Alacer Gold Stock Analysis – Why I bought and why I sold

 

  • I sold Alacer because it is not a value play anymore, it is more of an exploration play now.
  • What the market didn’t see last year was positive growth, what the market is missing now, might be a negative in the form of lower future ore grades.
  • However, there are still 3 catalysts that could push the stock price higher; a dividend, more exploration success at Aldrich and, as always, higher gold prices.

In 2018 I did a comprehensive analysis of gold miners, I spent more than a month on them and deeply researched about 40. I wasn’t pleased with what I found but Alacer Gold (ALIAF) (ALACF) looked good. We can say it was my favorite gold miner in 2018 as it was not just a bet on gold, but a value play with a nice business proposition thanks to the Copler sulfide project.

Since then things have changed, most significantly the stock price increased as the market noticed what ALIAF has been doing.

alacer.PNG
As the exploration results led to a new resource that will feed the old oxide plant, the management increased guidance and said ALIAF could become a 300k to 400k ounces producer.

alacer management

Source: SA Transcript

However, the path towards such high production levels is long and the ore grades of the sulfide ore aren’t really indicative of higher, sustainable future production. But this doesn’t mean there are no catalysts for ALIAF or that it now is a bad investment. The catalysts that could push it higher in 2019 are a dividend or buybacks, new successful exploration results and higher gold prices.

For me, when the stock price increases and reaches my intrinsic value, the risks are higher and the rewards lower so I prefer to find other, less risky value investments with a margin of safety.

You can hear more about why I sold in my video discussion.

0:43 My Alacer Ownership

1:57 Why did I buy Alacer

3:35 Sum of parts value

4:28 What changed recently for ASR

5:28 Stockpile and ore grade difference

6:33 Ardich expansion and exploration

7:30 Cash flow model

7:58 3 future catalysts

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ADM – A dividend stock to own for the long term

Contents

ADM company overview

Investment strategy

A few notes from the last conference call

My personal opinion

I analysed Bunge, as it seems like the cheaper stock between the two, but ADM looks like a better business.

ADM company overview

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Source: ADM investor presentation

Unlike Bunge, they grow by acquiring smaller players and including them into their business model and possibly scaling the smaller acquisition.

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Source: ADM investor presentation

Operating profits are stable.

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Source: ADM investor presentation

And earnings per share too.

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Source: ADM investor presentation

The return on capital is 300 basis points (3%) higher than Bunge’s and 200 basis points above their cost of capital.

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Source: ADM investor presentation

They plan to increase the dividend pay-out ratio by 30% in the medium-term range.

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Source: ADM investor presentation

The increased dividend payout should lead to constantly higher dividend yields. Thus, what is now 3.24%, could quickly become 5%. 

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Source: ADM investor presentation

The last dividend is their 349th consecutive quarterly payment and an uninterrupted record of 87 years.

Net debt is smaller than Bunge’s and the available liquidity allows for flexibility. 

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Source: ADM investor presentation

Investment strategy

If ADM continues to grow as it did in the past given that it has the foundations to do so, plus the acquisition potential, I would assume its operating profits could reach $5 billion per year over the next 10 years.

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Source: ADM investor presentation

This also means that distributions to shareholders would be 50% higher than in the last 10 years where the dividends paid out were $5.5 billion and buybacks $6.1 billion. Thus, over the next 10 years, allowing for the normal cyclicality in the food sector, I would say ADM could return at least $15 billion to shareholders. That implies a 6.5% dividend and buyback yield. 

Also, if profits increase 50%, we could estimate the stock price to increase accordingly. So, in 10 years the stock price will probably reach $60 at some point. This adds another 4.1% yearly yield and makes ADM a probably double digit investment over the long term. 

If food prices increase significantly, processing margins improve, there could be exuberant periods like it was the case in 2007, 2014 and 2018.

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The total shareholders equity is $18 billion on a $23 billion market cap giving some margin of safety, but the accumulated depreciation is $15 billion. We could assume that some things can still be used even if the accounting value is zero. The replacing value could be much higher than the $10 billion carried on the balance sheet. 

