YOUR HOMEWORK: EBAY

Here's one from Kevin in St. Peter, Minnesota. As a reminder, Homework posts aren't intended to be stock picks -- they're examples of the Rule in action.  This particular post gets into why it's important to come up with your own growth rate in addition to looking at what the analysts think.

Hello Phil,

I just finished reading your book (I devoured it in under two days!) and am hoping to use The Rule to help my wife and I be able to retire early (I'm 33, she's 32). I am planning on doing some paper trading for a bit first, and I went to Investopedia.com to open an account for practice. The first thing I did was buy 1000 shares of eBay, just for a test.

I then figured I should put eBay through the ringer. Here goes:

Meaning: I've been using eBay for years, and teach community ed classes on how to buy and sell on eBay.

Moat: I believe that eBay definitely has a Brand Moat, and possibly a Switching Moat as well -- once you're established on eBay you have a high "Feedback Rating", going to a new site would reduce the years of goodwill that you've accumulated.

Management: Pierre Omidyar is the Founder of eBay, and is also Chairman of the Board. The CEO is Meg Whitman, who joined the company in 1998 when it consisted of 30 employees. She has overseen the growth of eBay from a "Beanie Baby swap meet" to a global force that sells big revenue items like cars, houses and islands.

Margin of Safety: I ran the numbers on eBay, and here's the Big Five numbers:

ROIC		Equity				EPS				Sales				Free Cash
5	1	7	5	3	1	6	5	3	1	8	5	3	1	4	3	1
9.9	10.8	87	50	36	42	107	81	55	37	131	60	55	39	Err:523	-256	2310

The growth rates are dropping, but they were at absurd levels to begin with. The Free Cash numbers are all over the place. In 2005, eBay purchased a number of companies to expand their marketplace idea, including Shopping.com and Rent.com.

I picked a future PE of 60, which works with the industry analyst's prediction of 30% growth rate. Continuing the math:

• Future EPS: $10.75
• Future Stock Price: $645.18
• Sticker Price: $159.48
• MOS: $79.74

eBay is currently selling at $39.06.

Gosh, that looks good. OK, assuming I've done all that correctly, I need to check the charts.

The 8-17-9 MACD showed a buy on 3/28.
The 10-day Moving Average showed a buy on 3/28.
The 50-day Moving Average does NOT show a buy.

The 14-5 Slow Stochastic showed a buy on 3/28.
The 14-5 Fast Stochastic showed a buy on 3/28.

Thanks in advance for any help on this. I loved your book, and have read a ton of your blog entries. There's still a part of me that follows the adage "if it sounds too good to be true, it probably is." So I'm going to do some paper trading to convince myself that what you say works.

A new loyal fan,

Kevin

Here's my response:

Nice job on Ebay Kevin.  I like it and I buy it.  But let's check the MOS (you did a really nice job on the rest of it.)

 

It's important not only to check the analysts estimate but to make our own, and EBAY is a great example of why that is.

In January last year, Meg got on a call with the analysts and explained that there was no way the biz was going to keep growing at 40% a year.  She thought maybe 19% was a good sustainable long term number.  The stock dropped 30% overnight on the news. 

I got red-arrowed outta there about 10 days earlier, so the word was out that the theater might be on fire and some of the big guys were leaving the building days before the general panic set in.  Love those arrows.

 

If you look at the actual numbers on Zacks you'll see that the range of expectations for 9 analysts goes from a low of 22% to a high of 45% -- so nobody believed her.  They all think she's lowballing to get expectations down a bit and get the pressure off.  Likely they are right. 

But what is the right number?  There is nothing illogical about using the 30% average since historical projections are all higher than that.  Still, the CEO isn't stupid and 30% is a very high growth rate to sustain.  I'm feeling 25% -ish here.  That and a Rule #1 PE of 50 would put this thing at a Sticker of $90, and at the current price of $39 we still have a huge MOS. 

 

But here's the point: the market doesn't believe their own analysts or the history of the business.  The market believes Meg and is pricing the business accordingly. 

Isn't that interesting?  Plug in a 19% growth rate and the Rule #1 PE of 38 and you get a $41 Sticker. Close enough for government work.

 

Except that since she chatted up the institutional guys and scared the whatever out of them, her EPS didn't grow at 19%.  It grew at double that. 

