Intro to Stocks Lesson 4
Pricing a Buy/Sell Decision

      To review what you learned in Lessons 1, 2, and 3:  In Lesson 1 you learned how to begin a basic identification notepad.  In Lesson 3 you learned how to gather the price history information.  With some exceptions that I vaguely mentioned along the way and will go into in full detail in Lesson 5, it is simpler to do the Lessons 1 and 3 exercises together because you're already on the Yahoo web site whose better entre allows promptly using the symbol box to locate the symbol by entering the part of the name that you know or simply to enter the symbol that you want to research.  Then you use the click buttons to get to the various parts of fleshing out the Note File.
      In Lesson 2 you learned how to use Forms 10Q, 10K, and DEF14A on the SEC web site to get the serious financial analysis of the company gathered together. Now you've got a mostly complete Note File together on the company that you're researching and it's time to summarize what you found in the top pair of lines (if there are exclusions against getting involved with the stock) or to do the pricing at which you might rationally be willing to buy shares (or to sell shares if you already have some).

      Since the stock chosen for these exercises "MRK" does have some excluding factors, let's review all of the things that can ban a stock from rational purchase or that significantly modify the pricing if they aren't serious ones:
      DEFICIT TANGIBLE EQUITY   a fatal flaw and clearly identified in your Note File if it exists
      DEBT LOAD EGREGIOUS   a fatal flaw clearly identified already if it exists
      PRICE REVENUES GREATER THAN SEVEN   a fatal flaw clearly identified already in your Note File if it exists.  By way of explanation if *any* price that shows in your pricing analysis is PRgt7, that fatal flaw is recognized even if subsequent market pricing has brought the Price/Revenues ratio back down somewhat or even a whole lot below the "7.00".  "Somebody" was buying at those absurd levels and they form a portion of the overhead resistance to any subsequent future advances.
      GREENMAIL PAYMENTS EGREGIOUS   a fatal flaw clearly identified in your Note File if it exists but with a "questionable" area between -20.0% and -40.0% where it is only "marginal Greenmail Payments Egregious" such that the dollars per share amount that you computed becomes a deduction from whatever price you might otherwise be willing to pay for shares on the premise that if the manglers have already stolen *that* amount they're likely to do it again before you get clear of your position in the shares.
      BLOWOFF DANGER RATING   a fatal flaw clearly identified in your Note File, if it exists with a rating of 3.00x or higher, but which doesn't matter if the computation shows less than 3.00x.
      ELEPHANT STAMPEDE RISK or CONTROL PROBLEMS   a complicating factor which never prohibits getting involved with a stock, especially not these days when "Institutional" and "Mutual Fund" gangs (which I generally refer to as "elephants") have taken effective control of the vast majority of companies, as is the Control Problem of an excess of 19.9% ownership by insiders, but which does require consideration in pricing any purchases if the stock is otherwise buyable.  It does need to be *mentioned* in the top line evaluation, one way or another if it exists, even if the stock is otherwise buyable.
      BEZZLE FACTOR   which is an exclusion only when it gets into the LUDICROUS range of 50% or above, but becomes part of a divisor into pricing decisions if the stock is otherwise buyable in every range down to the midpoint of the HIGH range (12.5% to 25.0% midpoint 18.75%).  So if the Bezzle Factor is less than 18.75%, you need not even note it in your pricing decisions, but if the stock is otherwise buyable, it needs at least to be mentioned in the pricing decision.  So there is the potential for an exclusion with BEZZLE FACTOR LUDICROUS and a noted influence on pricing at the DANGEROUS, ALARMING, and above midpoint of the HIGH ranges.