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Source: ADM Morningstar

There is also the 24.9% stake in Wilmar, a $15 billion company traded in Singapore. The value there is $3.75 billion. 

A few notes from the last conference call

The plan is to save $1 billion from efficiency improvements and digitalization. I remember when I worked for Dow Chemical, there were all these little projects and I can tell you those improved small efficiencies cumulate over time. I see Dow did manage to improve margins over the last decade, the plan is that ADM could save $1 billion.

They expect higher interest payments as they are investing now for the long term, something Bunge can’t do as it has to deal with its issues which makes it another advantage for ADM.

In 2019 they will complete the acquisition of a French animal feed business, Neovia for $1.8 billion in cash. Neovia’s target was to reach $230 million of EBITDA by 2025, perhaps they will reach it sooner now.

ADM is a growth story with more than $7 billion in growth investments over the last five years including key investment like WILD for Taste ($3 billion), Biopolis for Health & Wellness, Neovia for Animal Nutrition, Algar in South America and Chamtor in Western Europe as well as other bolt-on additions and organic investments

My personal opinion

I target an investing business return of 15%. ADM’s average earnings and cash flows point to a 10% investing return so I have to be patient and put this on the watch list. You never know what can happen, but around $30, this might be a very interesting investment. For now, it looks like a good one. 

Also, as ADM’s CEO said, low interest rates allow for high investments that leads to high competition and food oversupply, consequently leading to low margins for processors. ADM is doing fine in this environment, if the environment changes over the next 10 years, ADM might do even better so something to keep in mind. We have been having 5 years now of bumper crops thanks to good weather globally. 

On $3.4 billion in operating profits, $1 billion in capex and about $350 million in interest expense I get to cash flows of around $2 billion. On a $23 billion market cap, that is a 9% return. Given the possible future growth of 4% per year as demand for food grows, I would look at this and compare to my other holdings at 12%. So, ADM’s market cap should be around $16.5 billion for me. That is another 30% down to $30 for the stock price. It is highly unlikely that it ever gets that low, but you never know. Let’s put this on the watch list. If you are happy with the exposure to food, like 10% per year, ADM looks like a stable and shareholder rewarding option. 

Less aggressive investors could wait for opportunities below $40 but anything below $45 seems like a good buy for 98% of investors. 

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Source: ADM investor presentation

Earnings per share are $3.19, we can assume growth of 4% over the long term and a terminal value at a PE ratio of 12.

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If the stock price drops to $30, we would have a 7% return from the stock which would bring this to 11%. 

So, cash flow return is 9%, stock plus dividend return around 7%. Thus, in line almost.

I am analysing the food sector and I must say, ADM looks better than Bunge, also better than Ingredion as it offers more stability thanks to scale. 

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Stock Market Crash, Economic Collapse, Rigged Markets? How to invest rationally!

Good day fellow investors,

Last week I made the news on the topic how one should focus on the businesses he invests in and not so much on the macroeconomics.

I’ve got this interesting email discussing how I am missing many points:

Underlying factors that affect the metrics you used in your article:

  1. The role of the ESF in market ‘rigging’. – U.S. Treasury’s Exchange Stabilization Fund
  2. Stock buybacks from the new tax code (fudging the numbers you are working with).
  3. The key role the central banks are playing by keeping interest rates artificially depressed, thus not exposing the true cost of debt servicing.
  4. The sheer number of Zombie companies and historic high levels of BBB bonds.

Plus, how I should contact Peter Schiff, Gregory Mannerino and I would get quickly to 100k subscribers!

All the above is all correct, if I make a business analysis, I get 2k views, if I put stock market crash in the title, I get 4 times more views.

1 views

And in this article, I really want to put the topics of market rigging, buybacks, low interest rates, zombie companies into an investing perspective because I think there is a big difference between investing and protecting yourself from something that might happen but doesn’t have to happen.

2 keynes

When it comes to investing, the key is to achieve the best risk reward return and always remain solvent, no matter how irrational the market might seem.

Contents

Stock Market Fear and Irrationality

THE MAIN QUESTION IS HOW TO INVEST?