Oh yeah and Sales also grew at almost 40%, and so did book value per share (Equity).  So if you're an analyst and your job is to predict where a business is going to be in five years you'd look pretty stupid projecting 19% while the thing is growing across the board at $38%, wouldn't you?  Yet the fund managers can't quite shake off what she said.

 

And there-in lies the joy of Rule #1 investing.  We can shake it off because we can get out in a hurry if she turns out not to have been low balling the numbers.  We can invest with a great MOS if the growth is 40% lower than it is right now.  We can do this because we are little and for the first time in history the little guy has an advantage.

 

So I'm with you, bro.  This thing looks undervalued to me.  It's a great company run by people who have a huge BAG and are honest and owner-oriented.  You are in the business that you want to buy.  It's got a HUGE moat.  The Big Five just don't hardly look better and the MOS is huge even with scaled down numbers. 

 

And be aware that no matter how wonderful the biz, no matter how cheap the price, if the institutional guys pull out of here, this thing can go down 50% overnight.  So watch the arrows and sleep well at night.

 

Now go play.

 

Phil

Comments

[Michael]

Phil,
Ok, I am confused. I too looked at Ebay a couple of weeks ago but a simple glance at the Phase 1 turned me off. So, here is my question. The Acc. Dist Current is 25 with a red arrow and the Insider trading is -9, shouldn't those two be HUGE red flags? You said to me regarding JBL's Insider Trading to know exactly why they were selling stock and at that time it was -2. Now, it is -10. Now, as far as Acc. Dist; the "big guys" are not in this either! What am I missing here?
Am I to understand that although these two are negative you would still invest?

Thanks,
Mike

[Michael]

Can someone please tell me how you get the Sticker Price of $159.48, other than dividing the Future Stock Price by 4.0455? And where does the mystery number come from?

Thank you.
Michael

[chandra]

Michael #2 -

It looks like Kevin used Excel to crunch his numbers, because they're so precise.

[Kevin Lund]

Actually, I used OpenOffice. Same thing, but free. :-)

And I did make some modifications from when I first sent in that question. Initially, I used a PE of 60, which breaks the rule of maxing out at 50. So I switched my numbers a bit - a more conservative growth rate of 24% and future PE of 48. That puts my Sticker at $79.54 and MOS at $39.77 - still higher than the current price, but not as insane as I initially projected it to be.

I'm starting to learn that very little changes in your future PE and growth rate make big differences in your MOS price. Gotta get those numbers down pretty solid.

Kevin

[Steve]

Kevin,
How did you get the Future EPS of $10.75? Ebay currently has a EPS of $.78? If I use $.78, I get a future EPS of $3.16.

I might be missing something.

Thanks.
Steve

[Kevin Lund]

Actually, my Future EPS for EBAY has changed from an incorrect $10.75 to $6.70 (see my comment, above). I used the FV formula, with a growth rate of 24%, to get the $6.70 value. For you to get $3.16, you must have used a growth rate of 15%. Why did you pick that number?

Kevin

[Chris C]

Kevin, I went ahead and bought ebay the day after I read your post, 300 shares at $38.45 a share. As of this writing, it's trading at $34.96. Am I missing something in the tools that should be telling me to sell? I'm actually kind of glad I didn't use a trailing stop loss, since I would have been stopped out by now, and I really think, based on a Rule #1 analysis, that eBay is a wonderful company that is undervalued (and Phil's comments seemed to agree). But it's a little nerve racking to watch my very first Rule #1 trade sink. Should I stay the course, or bail? I want to make sure that I don't violate the very first Rule #1 on my very first trade?

What do you guys think?

Chris

[Kevin Lund]

First off, Holy Buckets! Eleven grand on your first trade? You've got guts. I'm doing mostly paper trading still, and limiting my real trades to $1000 that won't affect me if I royally screw it up.

Anyway, based on the charts, you should have bought on 4/18 at around 38.8, and sold on 4/19 at about 38.6. Check here for details:

http://moneycentral.msn.com/investor/charts/charting.asp?Symbol=ebay

(I don't have Investools, so I have to use the MSN charts)

Basically, the stock was looking good until the company released their 1Q report, and said that they were sticking to their conservative growth estimates, not the larger expectations that analysts have predicted. More info:

http://news.moneycentral.msn.com/ticker/article.asp?Symbol=US:EBAY&Feed=AP&Date=20060420&ID=5654660

I still think it's a great company, but I would be in cash right now, if I were you. Keep in mind that I am a complete newbie at this myself.

