Been meaning to do this for a while, but I just honestly haven't had the time. I'm hoping to knock one of these out each week, but between school and other things, I'm not gonna make any promises.

Anyway, I think accounting is an essential skill to have (at least a basic understanding of it) in order to be a good investor. While it's inherently backward-looking, and you ideally want to be forward-looking as an investor, understanding basic financial statements go a long way towards understanding what makes a company tick and can help you determine what sort of assumptions make sense for a company in the future.

I wanted to start with the balance sheet. In my opinion, it's the easiest financial statement to understand and it's pretty straightforward. I'm not going to get too in-depth with debits/credits/t-charts/etc, the whole purpose is to help people understand at a high level, what it is they're looking at when they read a financial report.

I've chosen Seagate Technology as the company I'm going to be writing about, mostly because it's pretty easy to understand, but also because I'm looking at it right now so I'm a little more familiar with it. I'm just pulling all this data from their most recent 10-Q for simplicity accessed through Capital IQ, but this info is also easily available on the SEC website

So what are we looking at here? Assets are pretty straightforward, just what the company owns. I like to think of Liabilities and Equity as a lump "Claims" section however because that's what it is. Liability owners, as well as Equity owners, have a claim to certain assets that the company owns.

The important thing to remember is that Assets = Claims, or Assets = Liabilities + Equity. Viewing the balance sheet through the lens of Assets vs Claims makes it pretty easy to see why I think. Someone always has a claim on a given asset of the company, so this equation can't ever be imbalanced.

Most of these accounts are pretty self-explanatory, so I won't be talking about what cash is, for instance, because I think everybody on here can figure that out. That being said, if I skip over something and it's confusing, I'm happy to answer questions in the comments. For investing purposes, there are different ways to forecast these accounts. I won't get into that here, but I may talk about it down the road.

So, Accounts Receivable, basically just what the company is owed. If I sold some item and gave my customer 30 days to pay, that revenue would show up in this account until I actually receive the money, at which point A/R would decrease, and Cash would increase, keeping the accounting equation constant. The net takes into account that some customers won't actually pay us back ever. There are a few different ways that companies can net A/R, but the simplest way is to look at how often a failure to pay happened in the past, and just use that same percentage in the current period.

Other Current Assets are pretty broad, and they obviously will differ based on the company, but this gives me a good opportunity to talk about current vs non-current. Essentially, the rule of thumb is that if the account will become due/realized in 1 year or less, it's current. Otherwise, it's non-current. This makes a little more sense viewed through liabilities, but in terms of assets, you would expect to be able to use cash tomorrow if you needed to, and recover your net A/R within a few months most likely. On the other hand, you'll likely be using your buildings for a really long time, even if you absolutely had to sell them, it could easily take a year or more to liquidate, compared to inventories which could probably be moved in a week or so.

Net plant, property, and leasehold improvements are pretty much exactly what it sounds like. Just the value of those assets minus any accumulated depreciation. Leasehold improvements are a little tricky in terms of accounting, but as long as you understand that it's just an improvement on an asset being leased, that's really all you need to know.

Moving on to non-current assets with Goodwill, which is just a premium paid over fair book value when acquiring a company. For example, if I acquire company X for $100, and the companies assets are solely $50 in cash, I'd have an imbalance in my financial statements, so we add $50 in Goodwill as a plug to make the accounting equation hold true. This sounds a little funky, but things like customer loyalty, brand recognition, etc, are difficult to value and don't always appear accurately on a balance sheet (if they do at all), so the idea behind Goodwill is that it accounts for those items. This number doesn't usually change except in an M&A transaction, but Goodwill impairment can sometimes happen, however it's usually not worth worrying about.