Market rigging!

Stock buybacks from the new tax code (fudging the numbers you are working with)

Artificially depressed interest rates

Corporate credit, zombie companies, government debt

How to invest keeping the risks in mind

THE MAIN QUESTION IS HOW TO INVEST?

One should think about HOW TO GET BOTH; good returns from businesses and protection from what might happen while taking advantage of possible market rigging. That is what I focus on and the message of this article is to try to give more balance to the possibly predominant message on YouTube regarding Stock market Crashes and Economic collapses etc.

We as investors have to focus on how to get the best risk reward return to reach our financial goals. Let’s say that gold explodes in 2034, I bet you that 98% of all those invested in gold at the moment, would not have the patience to wait till then to realize profits. That is one, plus, by 2034, if you have $1k now and you get a 15% return because you understand the market;

You know it is rigged,

You know buybacks are strong,

You know interest rates will remain low, or inflationary due to the huge debt,

You stay away from zombie companies, buy those that will do even better when the competition dissolves!

Your 1k become 8k thanks to the power of compounding, earnings and dividends that you don’t get if you buy insurance. Actually, insurance is a cost.

Let me put the things into perspective!

Market rigging!

The market has been rigged since ever – it is in the interest of most politicians, policy makers and people that stocks go up, pensions go up, everybody has more money, more confidence, spends more and even wages go up a bit – so it is in the interest of the current economies that markets go up, collaterals go down, and everybody is pushing for it to go up.

Take advantage of it.

On silver markets, gold markets, there are many speculators that make it look crazy and rigged because there is no rationality there. You can’t eat gold; no dividend and it doesn’t grow. In the 1980-s the Hunt brothers tried to rig the silver market. They owned 30% of global silver but regulations broke them.

Silver price:

silver price

Stock buybacks from the new tax code (fudging the numbers you are working with)

4 smart

Source: Reuters

$940 billion of buybacks expected in 2019, that is 3% of the market.

There will be ups and downs, but some buybacks are smart if made below book value, or replacement value or intrinsic value, and those values are in the eye of the beholder.

5 bubyacks

Source: Yardeni

Try to find buybacks that increase your value, your ownership and avoid those that destroy shareholder value. Compare many stocks and you will find the difference.

Artificially depressed interest rates

As long as it works, it does good in the short term while it is uncertain for the long term – again, as an investor you have to understand the game and play it wisely. The tide could change with a big inflation, but that is why I invest in businesses that would do well if there is inflation but that also do well in this environment. I get dividends, I get growth, expansion etc.

6 rate

Source: FRED

Corporate credit, zombie companies, government debt

Governments and corporations have increased their leverage as low interest rates allowed for lower borrowing costs. US government debt quadrupled in the last 20 years.

government debt

Source: FRED

However, this situation can be solved with inflation for the government and with bailouts for corporations. Plus, when zombie corporations finally fail, the environment will be healhier for good businesses. I’ll talk more about that in the next article discussing Archer Daniel Midlands (NYSE: ADM) where the CEO actually hopes for higher rates to limit the competition.

How to invest keeping the risks in mind

Now, what I just said, doesn’t mean I completely disregard it, I’m not stupid, I am not invested in companies that would go bankrupt in case interest rates go up, I am looking for both, both good businesses, that offer business returns and protection in case of any kind of crisis.

You have three options to invest your money!

The first option is to focus on protection: gold, put options, Treasuries (if you can call them protection). The second option is to focus on businesses, growth, business returns and investments.

Your $1k becomes $8k in 15 years with a 15% yearly return. If you own gold, and the dollar loses 50% of its value, you are at $2k, no dividends, no business, a lot of stress because you depend on what others are willing to pay, not on actual value.

I must say I did a lot of research on macro, especially when I was writing articles on a daily basis three years ago as that was my job, but my conclusion is, that one should be smart and take advantage of what is going on and not bet on something happening because it is logical to happen.

The situation was crazy in 2009, and many sold what they had fearing the macro voices, I was buying businesses in 2009, nice 5 baggers for me.