Hope that helps,
Kevin

[greg]

Kevin,

What time period are you using when you look at the tools on MSN? 1-month? I find that the tools are a little wacky during the current day when you're looking at a month view. It's not until the next day that I can clearly see what happened? Do you find that?

Point is, when I look back on the charts, it seems obvious that 4/18 was a buy, and 4/19 was a sell, but in practice, I didn't really see the buy on 4/18 until the next day (and I actually did a paper buy on 4/19). Then on 4/20 I got the sell signals and sold). So I bought when it was way high, and sold after a huge drop -- obviously I'm feeling some of Chris' pain, on paper at least.

I think I need to use the tools differenly -- probably as posted in the latest question of the week.

(http://philtown.typepad.com/phil_towns_blog/2006/04/question_of_the.html)

Greg

[Kevin Lund]

You're exactly right - the charts fluctuate greatly during each day.

My paper trade lost about 5% during that time, but I think that is considered acceptable for a couple of reasons. First, the signals got me out before it dropped too dramatically. Second, minor losses or gains are to be expected. One of these times the signals will say "BUY", and the stock will go up 20% - the key is to be in when that happens.

I have adopted the philosophy of only checking the charts in the evening (or the next morning if I'm busy). It's too crazy to watch them during the day.

Kevin

[greg]

Thanks, Kevin.

So just to confirm, you look at the 1-month time period when you use the MSN tools?

Greg

[Kevin Lund]

Yes. I find the 1 month view easier to look at. But you can see the same thing on the 3 month view, too.

Kevin

[Tom VB]

Don't forget to look at the volume trend juxtaposed with the stock trend - rising stock on falling volume is the market's way of showing 'no confidence' in the current price.

[Tom VB]

Note: Click on my name for the Investools chart of Ebay...

[Chris C]

Well, just so everyone can learn from my mistakes, I sold 300 shares of eBay at $34.95.

Lost about $1000. Ginormous violation of Rule#1.

Here's what happened: I read the above analysis of eBay, got all excited, and bought right before I left for a trip to Chicago. I still hadn't learned how to read charts, but I figured I'd learn when I got back, and heck, what are the chances that there will be red arrows in two weeks? Surely that won't happen until after I get back and can spend some time learning the Rule #1 system better.

Well, as we now know, the quarterly report came out, earnings were not as exuberant as the street expected, and a lot of institutional money headed for the doors. All while I was playing golf in the Windy City.

OK, so I've lived and learned. I need to make *absolutely* sure that I'm buying at a good price, and at the right time, before I pull the trigger.

But here's my question: finding these wonderful companies that are cheap as hell is like a full time job. I'm not sure I've got enough spare time to analyze all these businesses! Anyone got any suggestions? I mean, once you've got your watch list, it doesn't take long to check the charts...THAT part only takes 15 minutes a week, like the book cover says.

But even then, after you've waited for a year, you need to rerun the numbers to make sure there all still in order.

Anyone know where I can find a pre-ordered watch list? :)

[Stephen]

I've started to find companies to monitor by looking at Fortune's list of the best companies to work for and other lists of the top brands in the world. I think those kinds of lists have the kinds of companies meeting Rule #1. I am planning to find about 50-100 to monitor from time to time. There are startup costs but I think Phil Town is right that fifteen minutes is enough time to monitor after you've got your watch list.

I'm not convinced on eBay yet. If you take Meg's conservative view that earnings will grow only at 19% and then assume that eBay will have the P/E of a more mature company in 10 years, say 30, then the stock is still trading above retail.

[Bruce]

Hello Everyone, alright, I've just finished the book (in two days because I couldn't put it down) and I was hoping to have someone help me out with my Sticker Price and MOS figures. I'm going to use CAKE as an example. (If someone could check these figures for me, I would Greatly Appreciate it, as that's the best way for me to learn!)

