Checklist of “The Next Apple”

Presenting a Investment Checklist from the Book “The Next Apple”

Investment checklist

The company should not have a very big base, and it should not be the market leader of the previous decade

Go after stocks from hated, ignored, or boring industries when they clear new all-time highs from a proper base. In this case, perceptions are worse than reality. Low expectations and new highs create a powerful combination

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Value Migration – the shifting of value-creating forces

Credit: Motilal Oswal report

What is value migration?

The flow of economic and shareholder value away from obsolete business models to new, more effective designs that are better able to satisfy customers’ most important priorities

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Price to Book: “An Illusion”

A financial ratio that is used to compare the market value of a stock to its book value is called price to book ratio or P/B ratio

Price to Book ratio = Share price / Book value per share

Book value is nothing but what the company own – i.e. assets – minus what the company owes – i.e. liabilities – is equal to book value of the company (it is nothing but the company’s total equity)

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Operating Leverage: A Framework for Anticipating Changes in Earnings

Operating leverage measures the change in operating profit as a function of the change in sales; i.e. when the company’s EBIT margin increase more than increase in revenue, company have operating leverage

Operating Leverage = Change in EBIT (%) / Change in Revenue (%)

Operating leverage means an increase in cost is lower than the increase in revenue

Basics of operating leverage (link)

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Summary of the book “How to Lie with Statistics”

Statistics (Averages, relationships, trends, graphs) are not always what they seem. There may be more in them than meets the eye, and there may be a good deal less

Statistics is better than a big lie, as it doesn’t pin reader.

The Sample with the Built-in Bias

If your sample is big enough, you will end-up making agreeable approximate statistics, but you can’t conclude the same with a biased or small sample

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Equity Dilution vs EPS Dilution

Generally, people take equity dilution and EPS dilution as the same; but these both are different terms; let’s understand both with an example.

Let’s say ‘A’ and ‘B’ started a bakery named ‘AB bakers’. They both contribute Rs 50 each. So now ‘AB bakers’ has 100 Rs. capital to run a bakery. They issue 100 shares and both have 50 shares each

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