2 gdx

I took a loan 4 years ago, bought a house, and it was probably the best risk reward investment in my life. Fearing a crash would have me being without huge gains over the last 10 years.

The third investing option is to have it both. For example, a company I was heavily invested in 2018 was Nevsun Resources, a copper miner with a promising project in Serbia. However, what the market disregarded was that 30% of revenue from the project were from gold, not just copper. So, you can buy investments that give you a business return but also protection just in case some of the above mentioned risks materialize. I am now exposed to silver with my portfolio, but if you would take a look at my portfolio, you would never imagine it has a silver call option in it. That is because I like it both; give me business growth and give me the insurance part for free.

Think about it, although so rational, I reiterate my question, is it and will it actually be profitable to be scared or you should simply see how to get the best out of it all?

To put things into perspective, don’t focus on what should rationally happen due to text books or chicken littles, but put probabilities onto every conclusion. What will happen in the future is probably something unknown, be ready for it by investing in both.

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Ingredion stock analysis – 10% yield

Summary – Ingredion

The operating cash flow yield is 11%, the company expects to grow earnings at 8% per year over the next 4 years, the PE ratio is just 13 for such a growth story, the cash flows are strong, it is a defensive stock and the returns might be substantial for investors over the next few years.

The company operates in two segments; one is a commoditized, low margin starch and sweetener production while the other is specialty ingredients that bring high margins and growth. It is important to keep the two separated when analysing the company as the market might miss the big picture.

Contents

Summary – Ingredion

Introduction – Lamb Weston Holdings Example

Ingredion Business Overview

INGR’s potential business growth

Current situation with Ingredion

Investment outlook

Introduction – Lamb Weston Holdings Example

When it comes to food stocks, if you can find a company that will grow thanks to more food consumption and won’t be hit by volatile food prices, you might have a winner. An example is Lamb Weston Holdings, Inc. (NYSE: LW) that is in the business of potatoes, mostly frozen fries.

LW is a ConAgra foods spin-off that did extremely well. Since the spin-off in 2016, the stock is up 112%.

1 LW stock price

Source: CNN Money – LW stock price

What did they do? Well, they invested in growth, had a nice return on capital, expanded margins and consequently earnings. Revenues were up 20% over the last 3 years, earnings 50% as there was margin expansion and the dividend increased too.

2 LW fundamentals

Source: LW Stock fundamentals – Morningstar

What they did is, acquired smaller players that allow for scale and expanded their own facilities. So, the above is something to look for when looking at such growth, niche food stocks.

Just an ending comment on LW, potato prices are increasing and 2019 earnings are already expected to be lower so a PE ratio above 22 is a bit risky for me and what is a bit expensive is a free cash flow yield of just 3%. I prefer higher yields if possible, or less growth risk so I am not going to dig deeper into LW, but it is a good example of what to look for. At the spin-off date, the stock was at $30, with current earnings at $3.21, the forward PE ratio was below 10, implying a double-digit return. A company that might do the same is Ingredion (NYSE: INGR), let’s see.

Ingredion Business Overview

INGR is an ingredients company. They produce starch and sweeteners that are commoditized products which make 70% of revenue but less than 50% of profits and specialty ingredients that include flavours, colours and other stuff that goes into processed foods to make it look better and taste better. The specialty section has higher margins as it often includes own formulas. It makes 31% of revenues, up from 20% in 2010 and more than 50% of the profits.

3 Ingredion business

Source: Ingredion

Although we all know of the unhealhiness of processed foods, the trends are clear, people want better, faster and more convenient food. This leads to more and more demand for processed foods, artificial flavours, starch filled foods with sweetener that the market for INGR is there and is growing. I personally think the whole sector, that actually caters to the American diet, is worse than tobacco for people’s health so I don’t think I’ll invest in this, but if you need money for a heart bypass in the future due to your bad diet habits, you might as well make money on INGR.

I’ll just show one example of what is going on in the environment and then I’ll go back to business and investment analysis. So, a company wanted to reduce costs with its spreadable cheese so they replaced the milk fat, i.e. cheese with starch. So, people will think they eat something related to cheese while in fact it will be starch.