Alright, first off, here's the numbers that I have from the big 5: (all found using the calculator on the rule1 site)
ROIC
5 1
13 13.5

Equity
10 7 5 1
18.46 16.99 15.27 17.93

Sales
10 7 5 1
22.07 12.98 16.91 21.5

EPS
10 7 5 1
26.98 19.68 15.51 29.76

Alright, with these recorded, I now begin to look at the numbers for the Sticker. First, the old and most recent EPS. (All info found on MSN's site)
Old EPS=.1
New EPS=1.09
Years=10
Plugging into calculator derives an EPS Growth Rate of 27

Now for the next calculation, Finding the Future EPS (Do I change the EPS Growth Rate on the Calculator to match up with the Earnings Growth Rate for the next 5 years?) This is giving me problems, as I'm not sure which number to use here. I'll go ahead and enter in the EPS Growth Rate as it's provided on the calculator, which ='s 27, for a Future EPS of 14.

Now, for the Future PE, the book states that we should use a double Rule#1 growth rate (which I see as the earnings growth rate for the next five years: http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Page=EarningsGrowthRates&Symbol=CAKE)
which is 20.4
The calculator shows a future PE of 54, but doubling the growth rate gives me a 40.8%, so I'm not sure which one to use. There must be something wrong here because the MOS from either 54 or 40.8 is far to high (91 and 70+ respectively)

If anyone could tell me what I'm doing wrong here, it would be greatly appreciated! I know I'm on the right track, but the numbers keep getting confused. If someone can show me the numbers to use for the Sticker and MOS, and how you get them, I would greatly appreciate it.

Thanks for your help,
Bruce

[Bruce]

And sorry to have posted this on the Ebay message page, just don't know where to post for help and this board seemed to be active

Thanks,
Bruce

[Kevin Lund]

Hi Bruce,

I don't have time to check all your numbers, but I'll tell you this much - for the Future PE, you use the historical PE or double the growth rate, whichever is LOWER. In this example, then, you would use 40.

Kevin

[Derek]

Bruce,
I am new to this too, but I have read the book twice to try to make sure I get Phil's message correct. When you were calculating the future EPS for CAKE, you were too optimistic in choosing 27% as the growth rate. You should be using the lower of the Equity Growth Rate and Analysts current growth estimates. Thus you should have been using something like 18% instead of 27% to calculate the future EPS. I did this calculation recently and got a future EPS of 6.00 rather than 14.00.
Also, when calculating the future PE you should use the lower of twice the growth rate just calculated (2*18=36) and the historical PE (35); so a future PE around 35 would be more appropriate. When I used these numbers recently I got a Sticker Price of $52.50 and a MOS of $26.25. With the current market price for CAKE around $31, this puts it close enough to the MOS price to watch carefully.
I hope this helps, but remember that I am new to this, so please double check my logic and math. All the best.

[Bruce]

Thanks to both Kevin and Derek for the help, I want to make sure that I get this correct so I don't invest incorrectly! If anyone else has any other ideas, please post them as your help is greatly appreciated! Will work on these figures tomorrow and try to figure it all out.

Thanks again,
Bruce

[Bruce]

One question I do have concerns the future EPS for CAKE, I arrived at 27 because that's what the MOS calculator derived when I imputed .1 for the old EPS and 1.06 for the new EPS with 10 years passed. I am confused here as to why I need to disregard that number and look insteat to the lower of the Equity Growth Rate and Analysts current growth estimates. I am sure you are on the right track Derek as the MOS is much more realistic then what I'm getting, I'm just not sure why we need to substitute these numbers into the calculation. Thanks again for your posts, it is greatly appreciated!
Bruce

[SteveO]

Hi Bruce, et.al,
I'm new too, but have a couple observations.
For the Future EPS, you can use .1 and 1.09 (which is the *current* EPS from MSN). For the years, I think you're supposed to use 9 instead of 10 (for example if you're looking at just 1 year, you count from 12/04 to 12/05 so 2 rows = 1 period (it's like n-1, so 10 rows = 9). On MSN, they list 10 rows (one of each year) but you are evaluting 9 years of EPS. So using Phil's calculator, EPS growth rate is 30%.