Deferred Income Taxes are what you would think just caused by different accounting treatments for a company's books vs tax. Deferred Tax Assets and Liabilities are really interesting, but it's a little complicated. Depreciation is a good way to give you an idea of how it works. Basically, most companies depreciate equipment on a straight-line basis, but you're allowed to depreciate using an accelerated method for tax purposes. When you do this, you'll pay less in tax than what's on your books, so you'll owe more in the future, creating a deferred tax liability. Obviously, this would go under liabilities, rather than assets, but you can imagine a scenario where it might go under assets.

Accounts Payable are just the opposite of A/R, so payments that the business expects to make in the future. Ideally, you'd like to make all of your payments, so this isn't really netted.

The accrued expenses are self-explanatory, accrued just means that you haven't actually paid them yet. The important thing to remember is that they're just estimates, so the actual number can change over time.

The current portion of long-term debt is just the portion of long-term debt that's due within a year. Commitments are just legal promises, usually disclosed in notes. Contingencies are a little complicated however because they involve uncertainty and depending on the likelihood of different outcomes, they get accounted for in different ways. I'm just not going to go super in-depth here.

Lastly looking at the equity section:

Common Stock or ordinary shares is just the par value of each stock (usually like $.001 or something really small like that) times the number of shares sold at that par value. Additional paid-in capital is just the amount of money that the company receives above that par value amount. I think it's usually confusing that this doesn't really change that often necessarily, but when we buy and sell shares on an exchange, that doesn't affect the company's books since they aren't gaining or losing any money.

Accumulated other comprehensive loss isn't too important. It's basically an accumulation of unrealized gains or losses (loss in this case) related to pension plans, Forex exchanges, or available for sale securities.

Just to touch on securities: companies can classify their investments as Available for Sale, Trading, or Held to Maturity. In AFS, you report unrealized gain or loss in Other comprehensive income, in Trading, the unrealized gain or loss goes with the other line items on the income statement, so it wouldn't be accumulated in the manner above. Held to maturity wouldn't show unrealized gains or losses at all on the income statement. I guess that's kind of a quick preview of how earnings can begin to be manipulated by clever accountants.

Lastly, the accumulated portion of net income that remains after paying dividends goes into an account called retained earnings (you might also see retained earnings as this line item name, but it's the same basic thing), which is what the Equity holders have a claim to. In this case, the account is negative, which means that accumulated expenses + dividends have exceeded accumulated profits. Retained earnings = Previous Retained Earnings + Net Income - Dividends.

I think I covered just about everything, but if I made a mistake somewhere or you could use some clarification, feel free to let me know. Also, there are a ton of line items not appearing on this balance sheet, this is just a primer. Often, I have to google what different line items are, but understanding the basics makes it a lot easier to put the puzzle pieces together, even if you don't have them all at first.

Next time: The Income Statement

I was thinking about posting a few memos about Accounting, really trying to help others understand how to read financial statements, what the various line items are, and how to use Accounting to evaluate a company. Up until a few weeks ago, I was planning on being a dual finance and accounting major (still plan on taking more Accounting courses, just not the high-level tax stuff), and I've spent the last few summers interning for PwC, so I understand Accounting a lot better than I understand valuation right now.

I figured not everyone on here is in the valuation group, and there are uses for Accounting beyond valuation so I wanted to gauge potential interest before typing up a bunch of stuff if others won't get any value from it

With all the craziness, I figured I'd type up a quick memo about why I've recently started to invest in Boeing, as I see significant upside, to offer some stability in these crazy times.

As I'm sure everyone on here knows, the stock was hammered by COVID-19, and hasn't yet recovered, still down almost 50% from its 52 week high. This is likely because of fears associated with the 737 Max, specifically, how safety concerns will affect future orders. While these concerns are valid, I believe they're overblown and represent the potential for significant upside in the future. Before I get into the details, I haven't had the time to really hammer out a full valuation, but I do think that the Company can reach pre-pandemic levels for the reasons I'll outside, representing around 100% upside from where it currently is.