5 ingredion example

Source: Ingredion

Unfortunately, given how prepared and processed food aisles are just growing and growing, the market for INGR will probably grow and grow, especially in emerging markets. As economic power grows, cooking is something mostly watched on TV and seldomly done in the kitchen.

INGR’s potential business growth

The company expects to grow sales mostly through their specialty segment. The other part of the business, currently making 71% of sales is commoditized, sweeteners for example, that has lower margins. Therefore, the focus is on specialty ingredients that lead to higher margins.

6 business growth

Source: Ingredion

Even though the growth in sales is expected to be small, margins and earnings should expand by high single digits per year.

7 earnings expansion

Source: Ingredion

High single digit earnings expansion over 4 years, on a PE ratio of 13 could be very significant. Their net debt to EBITDA of 1.7, compared to LW’s 4, allows for more room for growth through acquisitions, that are often a good thing in a growing market.

8 acqusitions

Source: Ingredion

If they reach their target return on capital employed of 10%, investor should expect similar returns. Plus, there is always the possibility that somebody bigger buys them. As we have mentioned in the food sector analysis, mergers and acquisitions are common in the sector.

9 target roce

Source: Ingredion

Current situation with Ingredion

Things haven’t been really that great with INGR lately. The stock is down more than 30% over the last year. The reason for the decline is weakness in North America on lower sweetener prices and a lower than expected guidance, also because of lower commodity prices.

10ingredion stock price

Source: CNN Money

However, the specialty ingredients part continues to grow and the company has been delivering on the ROIC above 10% for the last years, so we can expect it to continue to do so and even improve margins.

On the shorter-term noise, there are issues in Mexico related to retaliation for US corn sweeteners, the situation in Argentina is unclear, margins are expected to decline in some segments but those look like normal business issues.

If they could do an acquisition like the National Starch one, they did in 2010, where their earnings quickly jumped from $3 to $5 per share, that would be great but perhaps current market circumstances prevent them from doing that as even Buffett says valuations are sky high for acquisitions. Since the 2019 acquisitions they have kept debt levels steady between $1.6 and $2 billion.

Investment outlook

Estimated EPS for 2019 is between $6.8 and $7.5 so if I take $7, that is still just a PE ratio of 13 for a company that expects to grow earnings by 8% over the next few years. If they deliver on their promises, we could see earnings per share of around $10 in 2022, and depending on the valuation and future expectations, a price between $120 and $170. If I take an average target price of $150 in 2022, 4 years from now, that leads to a 13% yearly return plus a 2.7% dividend and some share repurchases. In 2018 they have repurchased $607 million of stocks which leads to a 10% buyback yield, not bad.

Cash from operations in 2018 was $703 million, that gives a cash flow yield of 11% where capital expenditures of $349 million are focused on production expansions across the globe.

Food, and especially INGR’s starches and specialty ingredients shouldn’t be much affected by a recession, so we can call it a defensive stock. If their specialty segment manages to take over, turn this into a growth stock and not a stagnating stock due to commoditized products, things might get interesting again as temporary price pressures weaken.

If you want a food stock to follow, this might be it. INGR looks like a stable defensive business with strong cash flows, a good management and a focus on rewarding shareholders.

I am personally not that happy with the healthy side of what they do as I don’t consider sweeteners and starch much of a meal, but you see how it fits your portfolio.

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Stock Market News – Forget About News

Stock Market News – Stocks might crash, recession ahead, so what?

Will there be a stock market crash, will there be a recession? In this article I’ll show you why it doesn’t really matter and what are the real things you should focus on!

We will discuss:

Contents

Politics and economic news vs. business news

Earnings are the key, not economics

Market valuations

Will there be a crash?

Earnings and volatility

How to take advantage of volatility

Invest when you are happy with the business earnings

 

Politics and economic news vs. business news

Over the past years, I’ve been making some macroeconomic videos, I like the mental exercise, analysing the long-term risks etc. However, I must say, all that ‘mumbo jumbo’; GDP, economy, debt, trade wars, employment, housing etc. hasn’t helped me at all when it comes to investing. I am subscribed to an economic newsletter from the Wall Street Journal and in the last 4 weeks there were two positive and two negative headlines all about the US housing market, so funny.

