Tag Archives: accenture

In 1989 I was four years into working on building what would later be called Friedrich and back then I read a book called “The Money Masters” by John Train, which changed my life . In that book, one of the chapters was about the portfolio manager of Source Capital = Mr. George Michaelis, whom I consider one of the greatest investors in history. In the Appendix of that book, is part of the Source Capital annual report to investors for December 31, 1985. Here is what George wrote then. The ratio that you see in the first paragraph is actually one of the foundation stones of Friedrich and plays a major part in my creation of the final algorithm. The reason that ratio is so powerful is because it allows one to determine a company’s actual rate of growth on Main Street by incorporating its return on equity along with the company’s dividend payout policy, which both speak volumes about how well managed a company is. What I look for in using what I call the “Michaelis Ratio” is a return of at least 15% or higher. Here for example is our Friedrich chart for Accenture (NYSE: ACN ) that includes the Michaelis Ratio listed for the first time. As you can see Accenture’s Michaelis Ratio came in at 30%, which is twice what I look for as the ideal for this ratio. When you factor in my other original ratios like FROIC and CAPFLOW, you have quite impressive results for the company. But in that chart you will also see the Watson Ratio and the Sherlock Debt Divisor. Obviously, I am a big fan of Sir Arthur Conan Doyle’s work and have named these two powerful ratios after his greatest creations. Having said that, what is the Watson Ratio? The Watson Ratio is one of 30 original abstract ratios that I have created, which along with many others make up Friedrich. This particular ratio deals with the relationship between a company’s free cash flow and its diluted earnings per share. It uses the free cash flow methodology that Arnold Bernhard (the founder of Value Line) created, which is basically cash flow – capital spending and divides that result by the company’s diluted earnings per share. In theory most companies should have (what I call a Bernhard Free Cash Flow) result equal to its diluted earnings per share, so an average result should be 100%. When a company is well managed you will see a result greater than 100%, like Accenture’s result above of 110%, which obviously tells us that Accenture’s Bernhard Free Cash Flow is 10% better than then Accenture’s diluted earnings per share. Thus we end up with bonus points. A major concern that I have these days in analyzing companies is the amount of debt each company takes on relative to its operations and whether management is abusing our current Fed inspired low interest rate policy. Debt as anyone knows, when used wisely, allows for what is called leverage and leverage can be extremely beneficial within means. On the other side of the coin, the use of debt can also be excessive and put a company’s future in jeopardy. So what I have done to determine if a company’s debt policy is beneficial or abusive is create the Sherlock Debt Divisor, which allows us to investigate debt in a different abstract way. What the Divisor does is punish companies that use debt unwisely and rewards those who successfully use debt as leverage. How do I do this? Well I take a company’s working capital and subtract its long term debt. I then divide that result by the company’s diluted shares outstanding, then multiply that result by (-1). So if a company like Accenture has a lot more working capital than long term debt, I reward it and punish others whose long term debt exceeds its working capital. The final result for Accenture came in at $100.13 but the closing stock price was $104.78, so I am rewarding Accenture’s management for doing a great job using leverage. How do I reward them? Well I do so by using $100.13 as my numerator and not $104.78 in all my ratio calculations performed by Friedrich. So since the valuation in the Numerator is less, each ratio naturally generates a much more favorable result than it would have had I used $104.78. What does a company that is not doing very well look like? Well here is the Friedrich chart for Chevron (NYSE: CVX ). First of all, Chevron pays about a 5.09% dividend yield, so the growth for the company on a Main Street is only 1.91% on a Michaelis scale (7%-5.09%). It’s Watson Ratio ratio tells us to avoid it as its free cash flow is a disaster relative to its reported diluted earnings per share. Finally the large debt that Chevron has on its books punishes the company by adding $8.84 to the numerator in all ratio calculations performed by our Friedrich Algorithm. The Max Value you see below uses a different methodology to come up with its result and sometimes that result is skewed as it relies exclusively on what is called the “discounted owners earnings using a two stage dividend discount model’ found in Hagstrom’s great book “The Warren Buffett Way”. The final “Market Value of the Company” you see in the table below is what I call the Max Value. My work also incorporates different free cash flows than Mr. Hagstrom uses as I use the MFCF = Mycroft Free Cash Flow and since my Mycroft Free Cash Flow for Chevron comes in at $-785 million, you are obviously going to end up with a negative result for Max Value. My True Value and Buy Prices are based exclusively on my own ratios and that is why they are positive as they incorporate many more things than free cash flow in the analysis. As you can see if you used the Max Value in 2014 for Chevron you would have sold it then and avoided watching its stock price go down to $69.58, which is the 52 week low for this year. So when operating with abstract ratios sometimes you get such results where the buy price is higher than the Max Value, but what we are trying to do with Friedrich is find companies that are consistent year in and year out, so we do not need to sell. We are looking for just 50 stocks to put two percent in to become fully invested out of 3000 stocks that we analyze as part of our research. There is no such thing as a perfect system as perfection is an illusion that can only be found as a word in a dictionary. Once an investor understands that, she or he automatically matures and becomes a more seasoned investor. Plato once said “Experience is what man calls his mistakes”. Therefore, Friedrich is the culmination of what I have learned over the last 30 years in creating the Friedrich Algorithm, through trial and error and through my personal experiences in the stock market as a Professional Analyst.