the Fundamentals tab Now if we go to the Fundamentals tab, what you’re going to notice is, once we click on Fundamentals– and Joe walked us through what we call the price multiples, talking about how they can be relative But if we go over here to the right, the valuation ratios–

Joe gave us an example of a lower priced earnings Sales– 3, price to book– 5, price to cash flow– all not super high, OK? And if you go down and actually look at this number, you’re going to see that it’s going to show the past history of what has been the annual growth of the earnings per share over the last five years That’s the number we want– 26.65 Now guys and gals, money attracts money If the company has actually been making money, the company might actually have other investors that decide to invest more money into that company that might also be trending The last thing we want to see on a relative basis is, what is the industry group P/E on a current year EPS? So this is not the P/E of the stock This is the industry group P/E And what you’re going to notice is, if we go back to, let’s say– going to go back to the last tab, Valuation If we go to Valuation, which was just the tab just to the right of Fundamentals– Valuation– what you’re going to notice is it’s going to show us the price to earnings It’s going to say, well, here’s AMAT But this is what the industry group is And the industry group there is showing 29.32 That’s the number we’re going to type in Now when we type this in, what you’re going to notice is 29.32 Now what it’s going to do, just like if we typed in here’s the make and model of my car, how many miles, it’s going to spit out what’s the intrinsic value based upon the current and forward metrics Well, now what you going to see is, if we look at what’s called the intrinsic value, well, should be trading probably right around $116.61 But the current stock price is really at $70.53 So this actually has– this is trading at a discount, meaning lower than the intrinsic value And this actually has what we call a positive margin of safety Now Joe, I want to ask you, just real quick, why is the stock not trading at the intrinsic value? Why is it maybe trading maybe quite a bit below the intrinsic value? Do investors not see it? What causes that to trade below its intrinsic value? That’s a– look, that’s a good question I mean, it– I noticed it showed that it was pretty heavily held by institutions So they’re the ones that are, for the most part, driving some of that stock movement It’s interesting, because I think, at least when you look at some of the competitors within this space, whether it’s Nvidia, some of the other chip names, they are driving higher growth at this point And people are paying up for growth So I think that is part of it But I do like the margin of safety I mean, that’s definitely one of those Buffett terms that people like to look at in terms of, hey, where does it give me a little bit of room in case I’m wrong? You want to see that– of course, you want to see a positive margin of safety That means it’s trading at a discount But in terms of why is it trading where it’s at, it’s the market, James And maybe it’s possible that there hasn’t been that full recognition of the value So we’ll see Yeah, so let’s kind of– let’s imagine the market sells off, right, Joe? So the market sells off One company is trading at a premium to its intrinsic value by a lot Another company like AMAT is trading at a margin of safety Which stock do you think actually might be more sold than another, potentially? It could be, maybe, the one that has– maybe was trading at a higher premium, right, that might have a greater percentage drawdown Stocks that actually is trading more in line with that intrinsic value, they could be sold too, but maybe not in the same proportion Would you agree with that, Joe? I would absolutely agree with that I think that a lot of times, when you do start to see a bit of a market downturn, people tend to rotate out of the higher beta names Now this is above– it’s above a 1 beta So it is a little bit more volatile than the overall market But when you look at it relative to the group– and that’s where you had that relative P/E. We said, look, P/E is great as a comparative tool It’s not– it’s not, I’m only looking for stocks that trade under this P/E Because you need to look at it relative to its peers And that was, in that example, what you did You looked at it and said, hey, relative to its peers, this does seem to be trading at a lower multiple than the industry Doesn’t mean that the industry can’t sell off And it doesn’t mean that AMAT can’t lose value by any means But if it is trading at a lower multiple, it tends to, right, or it could, provide a little bit of a cushion relative to some of its peers OK, so let’s do this So a realistic expectation, I think, when someone starts to do this probably five or 10 times– what I want to do is I want to take DHI You saw that that was actually one of the stocks that came back in the search on your GARP search