The fact is that companies are living beings that adapt to circumstances, grow and change over time. By looking at the business, not the economy is actually where I get my investing value. As I am really pushing on the research, more and more of it will be business specific and less macro. Although macro is fun to look at, discuss and you can talk about it for eternity, talking about it doesn’t really help your portfolio.

For example, the S&P 500 has been flat since January 2018.

news

Source: CNN Money S&P 500

The point is that nobody could have predicted where the S&P 500 could have gone, it could have been up 20% or down 30%. It is all a guess, no matter how much macro you study. The point is that we have to focus on the business, nothing else.

I’ll take this opportunity to discuss the real news and news that could be important for your portfolio.

  • Extremely important news 1: your long-term investment returns are driven by earnings

Earnings are the key, not economics

In 1999, S&P 500 earnings were 58.55 points. Today we are at 130 points. That is an increase of 122%.

2 S&P 500 earnings

Source: Multpl

How did the market do? Well, the S&P 500 was at 1282 points in 1999 and now it is at 2757 points, up 115%.

3 s&P 500

Earnings are up 122% and the market is up 115% over the last 20 years. In the mean time we have had the dot-com bubble crash, the great recession, a European crisis, Japan not growing anymore, a commodity boom and bust etc. Who knows what will we have in the next 20 years, but no matter what happens, good businesses will do well. Another thing that helps very much with determining stock market returns are valuations.

  • Keep an eye on valuations because the market is extremely differentiated

Market valuations

In 1999 the S&P 500 was at 1282 points with earnings of 58.55 that leads to a PE ratio of 22. Thus, the earnings yield is approximately 4.5%.

1282*1.045^20= 3091 points

According to the valuation, investors could have expected a return of 4.5% based on the valuation they were paying in 1999. The return was even a bit higher when you add the dividends of just below 2% per year.

4 s&P 500 dividend yield

Source: Multpl

The current market’s valuation is 21, so your expected long term investing yield should be around 4.5% as it was in the last 20 years.

5 S&P 500 pe ratio

Source: Multpl

Will there be a crash?

There will definitely be market crashes in the future but you can’t time them. Let’s say there is a crash of 30% 6 years from now but in the meantime, the S&P 500 grows at 5% per year. This would say that from the current 2757, the S&P 500 would go to 3694 points. If then it crashes 30%, we would be down to 2585 but by waiting for the crash you would have missed on the dividends so you wouldn’t be ahead. However, as we spoke that earnings are key, you can invest for higher than 4.5% returns by investing in earnings and taking advantage of the volatility.

  • The market is extremely differentiated and volatile – learn about the business

Earnings and volatility

If I look at the top 10 positions of the S&P 500, the PE ratios vary extremely and I can tell you that returns will vary extremely over the next 20 years.

6 pe ratio

Source: IVV

If we take a look at the top 10 S&P 500 holdings from 20 years ago, only two companies were there that are still in it.

7 top 10 1999

Source: ETFDB

Therefore, it is extremely important to look at try to understand where could your investment be in the next 20 years. This doesn’t mean that if a company falls out the top 10 it will be a bad investment. However, you can avoid buying companies with too stretched price to sales ratios and extremely high earnings valuations where the actual business doesn’t justify.

The point is that when you follow a company for a few years you begin to understand it much better than the media does, you understand its natural cycles and how to invest around those.

This allows you to take advantage of volatility. It is pretty simple if you have a long term view.

How to take advantage of volatility

The easiest was to take advantage of volatility is to rebalance your positions in relation to the earnings yield those offer.

8 rebalancing

The only problem is that you have to move your focus away from the news and future expected earnings and simply focus on the real current business earnings. Just 6 months ago, Apple’s stock was above $232 only to fall down to $142 in January and now rebound to $173. Apple’s earnings didn’t change that much, so if you focus on the earnings yield you can buy more when the earnings yield is higher, PE lower, and less when the yield is lower, thus the PE ratio higher.

I d