      If *any* of the exclusions apply after reviewing the stock that you're analyzing but don't yet own any (as at least several do for "MRK"), you begin by placing a ",810101" between the ticker symbol at the top of your Note File and its concluding "]".  Then you say " *LONGS EXCLUDED due to " and list each of the excluding factors in all caps with commas between each applicable exclusion, beginning one space immediately after the concluding "]". This makes it really easy to see your CONCLUSION about the stock at the very top of its Note File.  If you already own some shares of MRK, that "longs excluded" would be replaced with "PURCHASES EXCLUDED".  The word "LONGS" does not refer to anybody's family name but to owning shares of stock as distinct from "shorts" which means having borrowed shares to sell and being obligated to replace them at whim of the lender, regardless of whether the price per share has declined to the point where you can make a profit on purchasing shares to replace what you borrowed (a compulsory situation which I avoid like the plague that it is, as are all compulsory purchases or sales, and which recently created a $100,000 obligation for a guy who had only a small account with his broke maker because a criminal manipulator rigged the price thousands of percent higher on a merely overnight time frame).
      Since many of my computer programs use that "810101" as a key reference for computer processing, it does have to be there.  But my programs also want another line following that top, perhaps set of, line(s).  In that new second line for an excluded stock you say "*YYMMDD actual file date but uninvestable situation records it as 810101" using the date of the financial report from which you gathered its equity, debt load, and revenues information as the YYMMDD part.  That also tells you right next to the top of your Note File, without having to reread the whole thing, how "out of date" your evaluation has become.  As a practical matter, I won't review anything that has exclusions which are within two years of the current date and I'm sometimes chary of wasting the time updating Note Files for longer periods of time when the companies were wildly off limits on numerous aspects.

      The discussion above pretty much concludes your Note File about "MRK" which we both know contains several excluding factors.  If you want to you may email to me a copy of your completed file.  Make sure you omit any blank lines between the asterisked sections since that only makes it harder to read (that's what the four space indentions on subsequent lines are for to distinguish the sections).  Some text processing proggies other than NOTEPAD may have some "problems" getting that done, although I understand those other proggies do have ways of exporting .txt files.  But let's go on in this Lesson 4 to talk about the potentially buyable stock that eventually you're going to find, despite their scarcity these days, one that *doesn't* have any excluding factors but only the relevant question of how much you can reasonably pay for shares with expectation of a reasonable profit.
      Sticking with "ordinary" stocks for this discussion (there are some special rules for special kinds of stocks which I get to in Lesson 5), there are several ways of identifying the "maximum permissible paying price" for shares of stock.
      One of them *is* the "half level" that you computed in Lesson 3 during your evaluation of its price history.  Various other ways of computing maximum paying price get quite distorted under certain kinds of market conditions where the sources that I rely on for estimates of "full value" tend to get wildly optimistic about their projections.  The recent two years of virtually flat sideways markets has been one of those times where other methods than "half level" are producing grossly excessive estimates of maximum paying price.  Hard and fast rule of mine, enforced by some serious losses a decade or so ago before I learned it, is "NEVER pay more than half price".

      The second of them is the first E=25% level computed from the Value Line Investment Survey's projections of "full value" based on *their* emphasis of analyzing the "earnings" (air ninnies) of companies. They're reputable enough and good enough at what they do that I consider them a *useful* if not terribly reliable source for estimating "full value" for those roughly 1700 stocks that they cover in their service. You may be able to look at the VLIS in your friendly local library if you don't already have your own subscription.  For those who aren't already subscribed, I am providing a sample of what I *derive* from their publication in the way of estimated full value for "MRK":

      >  *190222 VLIS prcd at $80.77  1  1  75  90 (was 65-75, 55-70, 50-60,
      >      45-55, 55-85, 50-70, 30-45, 50-65, 60-80, 55-65, 75-90, 85-100, 80-95,
      >      85-105) A++ divs 2.20  pg 1624  Merck & Co Inc.  $37.39 at $86.46

Reading through the elements in that set of lines (which you may copy into your Note File for "MRK" just below the CONCLUSION line(s) and just before the Equity/Debt/Revenues set of lines), here's what I gather into that computer generated *translation* of what VLIS has to say:
      First is the date of the report from which I extracted the VLIS *opinions*, in this case adjusted to the date of current market when I extracted my derivation of the VLIS projections.  Then a mention of whose stuff I'm evaluating and the last trading price that *they* recognize in their publication (not necessarily the same as a current price for those stocks that have been excluded for one reason or another or which I simply don't follow in my own charting and pricing systems but in this case it was the 190222 closing price).
      Next is a pair of numbers, in this case "1  1" which represent *their* opinions of the "timeliness" and "safety" of the company. Regularly has nothing whatever to do with reasonable expectations of stock price rising nor of the "safety" of investing in de facto bankrupt, debt drunk, thieving of stuckholders equity, grotesquely embezzling trash papers.  But since it is their opinion and they are widely published and followed, I gather that into my VLIS lines.