What I want to do is– when you start to do this over and over again, it’s probably going to take about 30 to 60 seconds to run each stock So just to show this, what I’m going to do is I have DHI here And what you’re now going to know is it’s $70.61 So what I’m going to do is I’m going to scrape out that previous example– so $70.61 We need to find the earnings per share Remember, that’s on the same page So $70– $70.61, we type that in Earnings per share is 5.52 See it there And we see the beta is actually 1.8, which says this stock, historically, has been more volatile than, let’s say, the S&P. So I’m going to remember those two numbers, 5.52 and $1.80 And here’s the nice thing is when you’re running this over and over again on different stocks, we don’t need to change VIX, TYX We don’t need to change that The only other two numbers that we need to see now is what’s the earnings per share growth rate, which is on the Fundamentals tab The industry group P/E that’s actually got to be right on the Valuation tab So when we actually pull this up, what I’m going to do is let’s click on the fundamentals And we’re just going to scroll down a little bit There’s our valuation ratios again Pretty low, Joe, OK? And now what you’re going to see is when we look at the earnings per share– 23.38, all right? So let’s remember that And let’s go to valuation– 23.38 And then when we also go back and take a look at this, Joe, show us another example where the current stock price is trading below the industry, OK? So I got 12– I got 15.96 We’ll type that in Let me just verify that last number just so we’re fair, OK? So this would be our last one we’ll look at here So now what you’re going to see is the EPS is 23.38 I’m going to type that in So when you do this over and over again, how long would it really take? I think 60 seconds Because you’re not having to update each one of the numbers, like on VIX, or TYX, or even the years or projected growth As we scroll down to the bottom, you’re going to see that this is another example where it’s really showing, what is the intrinsic value, OK– $91 What’s the stock price? $70 Trading at a margin of safety here of, really, 23% Now Joe, I got to ask this question Because we just showed, from the search that you showed us, two stocks And both of them came up with a positive margin of safety With your past history of really looking at it from a portfolio manager point of view or an institutional perspective lens, so to say, why would a company– or why do firms or managers– really buy stocks at a premium, or in other words, greater than their intrinsic value? What’s the idea? Why doesn’t everyone just go in and buy stocks that are trading below their intrinsic value? What’s the idea there? Well, that’s a great question I think part of it is you are judged, as a portfolio manager, based upon some type of index, OK? So it’s interesting, Liz Ann Sonders and I get a chance to host a show every Monday And that’s one of the things that she’s brought to light recently is you talk about the– you talk about the five names, right, your Facebooks, your Amazons, your Apples, Microsoft, and Google, and that they represent, what, 23%, 24% of the S&P 500 now And so there’s a couple things going on with those, right? I mean, if you’re a manager, a portfolio manager, and your job is to beat the S&P 500 or stay in line– or let’s say you’re– let’s even say you’re an indexer You have to continue to add those stocks to your portfolio to make sure that they stay in line with what the index is doing On top of that, you’ve got a much larger influx, now, of retail clients that are buying up these names So as they’re buying it up– and are buying calls on these stocks as well, too– there’s a whole other thing that’s going on as well, too They’re buying the calls And what happens is, as a market maker, if I’m selling those calls, I’ve got to buy the stock So you’ve got this– you kind of got the rock rolling down the hill, right? And you got– it’s picking up speed as it’s moving along So even if you’re a fund manager and you’re saying that, hey, look, I would much rather try to buy everything that’s way below its intrinsic value, sometimes you got to be a little careful Because for some reasons, and for some stocks, there are stocks that are trading below an intrinsic value for a reason And that reason might be, even in the past, maybe they had that growth, but the prospects for growth are slowing down dramatically Yeah That’s one reason why you would see some people move away from value to growth But the bottom line is this– all you’re doing in this example is you’re building that bench And then what I think was more important– or maybe not more important, but is the second step– is you’re waiting for that entry point

And that entry point could be by buying the stock It could be by selling the put There’s a lot of different ways that you can skin a cat in this one But I do like the margin of safety And what I do like about this Excel spreadsheet that you guys have here, that you built here, this calculator is it’s really neat that not only is it– does it– is it very, very user-friendly, but I like the fact that when you look at the future growth, it adds a discount to it It’s not looking at the past growth and making the assumption that that past growth is going to continue down that current path It actually discounts it a bit So when I see something like this, it lends a little more credence to it Perfect Thank you So one, you said the managers were compared to a benchmark Number two, you actually said that sometimes managers are having to chase performance, right, that might cause them to maybe stretch and maybe reach for some of these stocks that might be