First, Boeing is a diversified company with about 40% coming from its commercial airplane business and about 35% from the defense business. Normally, especially on the defense side, I don't think it's great to be so dependent on one customer, in this case, the U.S. military, but the planes that Boeing creates can't be easily replicated by defense competitors. For example, Boeing makes probably the most successful combat plane in history, the F-18. If the government decided that they wanted to start ordering F-18s from competitors, those competitors would have to redesign the whole plane as Boeing likely wouldn't just hand over the blueprints. You also have engineers who would never have worked on the plane before which could create safety issues and certainly some delays. For something as expensive and complex as a plane, this provides an incentive for the government to keep ordering planes from the company that won the original contract. In this case, the concentration of orders from one customer really limits the risk associated with the passenger segment.

However, the real upside is associated with the passenger segment. Unlike most travel stocks, Boeing hasn't recovered, because of issues in that area. I think that these issues are overblown and present a great opportunity to add upside and diversification.

Boeing really does benefit from only having one major competitor in the passenger aircraft space, Airbus. Each plane that these manufacturers create is designed to fill a specific niche, with not a lot of overlap. i.e. The 777 and 787 both are long-range, international jets, but serve different purposes and are bought by airlines for different uses.

This means that the 737 Max really only has one competitor, the Airbus A320 Neo, however, Airbus is currently sold out until 2025, giving airlines no choice but to purchase a 737 Max if they need to buy a plane that fits that particular use case.

There are also high switching costs associated with Airbus jets. With the exception of Delta, US airlines are committed to the 737 Max with hundreds of jets ordered per airline. This is important because crews have to be certified for the family of jets that they are flying, so if a pilot is currently flying from New York to Chicago on an A320 Neo, they can't necessarily fly the same route on a 737 Max without the proper certifications. This creates massive expenses for airlines in the form of switching costs that would occur if Airlines began to switch from a Boeing fleet to an Airbus fleet, creating an incentive for airlines to stick with Boeing through the storm.

There's also the matter of pricing in general. Generally speaking, after discounts, the 737 Max and A320 Neo family of jets are pretty competitively priced, but (unless this has changed), A320 Neo jets are subject to a 15% tariff as they are manufactured overseas. This tariff makes the A320 Neo millions of dollars more expensive than a 737 Max. For airlines, many of whom are still financially struggling amid a slow rebound in travel, the cost of purchasing A320 Neos just isn't worth it.

In short, Boeing has a very substantial moat. They make a product that is almost as essential as a product can be without actually being "essential" and switching costs are so high for their customers that they have limited risk in instances like COVID-19 and the 737 Max issues. Unlike most companies, the share price has yet to completely rebound. While I don't think this can happen immediately, I'm buying and holding as a long-term play over the next few years to see how Boeing is able to grow.

I want to begin by saying that I personally believe the death of physical retail thing is overblown in some aspects. I think that there's a certain experience from going to a store that you can't replicate online which benefits certain retailers (Looking at you Williams-Sonoma/Nordstrom). However, it's clear that in a lot of areas, retail is shifting online. This benefits consumers who can easily place an order from their couch and limits physical locations, which can lower costs while also increasing margins.

Enter Mohawk ( $MWK ), a technology company bringing technology to consumer retail. Mohawk doesn't operate any physical stores, rather, they use their proprietary AI, called AIMEE, to research consumer trends extremely in-depth to create new products that they sell through platforms like Amazon. I don't think I need to elaborate on the shift toward e-commerce, but I'm happy to discuss trends that I find particularly insightful.

This engine uses ML and NLP to optimize consumer product launches in four main ways. The first is research. AIMEE analyzes data from a variety of different platforms to automate emerging consumer trend discovery and launch new products before widespread adoption. Second, AIMEE automates a lot of the financial data, including projections, inventory, etc and organizes it in one place for easy access. This ensures inventory is better managed and projections become more accurate over time. The third is sales. AIMEE uses ML to constantly learn about what marketing strategies tend to work best in real-time to best scale sales of new products. Last is supply chain management. The platform automates to supply chain in order to get products to customers faster and continually manage existing inventory better. Obviously, this is super simplified, but I think it provides a good overview.

