Whale Stock Formula

A great business is much more than just a company with an attractive logo or popular products. Here is where the first five steps of our formula come into play. These steps help us examine if a company is worth considering for investment.

Step one involves scrutinizing the company's financial records to ensure it has a consistent trajectory of increasing sales revenue, earnings, and cash flow. This is akin to assessing the financial health of a business. So, how important is consistency in company earnings and sales revenue?

Take a look at companies like Johnson and Johnson. Despite temporary setbacks, their consistent growth in earnings makes them worthy of the title, "great businesses." Exceptional cases like Amazon, Tesla, and Facebook might have increasing sales revenue without net income and cash flow from operations due to the nature of their business model.

However, not all companies exhibit this consistency. For instance, financial institutions, property developers, and growth companies in the early stages may show inconsistent or negative cash flow from operations. As an investor, you must be vigilant in detecting such inconsistencies.

Step two calls for a forecast of the company's growth rate. A company's past may not be a perfect mirror of its future. Despite high historical growth rates, a company's future growth potential is equally significant.

To get a good grip on this step, employ resources from reliable financial websites which offer consensus estimates on a company's future growth rate. Aim for positive growth rates, ideally in double digits, indicating that the company is on an upward trajectory.

Step three encourages us to investigate if the company possesses a sustainable competitive advantage, commonly referred to as an economic moat. Factors that contribute to a sustainable competitive advantage include brand monopoly, pricing control, and supplier management.

To illustrate, companies like Domino's, McDonald's, and Coca Cola rule the food industry due to their brand monopolies. Other examples include Boeing, which has high barriers to entry, and Amazon and ExxonMobil, which leverage economies of scale. These factors, coupled with a high gross and net profit margin, indicate a robust competitive advantage.

The fourth step involves analyzing a company's high and consistent Return on Equity (ROE). High and consistent ROE is a clear indication of a competitive advantage. This can be calculated by dividing the net income after tax by the shareholders' equity. Aim for an ROE consistently above 12 to 15 percent.

The fifth and final step in identifying a great business ensures that the company has conservative debt. A company's debt should be manageable to avoid the risk of bankruptcy. Assess the company's current ratio; it should be more than one, indicating that current assets exceed current liabilities. Additionally, the debt to equity ratio should be consistent or falling over the last five years. Compare this ratio with competitors to ensure the company is not among the highest.

The second category of the formula focuses on ascertaining whether it is the right time to invest. Factors such as fair value and market momentum come into play here.

The ideal time to enter a buy order is when the stock price is near or below its fair value. You can use several methods to value a stock, such as the Price/Earnings ratio, discounted cash flow from operations, and the price-to-book ratio. But remember, the company should have a positive and increasing net income for accurate valuation.

Timing is crucial in the stock market. As an investor, it's ideal to enter the market when the wins (profits) are high.

Analyze the charts to time your entry when the momentum is in your favor. You should look for support levels at moving averages to identify good buying opportunities. It's crucial to recognize the phase your stock is in - uptrend, consolidation, or downtrend - to determine the ideal time to enter.

Also, it's important not to buy at the high of an uptrend; instead, buy during temporary retracements or dips on the uptrend. Buying at support levels or on breakouts into new uptrends are also good entry points. Dollar cost averaging is suggested to average in and get a good average price while considering favorable technicals.

Despite our thorough analysis, there will always be businesses that present higher risk. Companies like banks, insurance firms, property developers, and commodity businesses are highly leveraged and considered risky. The share price or valuation of these businesses can drastically fall during a financial crisis or major recession due to their high leverage.

So how do we handle these risky investments? Diversification is key. Do not invest too much money in these companies. Allocate no more than ten percent of your portfolio to these risky businesses.

Remember, any company that successfully passes the first five steps of our formula is considered a great business and should be added to the watch list.

In conclusion, the Whale Stock Investment Formula is a comprehensive method for identifying great businesses, ensuring they're at a great price, and timing our entry into the market. By leveraging this formula, you can significantly enhance your potential for superior returns and reduce investment risks, thereby taking control of your financial future.