      As an historical footnote, I was burned very badly some years ago buying into one of the VLIS "1" ranked "timely" stocks which they put there on behalf of a major criminal gang (Gulled Mon Sux) which promptly ran a "bear raid" against the stock, threatening to sue the then still competent Wall Street Journal for disclosing criminal activities of the company involved, then selling their own shares and those of favored customers of the major criminal gang to victims such as myself and clients of mine, then "admitting" to the disclosed criminal activities and running a horrendously low priced "buyin" of the shares bought by their victims, then offering to pay a nickel a share as compensation to victims who submitted proofs of loss (for purposes of collecting signatures for use in their felony identity theft activities), but in fact never even paying that minimal compensation for their criminal activities on behalf of the subject company.  However good VLIS may be at analyzing air ninnies, their "timeliness" rankings are generally rigged on behalf of elephant clients of their Institutional Services.
      Next is the one pair of numbers that VLIS publishes "75  90" that I have found to be useful which represent *their* estimates of future pricing respectively three years and five years into the future, based entirely on *their* evaluation of the air ninnies of the company and *their* views of how the economy is going to develop during that time period.  Since I've been subscribing to their service for decades now, I keep track of what their earlier versions were, adjusted to reflect the current stock (the parenthetical set of "was" numbers).
      Next is what they *call* a financial strength rating which I continue to track (along with their earlier versions) despite the reality that they regularly assign really good ratings to de facto bankrupt, debt drunk trash paper that my survival requires me to avoid like the plague that those companies are.  The best explanation I have of what that "financial strength" rating *means* is that it represents what felonious foreclosing bunkos WANT SAID about the trashy companies on which they have "not yet" foreclosed so as to wipe out cash paid public stuckholders.  But I track it anyway because that's what "THEY are saying" about the company.
      Next is a statement of "divs" which are either "0.00" as in "they don't pay any dividends to their beleaguered stuckholders" or is an "estd divs" figure which is only an estimate and frequently bears only vague relationship to what the company is actually paying or is a "divs" number greater than 0.00 which reflects what *I* am actually getting per year on shares that I own regardless of what the VLIS "estd divs" might be.
      Next are the most recent page number within the VLIS service and most of the name of the company.  Lastly are a pair of numbers which are strictly of my own computation and which have only a "starting point" relationship to what VLIS had to say.
      The first is an E=25% computation which is that price which would produce an annual return on investment of 25% per annum if and only if the stock winds up at the midpoint of the VLIS projections four years into the future including the expected dividends during those four years.  Lotsa "ifs" in that computation but it is a number that I find useful.  The reason for the requirement of "25%" to get involved with stocks is that there are so many losses, bunko rapecies, and washouts along the way that the "good ones" really do have to generate at least that to make any of the process worth while.  If I can't compute at least a 25% per annum Return on Investment (ROI), it just isn't worth doing (exceptions will be duly identified in other lessons).
      The second of my computed numbers is the estimated "full value" four years into the future based on the same underlying midpoint of the 3-5 year VLIS figures including expected dividends during that period. It is useful as one estimate of an appropriate *selling* price when as and if it is reached.
      The first of my computed numbers is another version of the "maximum permissible paying price" and the second of my computed numbers is a first version of "estimated full value".  So if it weren't for the fatal flaws of "MRK", I *might* end up with a top line (different from the LONGS EXCLUDED that actually applies) that reads something like:

       >  [MRK,181130] *190225 QUOTING  bid $23.24/sh at $86.46/sh full value
       >      (none offered [if I don't own any]), bid based on half level
       >      at 33.20 is less than first E=25% less 10% Greedspan Wrongdoing
       >      discount less 10% Frag Fraud risk less 10% Elephant Stampede
       >      Risk [full details on what those are a bit later in this lesson]

What that does is to provide me with a maximum permissible paying price (the most I would be willing to pay for a *first* tax lot of shares) and an estimate of what I would be looking to get out of the stock at some future point in time (officially 3-5 years in the future).  It is a silly computation of bid and ask in the situation of "MRK" which is LONGS EXCLUDED for a multitude of reasons, but I wanted to show you what it might look like for a company which doesn't have all those fatal flaws in its financial structure.