trading well above their intrinsic value So I’m glad– I’m glad you shared that perspective One thing before we just, real quick, go to questions– I want to go back to you just real quick And I want to bring something up So when we actually talked about the intrinsic value, OK, what we really did, actually, here is it was trying to really forecast potential future growth That’s why we said the years of projected growth was three The problem is when you go greater than three years out, a lot of things can happen By the way, a lot of things can happen in a year, OK? But in our example, we always like to show an example of looking out three years What we also try to do is number– third point there is account for risk The greater the beta, we want to know that Because there could be more volatility, OK? Higher beta relative to the S&P could be more volatility or risk The other thing we want to take a look at is also identify– the last point there is identify the margin of safety The biggest, actually, thing is this is not making the decision that someone has to do all, OK, value stocks They also might choose some value, which can perform quite well in different periods, or income stocks But also at the same time, they actually might pepper, if you want to say like that, or spread into some growth stocks that might have high weightings in a certain index like the Dow, or the S&P, et cetera And so it doesn’t have to be that someone’s whole portfolio is just in value stocks But I think what– one of the things that Joe talked about that is very important– in a market environment, in an economy where many companies could be struggling cash-wise, cash-flow-wise, it’s very important to look at these liquidity measures that Joe talked about It’s very important that we actually look at the revenue and sales, and really, also how some of these companies are really being affected by COVID Who’s benefiting? But then also, who’s going back? It might not– and I’m going to say might not never– it might be more important than ever But probably with COVID-19, it’s probably been more quicker than ever And it’s important to be able to read the gauges that, really, Joe talked about Now what I want to do is we talked about– these were our summary We’re going to go to questions now Number one– we talked about company types, OK? We talked about characteristics of value stocks We talked about the value stocks searches, even showing, for example, on Charles Schwab, prebuilt searches, one of them called GARP And Joe showed us how, actually, someone could get a list Joe did mention that if you take off even one or two just criteria, the list could get a lot bigger just if you drop one or two And then we also showed the intrinsic value calculator that can really be found on right in the fundamental analysis course area What I’d like to do now is I’d like to go to questions So I’m able to see the questions And Joe, if you don’t mind, one of the first questions that got asked is, what does it mean if the enterprise value is negative? What does that mean? Well, that’s an interesting one Because the enterprise value is really kind of the market cap for the firm So that’s an interesting one to see I mean, I haven’t seen too many of those So I can’t even answer that one That one’s a little bit difficult I haven’t seen too many of that at all Yeah, so you– let us– so, number one, you actually said market cap So let’s– it was a $50 stock, OK? And I’ll just do quick numbers If it’s a $50 stock– and let’s say there’s 10 million shares So when Joe’s talking about the market cap, he’s just taking the stock price times the number of shares outstanding Now what it’s actually doing is it’s just adding in the debt, OK? And then what it’s actually doing is it’s subtracting out the cash And it’s also subtracting out the marketable securities, OK, things that could be converted to cash more quickly

So in answer to that, what Joe was saying is, if a company’s enterprise value is negative, OK, it means that the company has a lot of debt, one, or very little cash or marketable securities that could be converted to cash And I agree with Joe’s statement I don’t see too many companies that have an enterprise value of negative But if they do, it’s either, one, they have a mountain of debt, or number two, they have low liquidity, low cash, OK? So thank you for that question And I know that one’s a little trickier You’re not going to see that one show up too often in a lot of these screens, just because that– that’s a very, very small percentage of the S&P 500 So that’s– yeah Yeah Yeah, it’s hard– it’s hard to see that Now the other question from Larry– Joe, you might be able to answer this– does Schwab cross-reference blend-value stocks with ESG– so Environmental, Social, and Governance factors– list? Is this done with developed nation value or an ESG list as well? So let me just stop right there Do you guys have anything where there is a cross-reference of value and also ESG, Environmental, Social, and Government factors? There’s not on the– there’s not on the stock screener But they do have something like that on the ETFs So you have the ability to kind of look at that through an ETF Schwab’s got a really neat ETF screener OK, perfect Thank you Now one of the other questions that came in, it says @James, do you have a script that can calculate the intrinsic value