For the next step, instead of using the 30%, I used MSN's 5 year estimate of 20.4 as it's lower/more conservative. I'm not sure if you're supposed to change the calculator value from 10 to 5 to reflect this 5 year estimate, but I left it at 10 (anyone?). Entering the values: 1.09, 10, 20.4, I get a Future EPS of 8. Just a note, in excel, this values comes out to $6.98. Not sure what's going on here. Here's the formula I used =FV(20.4%, 10,,-1.09)

For the next step, I use the 8 and put in 33.82, which is the average of the Ave P/E column on the "Ten Year Summary" page under Financial Results > Key Ratios on MSN. This is another leap of faith here but I pulled this from the book. On page 230, 3rd paragraph, Susan notes the average historical PE: "her estimate after looking at the column of PE numbers is 35." Then on page 234, #3 towards the bottom, "Estimated PE in ten years - which Susan found has been averaging 35." Using these values, I get a Future Value of $271.

Calculating the Sticker with 271, 15%, and 10 years, I get a sticker of $67. This gives me a MOS of $34 on Phil's calculator. With CAKE trading at $31, it's time to look at the charts.

Of the 3 things to look at (RSI, MACD, and Stochastics) CAKE is not looking good. Looks like the recent news pushed the stock lower. Look at this chart - http://tinyurl.com/rjgrp
Looks like it's best to watch it and look for the indicators to turn green.

Looking for input on my numbers to see if I'm also on track.

Thanks,
Steve.

[Kevin Lund]

I get a MOS price of $26.69 for CAKE.

[Bruce]

All of us beginners who are unsure of the numbers need some concrete example, with current figures, to make sure we are all on the same track. A difference in a MOS price for CAKE of $10 is a huge difference. If there was just one example, using current figures, that was computed with certainty I believe it would be a big help to all of us. Steve, I appreciate your post, it has made things clearer for me. Where did you get your charts for CAKE? Thanks to Kevin as well for the MOS on cake. If anyone would offer to post an example with figures that they are certain of, we would all greatly appreciate it.
Thanks to all,
Bruce

[SteveO]

Hi Bruce,
There are some good examples on the blogpost explaining the Excel formulas:
http://philtown.typepad.com/phil_towns_blog/2006/01/how_to_set_up_e.html

I put some numbers up for WFMI (Whole Foods) that might help. Looks like my numbers were close to Kevin's so I think I'm getting the hang of this.

SteveO

[Kevin Lund]

Bruce,

Here is my worksheet on CAKE:

http://hickorytech.net/~klund/Investing/Homework-CAKE.html

The formatting in HTML isn't great, but hopefully you get the picture.

Kevin

[SteveO]

Hi Kevin,
For your MOS for CAKE, just curious but did you base this off an EPS of 1.09 and where/how did you come up with the EPS Growth rate (%)?

=FV(19.34%, 10,,-1.09) = $26.69

Thanks,
Steve.

[Kevin Lund]

Here's the Math:

Future EPS = FV(20%,10,,-1.09) = $6.75
Future Stock Price = Future PE * Future EPS
= 32 * $6.75
= $215.97
Sticker Price = PV(15%,10,,-215.97) = $53.38
MOS Price = $53.38 / 2 = $26.69

Hope that helps,
Kevin

[Bruce]

First off, a big thanks to everyone who has posted, all comments are a big help to all of us! Alright, I think I'm getting this correct now, but want to make sure because a wrong calculation is the difference between gains or losses. I'm going to run some figures on BBY, if someone would check them for me it would be a great help to know what I'm doing wrong, if anything. Here are the figures:
ROIC
9 5 3 1
18.7 19.7

Equity
9 5 3 1
25.99 30.05 19.71 28.59

Sales
9 5 3 1
15.5 17.03 11.87 11.76

EPS
8 5 3 1
29.86 20.57 16.38 14.11

Free Cash
1,202.0 683.0 -61.0 583.0 -175.6

Alright, these all make the cut, so onto the MOS Price
old eps .23
current eps 1.86
years 8 (year nine eps is NA)

This give an EPS Growth of 30%, because analyst growth is estimated at 17.2, I'll use 17.2 as the growth rate

This will give me a future EPS of 10

Because the average of the last 8 years of P/E appears to be around 22, and analyst estimate a P/E of 20.9 for 06, I'll use 21 for my future PE

This gives me a future value of 210, Sticker of 52, and a MOS of 26, given the current price of Best Buy is 56.66, this is well out of the league at the moment.

