Another Gift and Analyzing Autodesk Stock Top to Bottom

Big News! Our forever generous and loving Grandma Serafina is giving us another $1,000 each to invest. The one condition is that you must invest the money into the market -- no expensive hair dryers are allowed. To add your $1000 to the google sheet, just add it to your balance of cash or update your section with whatever you invest in. For example: Brenna has $44 in cash now, so just edit that cell to be $1044.

Poppy's CAD Stock Pick

Let's take a look at a computer-aided design company that Poppy's recommended called Autodesk (ADSK). People always ask me what to look for in stock, and Autodesk is a great example of desirable numbers, growth, and great-looking charts. I wouldn't call it a 'perfect' stock necessarily, but it is certainly close.

At a Glance

The stock price and chart usually jump out at you the most, so let's start there. A good stock chart should show an upward trend, from the bottom left to the upper right, at something like a 25-45 degree angle. Super simple. If a stock pays dividends, then you should expect a more minor upward trend (maybe about a 10-20 degree incline) because paying dividends literally causes the stock price to increase less. Autodesk has not paid dividends for many years, and the stock price has increased ~380% over the past 5 years. Very solid.

Other than the price per share and the chart, the first data point I look at is the P/E (price to earnings) ratio. Autodesk's is around 53, which is just the stock price of $295 divided by the earnings per share of $5.51. In stock analysis, a lower P/E number is more attractive because an investor has to invest less money to own every dollar of the company's earnings. Huge companies like Intel and General Electric have a P/E in the 10-25 range. For stocks that pay dividends like those two, that means more money in the investor's pocket than if the investor picked companies with a higher P/E. A negative or "N/A" P/E ratio means the company is not yet profitable, which is an important red flag. I remember whenever pitching some small, hot, unknown stock to Poppy, that was literally his first question: "Is it profitable?" Obviously, if a business isn't making money, it is a much more questionable investment.

Analyst Rating

Analysts provide a rating on a standard 1-5 scale for any stock they cover. Larger stocks have more analysts covering them. Apple has something like 60 analysts covering it. In Autodesk's case, there were 23 analysts rating the stock as of April, which you can see at the top of the stacked bar in the chart below. The analyst rating for Autodesk is a very good 2.1. Analyst ratings are a simple datapoint that I like to use as a gut-check on a new stock or a shortcut to validate that an existing stock you own will still continue to perform well in the future. Take the analyst rating as a nice datapoint, but don't let it be the core of any stock analysis. Analysts are human and can certainly be wrong from time to time.  

Earnings History

Earnings matter. A lot. Autodesk's earnings trend is nothing short of perfect - there is an upward trend, and nowhere in the past few years has the company 'missed' earnings. An earnings 'miss' means that the earnings per share for the quarter was lower than all the wall street analysts were expecting. Companies file their earnings reports quarterly in a federal filing called the "8-K." Sites like Wallmine and Yahoo Finance make it pretty easy to read these reports, if you feel so inclined. The quarterly 8K report (and the annual 10K report) are probably the best sources of investor guidance any individual investor can read, even if they are a bit dense.
The two charts below show Autodesk's earnings over time. One is from Wallmine and one is from Yahoo Finance - I'm including both because they are visually different ways to show the same information. Each quarter's earnings 'beat' shows in green, and each quarter's earnings 'miss' would show in red, although Autodesk doesn't have any earnings misses in the last five years. Certainly a good sign.
In general, when a company 'beats' earnings, the stock price will rise the next day, and when a company 'misses' earnings, the stock price will fall. Most companies report their earnings immediately after the market closes for the day on a public conference call. These calls are public and you can listen in, even as an individual. In addition to reporting the earnings per share in the quarterly reports, companies also report key metrics, which investors may care even more about than the earnings per share. For example, Netflix recently beat earnings (from a money standpoint), but because their new account subscriber growth was slowing down, the stock price dropped the next day. There's definitely a Stranger Things (the Netflix Series) joke here somewhere.

Summary

• Profitability: Is it profitable? Is the P/E ratio good compared to other companies like it?
• Chart Trend: Does the stock chart graph trend up to the right?
• Analysts: Is the rating from wall street analysts a 'buy'?
• Earnings: What is the earnings trend - does the company mostly "beat" earnings?In addition to these, in my opinion, you should have some kind of reason for buying it. Maybe you like the CEO, or the company's products. Maybe the company owns something special, such as the rights to all Marvel movies, that you think is extremely valuable and unique. Whatever the reason - be confident in it! And when (not if) you're wrong about something, try to swallow your pride, cut your losses, and sell out of any badly losing position.

Trades

• No trades this month. Garrett has entered the #1 spot with about $3400.

Please remember to update the google sheet detail tab when you buy/sell something. I look at the revision history each month so I can include your trade in this newsletter. The summary tab is at the bottom of this email as a picture and the live link to it is here.