Because of how widespread consumer needs are, the product mix is well-diversified across various sectors, including electronics, wellness, and home appliances. This diversification hasn't led to inferior products, however, as the company has strong sales and great customer satisfaction across many of its products (looking at Amazon reviews). This has driven a huge increase in sales, from $36.5 million in 2017 to $114.5 million in 2019, and this strong growth should continue as more people continue to work from home.

To determine a potential valuation for Mohawk, I examined recent 10K/Q's and projected out financial statements to 2030. I expect the strong sales growth to continue at recent levels (50+%) for a few years as the company continues to grow, slowing down around 2025 before beginning to level off around 10% near the end of the projection period. However, over time, as AIMEE continues to improve, costs should definitely decrease as AIMEE becomes increasingly efficient, and I believe that profit margins between 15-20% are definitely possible a decade or more in the future. By 2030 I think revenues of around 2 billion dollars are possible, with an implied market cap between 2-3 billion based on that intrinsic valuation.

One other potential revenue stream that currently isn't in play is potentially licensing out AIMEE to other companies that Mohawk doesn't plan on competing with. I haven't incorporated this into my financial projections since I don't think it's a focus of the company, but it would definitely be a way to increase profits further without hurting their business much, if at all.

I've opened up a small position in the company, and plan on holding long-term and DCA'ing, but I won't be adding significantly more until the company matures a little. AIMEE is definitely unique, and I don't think there's another competing company that is using this technology to the same extent/effect as Mohawk. Nonetheless, in an age of disruption, the disruptor becoming the disrupted is a real risk, especially since the company is so new and doesn't have any particular brand loyalty. Specifically, I'll be interested to look at earnings for 2020 and 2021 to see how they compare with my own projections before really deciding whether to pursue a large stake in the company.

Regardless of how you feel about 2020, I think we can all hope for a better 2021. Happy NYE to everyone!

I've seen a lot of people talk a lot about $LMND, and how it's going to disrupt the insurance industry and produce outsized returns. I'm not as confident, and so, at the risk of looking foolish as time goes on, I'd like to share some of my thoughts.

1) Lemonade first and foremost, is an insurance company. An insurance company needs to have cash on hand to pay out claims when they happen. This is a company that is burning cash and losing money each year. The net loss premium for this company was ~70% in their latest 10-Q. I just don't see how the financials add up for this company long-term.

2) Lemonade isn't the differentiator everyone thinks it is, as far as I can tell. I see two main issues: First, claims adjustments, and second, corporate insurance. A claims adjuster is an INCREDIBLY difficult and in-depth job. You can't just take a picture of a burnt house and expect to get paid in 5 seconds. Furthermore, if my house burnt down, I'd probably want to deal with an actual person to make absolutely sure everything was documented 100% correctly, rather than hope the claim I submitted on my phone was sufficient.

It's the same story with corporate insurance. When you're dealing with running a company, you need to make sure that the insurance is truly customized to your needs. It's not as simple as taking 10 minutes to answer some questions and poof. Lemonade is good at claims because of the type of insurance it offers, and I believe that's intentional. It's a lot easier to pay on a renters insurance claim than it is on, say, a COVID-19 claim.

If the argument is that AI just makes Lemonade cheaper, and not necessarily faster for more complex claims I would argue that human adjusters are still needed currently. In the future, maybe not! I think it's a mistake to just assume, however, that no other legacy or new companies will innovate by that time and create something better than what Lemonade offers currently. At that point, it's not like people are gonna have strong brand loyalty to their insurance company. They'll choose whatever provider meets their needs and has the lowest rate.

3) Legacy insurance companies aren't dumb. They've been around forever and have tons of data on people, locations, etc, that all can be used to make better decisions. I don't see how Lemonade could have close to the amount of data. Sure, they're definitely constantly collecting customer data, but there's only so much you can gather from smartphone usage habits. Lemonade's AI isn't physically inspecting properties or locations to create better risk models the way traditional insurers are, so even if it could create a better model, I don't understand how the data inputs are of a high enough quality to actually be beneficial.