Any comments on these figures would be greatly appreciated, please let me know what I'm doing incorrectly here, if anything.

Thanks again for all of your posts, each one makes all this easier for all of us.

Bruce

[Bruce]

I also just ran a MOS calculation on PNRA, but don't know exactly what to work with on the EPS, because year 9 is -. I used .08 for old eps and 1.65 for current eps and 8 years as the time. This gives an EPS Growth of 46, analysts estimate growth at 23, so I'll use that. This gives a future EPS of 15, P/E's look to be all around 37, so I'll use that. This gives a MOS of 69, and since the current price is $74, seems like this one is worth watching. Please share your thoughts. All big 5 numbers check out for PNRA.
Thanks again,
Bruce

[Kevin Lund]

I also have a $74 MOS on PNRA. As a matter of fact, so far I have made an amazing $25 on my PNRA investment. In a couple of weeks it will be nothing but champagne and caviar for me.

[Derek]

Looks good Bruce. I ran the numbers on PNRA a few days ago and came up with a MOS of $65. Very close to your $69 figure.

[Bruce]

Thanks to everyone for confirming my numbers, I'm going ot keep looking over some more companies and will post my numbers here, both to help everyone and also to look for feedback on my figures. Thanks again to everyone, your help is appreciated. Looks like we're all on the right track, so I'll post more ideas soon, still looking to find a stock that's below the MOS.
Bruce

[Jeff]

PNRA seems to be a turnaround story. Past 10yrs. doesn't look good but since 2000 the companyy seems to be showing a strong turnaround and growth. The growth seems to be coming from new establishments.

EPS= FV($EPS(ttm)1.65, zacks: 23%, 10yr) = $13.08

P/E projection:
Current PE: 44.6
6yr avg (since turnaround): 35.1
2xBVPS = 2x24.1 = 48.2 (BVPS growth for past 5yrs based on MSN numbers of :

('00 BV) 3.44 -> ('05 BV)10.14 = 24.1% 5yr.growth

If we take the most conservative PE of 35:
10yr price = 35x13.08 = 457.80
Sticker @ 15% = 113.16
MOS @ 50% = $56.58

if we go with similar current PE of 43:
10yr price = 13.08 x 43 = 562.44
Sticker @ 15% Discounted = 139.03
MOS @ 50% = 69.52

current Price: $74.18

Company just announced 1Q06 earnings of 47cents vrs. 44cents year ago.

Analyst estimate 2006 EPS is 1.95 per earnings press release. If we take that as our basis w/ PE of 37, Gr: 23%, I get a MOS of 71. Not a bad entry point.

[SteveO]

My MOS for PNRA is $63. Just a note, but I get different values for Future EPS in excel vs. Phil's calculator - using the exact same numbers. I used 1.65, 10, 23.6 (from MSN) and Phil's gives me $16 (i get $15 if I use 23 instead of 23.6). Anyway, in excel, =fv(23.6%, 10,, -1.65) gives me 13.73. Based on this, my Future Value is $512, Sticker is $126.64, and MOS is $63.32.

[Derek]

Confirming your numbers for PNRA, my MOS came out at $64.60.

[SteveO]

Hi all,
I find this blog format in typepad to be a little difficult to follow plus it's hard to get images in. I'm a new blogger, but what do you guys think of this?
http://ruleone.salrok.com/

My goal is to better inform Phil's readers on how to run these calculatoions with better visuals and explanations. This is just my first pass, so take it easy on me. Also, let me know of some stocks and I'll try to run them and post figures.

Thanks,
SteveO

[Steven]

Wow...

now before you think I am some kind of negative guy you need to read my post on using the indicators which Phil has commented on as really good...

with that said I want to go back to the orignal post about EBAY...and the guy who lost a grand...