in Thinkorswim? The answer is no I do not have a script that will actually crunch those numbers So what I always tell people is, for example, think about, on a weekly basis, maybe stocks that the investor would consider on entry And Joe talked about, for example, building the bench What are some stocks that the investor might like in their portfolio? The mentality that’s been developed over time is when markets go down, a lot of people think, oh, I’m just going to mentally check out for the next two weeks That’s probably not a great idea When the market goes down, you want to be looking at, what are some of those companies that you were trying to buy For example, the investor said, here’s what the intrinsic values are And if the prices, in the short term, fell, that there might be an opportunity to buy the stock near its intrinsic value, or maybe even below, based on short-term price movement It’s not necessarily the company changed It’s just that price went down And it could just be, a lot of times, short-term So I don’t have any, for example, script But I would say, realistically, 30 seconds, 60 seconds per stock So if you said, James, I have a list of maybe 10 or 15 stocks that I’d really like to consider and evaluate for my bench, my team, so to say, for my portfolio, I think, maximum, 15 minutes a week to see, where are those companies trading And when you start to monitor those companies and see where the prices are, when prices fall, in the back of your mind, you’re already going to have the due diligence done And you’re going to say, jeez, when Apple fell down to $122, that’s what the intrinsic value was And you start to follow some of those stocks over and over again And instead of missing those opportunities, you’re actually prepared for those operatives So I don’t have a script, OK? So Jermaine asks, can I see an example that has an unfavorable? OK, so I like where you’re going with that So I have an example here So Jermaine, in answering that question, I have an example It’s a small company we’ve never heard of before And it’s called PayPal I’m joking with you, OK? We’ve probably heard of PayPal before And what I’m going to do is I have the numbers that I actually ran earlier And I just– in answer to your question, Jermaine, I’m going to show you an example of a negative margin of safety to answer your question So this is from Jermaine Can I see an example of a stock that has unfavorable margin of safety? OK, so this is what it looks like So based upon the metrics that I typed in and the metrics I looked at the stock before, PayPal, PYPL– and it says the intrinsic value is $155 The stock price is $202.73 And the margin of safety is really negative $30.7 Now this begs the question– and this is why I asked Joe that question– why– who would buy a stock that has a negative margin of safety? Well, so not all investors are fundamentalists Some investors are just technicians Some investors actually are just trying to make money upon the trend

And so if we look at the stock in, let’s say, PayPal– now with COVID, you go into many, many, many stores And they say, please don’t pay with cash Please pay with card, or Apple Pay, Samsung Pay, whatever And you see, from COVID, what that has done to one of their arms or their business called Venmo And you’re going to see that the stock was down at $80, and it’s gone up to $215 So this kind of begs the question But why would they continue to actually pay for the stock? Well, if they think that these trends can continue and the company could grow– well, I wonder if the EPS went into $3.18 All of a sudden, it goes from $2.18 to $3.18 Now the margin of safety is not negative But wonder if the company goes to where it even explodes even more, more of their products or services are adopted Wonder if it goes to an EPS of $4.00 Well, now it’s not the margin of safety being negative Now it’s the positive margin of safety Guys and gals, this is why, when you listen to Ernie’s conference calls, the analysts are asking the question, do you continue your guidance on what you think you can do? Or is the company continuing to raise guidance? Or will they? If They, raise guidance, what that could do is it could take a company that has a negative margin of safety and actually turn it into something that might grow into that valuation Joe, anything you want to say on that? No, you hit the nail on the head I mean, basically, you’re paying for growth, right? You’re paying for– you’re paying for what the stock might be worth, what the earnings might be worth, what the cash flow and the revenue might be worth in the future And that’s why I real– wholeheartedly– it is absolutely worth listening to the conference call Because that’s where you’re going to get the CFOs, the CEOs That’s where they’re going to give you an idea of what the next quarter’s, next annual’s, or next year’s annual growth might look like And I want to go back to that first question real quick Yeah Because you did mention the debt The other thing is– and this is why you don’t see this very often Basically, the share price has to be below cash flow And that just doesn’t happen very often Does it happen? Sometimes Does it mean that it’s horrible? No It might mean that you’re getting a stock that’s really, really deeply discounted But it’s also one that’s probably levered up a bit So you do need to– you do need to