      But as is true for roughly two thirds of the companies in my Note File system, what is a person to do if the Value Line Investment Survey *doesn't* provide any pricing guidance?  One still has the half level, always computable from the Pricing Analysis, but that doesn't help much for determining estimated full value since that reflects only what the crazies in the market have done to boost the price to double that number.  What one does have is the computed Net Tangible Equity from the Financial Analysis.  On the assumption (and it is an assumption since the books "coulda" been cooked) that that Net Tangible Equity represents the best available estimate of future value, one could start from the NTE computation to compute the same kind of "what does it take for me to get 25% per annum out of this if I buy some?"  1.25 to the fourth power (four years typical holding period) is 2.4414.  Dividing the current Net Tangible Equity by /2.4414 also provides me with a "first E=25%" number for use in bidding.  That one is almost invariably less than the half level but still needs to be Bezzle adjusted, when applicable, because what authorized embezzlements *do* is to take the top off of anything the stock price might otherwise be capable of doing and the Bezzle Factor is the best estimate I have of "how much" is going to be taken off the top by the insiders getting those freebie shares.  No need for the Greedspan, Fragmentation Fraud, and Control Problems adjustments because we're starting from a hard core "certified by the Auditors of record" valuation already adjusted for all of the fluff that got included in the Balance Sheet under Genuinely Asinine Accounting Pretenses,.  In this situation, the current NTE is my initial estimate of "full value" that I expect to get out of the stock, of course subject to updating as subsequent financial reports are issued for the shares.

      Whatever the lowest of those maximum permissible paying prices might be (always use the lowest of them), there are certain deductions which need to be made.  Keep in mind, this stocks thingy ain't about "pride of ownership" (although I do a little of that which I'll tell you about later), nor is it about "going with the crowd" nor is it about the felony tax evading religionist "faith hope and charity".  It is about money, YOUR HARD EARNED MONEY, and the need to employ it FOR PROFIT if at all.  That means avoiding the pompous pushings of scammers such as the Frauderal Reserve Bored's Gee Rome Pow Hell, the Presidunce Don Old Trumpet, the flock of 535 legis critters destroying the nation for fun and profit, the gutted and looted "media" writers pushing whatever trash paper they're being paid to promote, and all the rest.  It's YOUR MONEY which is at stake and YOU need to get a profit for using it if you do anything at all other than keep it as money.
      As I think I've mentioned numerously, His British Lordship the criminal mastermind Greedspan has seriously trashed the financial and economic systems of the former United States of America, now Loonie Tied Studs of Merka.  So whatever price I otherwise might pay, I deduct 10% to adjust for those serious trashings.  Another is the modification from fair and orderly publicly accessible continuous auction markets to wildly fragmented and unreliable markets where "market makers" quite different from the responsible specialists who "used to" maintain orderly markets on the former New York Stock Exchange (which hasn't actually existed since the criminal purpose takeover by Gulled Mon Sux and Citicrap of the NYSE replacing responsible specialists with criminally manipulable "computer" systems).  Instead of a centrally located competently managed market, there are now a plethora of market FRAGMENTS leading regularly to Fragmentation Fraud in which rationally placed orders are disregarded in favor of cronyism and overt manipulation of prices.  Such frauds damage my trading so regularly that I insist on deducting 10% from any buying price I might otherwise pay to adjust for "Frag Fraud risk".  The most frequent occurrences of fragmentation fraud occur on the sell side when high speed traders "penny" my offers and then drive the price down, but I have had situations where negligible of my eldest in market order actually got fillled and the "market maker" took substantially more shares than I had even been bidding for at my eldest in market price.  Thirdly, and it applies to the vast majority even of otherwise qualified stocks these days, there are the complications produced by Elephant Stampede Risk or Control Problems, even if those problems haven't *yet* manifested themselves in felony thefts of the ratable property of continuing stuckholders euphemized as "stock buybacks" and measurable as Greenmail Payments.  Use the correct label of "Elephant Stampede Risk adjustment" or "Control Problems adjustment" but deduct 10% for that set of problems too when it exists. So in some cases you wind up with a maximum permissible paying price which is -30% (times 0.7) of what it might otherwise be, simply to adjust for the systemic disasters which have been inflicted on the former markets since 1987.  In theory, in some hoped for but improbable future, those adjustments "could" go away but the reality of criminal gang takeovers, such as have been inflicted on the former markets of the US since 1987, typically never do.

The primary purpose of this Lesson 4 has been for you to gather together from your existing Note File about "MRK" those factors which exclude it from consideration for squandering one's hard earned money.  But I also wanted to acquaint you with what the situation begins to look like when you do find "a good one" that is financially sound and not engaging in any of the destructive behaviors which have become altogether too common these days.
      Bob Grumbine      :-)##               Onward to Lesson 5               back to Bob Grumbine's Central Blogging Site