The problem people are having is that they are putting the cart before the horse...

the indicators are just that...indicators...they are the last thing you should be looking at..if it was all about the indicators than all you would need to do is look for what companies have shown three "green" arrows and buy them and just trade on two reds and buy on three greens...

but thats not what Phil does...90% or more of Rule # 1 is finding a great company ...and it is great because 5, 10, 20 years from now it will still be great...

but the indicators are worthless if you dont believ ein the greatness of a company...Phil himself has said that he did not have space in the book to talk about the benefit of the trend in stocks...you need to read what he has to say...

you see Phil is mixing two investment schools , actually three, fundamental, qualatative, and technical...

one of the most important rules in technical is that you don't fight the general trend...if something is going down than it usually keeps on going down...and the opposite is true for up...

now i have only been investing for about 5 months but this is what I have learned:

If you are a fundamental investor who finds a good company like EBAY that is selling at a discount to its fair value...what do you care that it went down $4 from $38 to $34...if EBAY was a great buy at $38...is it not a better buy at $34????

the fact a stock goes down in the short term should have no effect on the value of the company if your analysis of the reasons to buy are still correct...thats why if EBAY was a grerat buy at $38 it is even better at $34...because if the reasons you bought it at $38 are still there than it becomes a bette rbuy at $34...

now also if you buy a stock at $38 and it goes down to $34...have you lost any money. NO!!! why not...because you dont lose (or make) money until you sell...if you by at $38 and next week it goes down $34..and than the next week it goes to $40...how much have you made or lost...not a damm penny...because you did not sell...so if you buy EBAY because it has got great long term prospects than why do you sell if the short term is bad...if you had not sold you would not have lost $4 a share....and not violated Rule 1..

you see to me if I do the 4m's correctly and buy a stock and it goes down...I have not broken rule # 1 because my analysi is right and ina year or two the stock will go up...but if I sell in the short term and panic than I violate rule #1...so its better to just be patient...

now look at this...

tak a look at a chart of EBAY for the last 12 months...12 months ago it was trading at about $31.50..so as of yesterday iof you bought a year ago you made about 10%...which is pretty good...last week you were about about 20%-25%...but thats beside the point...

now about the middle of november 05 and jan 06 EBAY it its high for the last 12 mponths of about $46.75...

so we can see form May 05 to 1--05 through 1-06 ebay was trending up...and we can see that since 1-06 EBAY has been sliding...

so if you are a fundamentla guy you buy EBAY becaus eit is a great value right now...and you dont care if it goes down...because it means you get a better value and buy more...

but if you are a techinical guy...the trend for the last four months is way down...so you dont buy this stock because the indicators say stay away...you need to wait until the trend is up...

now if yo go farther back you can see that around April there is a sell off of EBAY (smoe years more than other) it trades around for a month or two..and than a bounce back in summer with sometimes correction and up to il the end of the year...so if you are using technicals...why would you buy into a stock that goes ddown in April in april....you wopuld not...or why would yo buy a stock that has been going down for th elast 4 months with no positive news or change recently..agian you would not...

but what we are doing here is mixxing fundamentals with techinicals....so what you need to do is finds a great company at a disocunt and than wait for it to show positive momentum trending up...i.e. let EBAY bottom out and than use the indicators to get in and out on the way up..

i mean if you are a true long term investor what you shoudl do is set your chart to show the weekly view of ebay using Phil's indicators...if you do that then you can see that there has been no signal at all..in fact the indicators said to get the hell out in mid january 06 and stay the hell out of EBAY since then...

the actual last time to buy EBAY woudl have been mid oct 05 using a weekly price quote...and if you are long term investor weekly is al you need...

so like I said I aint been doing this for too long..about 5 months...but so far wqhat works for me is using the daily price quotes to see the recent trend as up or down...and than run the indicators for both daily AND weekly to see what they might say...but only after I do the 4m's

honestly most people are not going to lioke this...but i thnk a person should spend about a year or so reading about how to figure out what a 4M company is and practiving finding a 4m company..afte ryou get good at that...THEN you start to figure put if the 4m company has a ok MOS...and than you wait for the indicators and trend to tell you to buy...

using the indicators and figuring out the MOS takes all of about 15 minutes...heck I learned to do it in 5 months and I aint that bright...

it is the 4M thats the b*&^% you got to hump up the mountain...

I am truly sorry f I put some poele off with my post...but if yo go to my blog you can read and see that I truly care about new investors cuz one I am one of them...so my desire is to help people..with a little tough love in this post...

its jsut that I am reading about all these people jumping in and losing money already...and thats not what Phil is all about...but Phil aint gonna have time to tell you all this himself...

and hey if I am wrong here I hope Phil slaps me down (like I said you may not liek the message but I think thew heart of it rings true)..

by the way...I used stockcharts.com to run the indicators..its free and you can customize them better than MSN. Hiope this all helps.