have some caution in that And James, the other thing I would add too is, any time that you are looking at valuations, a lot of times– and I heard earlier, you guys were talking about dividend yields, and you’re talking about P/Es, and deep discounts Sometimes it’s deeply discounted for a reason So always make sure that you’re doing some due diligence Just because things look cheap in this example– the price is trading below the estimated cash flow– it’s probably there for a reason So just, like I said, do the due diligence behind that Yeah, perfect So the other question that we have is from Ainge regarding, can you please explain how to read the SEC filing? So can you please explain how to read the SEC filing and which points to focus on to determine if the stock is a sure value to invest in? I’ll say my quick points on this just real quick And Joe, if you have anything to add on this– so first off, when we’re actually in classes, we’re actually looking at companies So in the past webcast, we talked about, for example, PayPal itself in terms of the earnings conference call, OK? When we talk about investing, it’s called investing for a reason It’s not spending, OK? You’re investing thinking that the company could be something that actually has some growing value from cash flows, out-comparing their peers, et cetera The biggest, actually, thing is, the SEC filings, we’re mainly looking at the actual conf– we’re listing to the conference call itself Now when the CEO comes on, or the CFO, they work for the company The biggest, actually, thing that would be a good idea is listen to the questions that outside participants are asking, which are maybe more pointed But it’s also very important to really look at the analysis over time of how they’re actually growing their metrics themselves So I’ll bring up something just very quickly When you take a look at, let’s say, a company– and I’ll just use example given Microsoft Sometimes you don’t even necessarily have to– maybe if you say, look, I’m not going to look at SEC filings I might just look at trend analysis of their balance sheets, or the trend analysis of their income statements, trend analysis of their cash flow, their CFO Those can actually be places you could go as well to take a look at So I would say listen to the conference call itself, which is a lot Number two, listen to the questions that people are asking, and why are they asking those And number three is look at the balance sheet, income

statement, and cash flow And really see which direction those are going Joe, anything you want to add to that? No, I agree The one other thing I will add is you guys have a pretty neat tool in TOS, that Trefis fundamental analyzer that looks at the different variables that make up what they consider their intrinsic value for that So I would recommend looking at some of the fundamental analysis tools that you have within TOS, especially like that Trefis one I think that’s pretty slick Absolutely So Joe, I know how you feel on this But if I was going to go back to investing in 1996, I wish I would have actually maybe learned about fundamentals sooner I wish I would’ve realized that fundamentals can drive technicals, and vice versa Sometimes finding good quality companies might also lead to a technical trend that also could lead to an options strategy They’re actually all kind of linked if you actually really think about it And by understanding not just technical analysis, but seeing fundamentals and seeing options strategies, they’re really able to see more 360 as far as what other investors could be seeing that might cause, maybe, the company to be attractive And it’s very important to see the different sides of what other investors are looking for So what I’d like you to do is, as the takeaway, apply what you’ve learned, OK? And we know that value investing might not be suitable for all investors But you might say, James, when I go to the store or wherever– you like to actually identify what’s a fair price And are you getting, let’s say, something that might be a fair deal? Or if you’re paying up for it, why? What’s causing that? Is it sentiment, et cetera? We’d like you to practice, and also search looking for value stocks Practice using the intrinsic value calculator You might start with your own portfolio as well, and maybe also some search candidates You can also, for example, go to these classes where we talk about looking at fundamentals, technicals as well, and combining those Notice that fundamentals are not just in isolation We use fundamentals to build a bench, as Joe mentioned We use, actually, the technicals to confirm the trend of what we’re actually really seeing So we’re out of time here today. but we want to thank you so much for your comments, your questions, and your participation Joe, we also thank you for being here and actually sharing your knowledge, your past, your history as far as on this topic as well And coming up, we’re going to have a closing session by Lorraine And that’s going to be about a 15-minute closing session And then after that, we’re going have what’s called a laugh fest with Frank coming up right after Lorraine So thank you again so much for your comments and your participation Again, thank you so much to Joe as well We look forward to working with you and seeing you in our webcast as well Take care Have a great day Bye-bye