Take Care

Steven

just remeber

[Steven]

p.s.

here is the link to the stockchart.com chart i looked at

http://stockcharts.com/h-sc/ui?s=EBAY&p=W&yr=1&mn=0&dy=0&id=p61381812110

[SteveO]

Seems like this post is being used for everything :-)

I hear Cramer talking a lot about NBR so I decided to take a look. The Big 5 numbers look really, really good with values steadily increasing - especially the EPS growth with the help of 2005's number. According to my calculations, the conservative MOS is $52.26 and it's currently trading at $37.33 (swap-meet-priced). Here are the numbers I came up with:
Current EPS $2.00
Future PE $33.4
Est EPS growth rate 20.3%
Future EPS $12.66
Future value $422.83
Sticker price $104.52
MOS $52.26

Again, I've posted these numbers and the Big 5 chart on my blog: http://ruleone.salrok.com.

Anyone else get similar numbers? Might be a good stock when the chart indicators look good.

Thanks,
SteveO (not to be confused with Steven)

[Bruce]

Ebay is looking like it could soon be a buy, anyone else see what I'm seeing? This post has given an MOS of about $35-38 so we're good at this point, the Stochastic has just crossed over. The MACD and the 10 day moving averages are still not showing a buy, so we've got one of the three tools showing us that's a buy. Any thoughts on Ebay? I think I'll move in once the other 2 tools show a buy. Also, thanks for all the great charts and links that have been provided, they have been a big help! Look forward to your ideas on Ebay.
Thanks,
Bruce

[Bruce]

I'm getting this info for ebay from www.stockcharts.com, using a full STO, MACD at 8,17,9 and the multiple moving averages, 200 50 and 10 day movements.
Thanks again,
Bruce

[SteveO]

Having worked for eBay, I truly love the company and feel mgmt is top-notch. I'm a little sad by the recent hit in their stock price (I still have quite a few options), but seeing these numbers people are coming up with is really promising. They've just launched a new 'retail shopping experience' with a checkout cart and integrated PayPal payments (http://express.ebay.com) and I'm hoping this will create a positive experience for new users (which adds to their bottom line). People still have the belief that ebay only sells used or collectible items, but Express is 100% new products from reputable sellers. Go eBay!

SteveO

[Gary]

This is a great thread for us newbies trying to figure out this process.

Just a couple of things.

First, the excel formulas require that you subtract one (1) from your period when do PV or FV calculations. If you have 2 years of data, the comparison between them is a 1 year change. If you have 10 years of data, the comparison between them is a 9 year change. That would probably account for the discrepancies with Phil's Calculators. Try using 9 in your formulas and see if the numbers match Phil's.

Second, it appears that MSN Money uses the "daily" period rather than the suggested "weekly" period which may account for the whipsawing that some of us have encountered when trying to interpret the technical indicators. I'm going to try to work with the stockcharts.com charts to see whether that resolves my problems with interpreting the charts.

Gary

[greg]

Gary,

You can set the MSN charts to "weekly" under Period --> Custom.

Greg

[Gary]

Thanks for the tip. I thought that I had checked all of the menu options, but I missed that one.

[Ryan]

I just learned not to buy after good news after hour trading. I was expecting to purchase at 30 and when I checked in the morning I ended up paying $33.57! It was all down hill from there. I only purchased 15 shares and lost about $50 so far.

[TOM]

AFTER READING AND CHECKING OUT OVER 50 COMPANIES, EBAY IS NOT A RULE #1 COMPANY.HERE IS A GREAT RULE #1 COMPANY WITH A GOOD MARGIN OF SAFETY RIGHT NOW (MARATHON OIL).PHIL I'M USING THE RULE WITH MY 401K PLAN AT WORK.LAST YEAR WITH THE HELP OF YAHOO AND INVEST TOOLS MY ACCOUNT WAS UP 27 PERCENT AND ON DECEMBER 5,2007 I PUT ALL OF IT IN A CASH MANAGEMENT ACCOUNT.EVERYONE AT WORK LOST WHAT LITTLE BIT THEY MADE LAST YEAR AND THAN SOME IN ONE MONTH. BACK IN THE GAME ON MARCH 5TH 2008.THANKS AGAIN.......