4) Lastly, I see a risk with how much of their business model relies on reinsurance. What happens if Lemonade has to pay out on a lot of claims and the reinsurers can't make money? They'll raise the fees or stop doing business with Lemonade all together, either of which throws a wrench, in my view, into the low-cost business model.

I'm sure I'm missing something, so I'd love to hear if I've screwed something up in my understanding. I also am not a complete hater of Lemonade. I think they've done some amazing things, and I think they'll likely continue to grow in the areas they've found success in. I just see them having trouble continually expanding which causes me to struggle with the current valuation. There are definitely reasons to be incredibly excited about what Lemonade brings to the table, some of which, I probably haven't thought about, but this idea of just explosive growth doesn't make a whole lot of sense to me.

I recently finished a deep fundamental dive on Zoetis. For those of you who don't know, Zoetis is a spin-off from Pfizer focusing on animal pharmaceutical products. What makes Zoetis unique in that space is its focus on companion animals (pets). Whereas many competitors earn a disproportionate amount of revenue from livestock, Zoetis has about a 50/50 split between pets and livestock.

Why does this matter? Because meat production is forecast to decline worldwide. On the other hand, the pet space is forecast to grow to roughly 10 billion dollars by 2026. Clearly, Zoetis has been making smart plays by focusing its efforts on pets, as revenue has grown more than twice as fast over the past 5 years as its competitors.. Additionally, with 13 blockbuster drugs, Zoetis is only dependent on its top ten products for 40% of revenue, demonstrating product diversification which I find to be incredibly important. This means that as many competitors begin to really struggle with meat trends shifting, Zoetis can continue to thrive in the pharmaceutical space.

Source: Statista

With that being said, why do I recommend holding this company, and not buying? To understand my reasoning, we need to talk about Pumpkin Insurance.

This is a new venture that Zoetis is undergoing in order to have a foothold in the $1.5 billion pet insurance market. This number should continue to rise 1) as pet ownership continues to increase in the United States, and 2) as the increasing humanization of pets encourages consumers to only want "the best", including when it comes to pharmaceuticals. If Pumpkin Insurance catches on, I believe that not only will Zoetis have increased revenue from existing customers, they will also attract new customers who are seeking an affordable way to buy the best medication for their pets. By offering Zoetis products at an affordable rate with Pumpkin, they can lock pet owners into the Zoetis ecosystem, and further expand on their market share in the pet space.

However, this is a very new venture, only around since April, so I don't think it's possible to predict with any certainty if this will catch on and begin to chip away from existing offerings. Thus, I didn't incorporate it into my financial projections

Since $ZTS revenue is about a 50/50 split between US and International, I divided up those projections accordingly. I forecast 10% annual growth in the US and 6% worldwide, both aggressive, yet in line with previous years. Even in COVID, people are buying more pets, so regardless of vaccine roll-out time, I feel confident in these projections. With a projected net profit margin of ~30%, well above competitors, this results in almost 3 billion dollars of revenue in the final year of my projections.

I next created projected financial statements out to 2024. I won't post them here for simplicity's sake, but I'm happy to let others review them, just ask!

By projecting out future cash flows into the future, I attempted to determine a fair value for Zoetis's stock.

My WACC of 5.4% was based on a COD based on the current bond rating for Zoetis, a COE based on CAPM, market values for equity, and book values for debt, with that number being used to discount my cash flows.

As you can see, I determined a fair target price to be 167.21, with 3.4% upside from current levels. Thus, I don't think it's time to be buying more or starting to sell.

I'm looking at pet ownership trends over the next year to see if I can spot any signs that benefit or hurt Zoetis with the upcoming vaccine. While I think that Zoetis can continue to be successful even if new pet adoption reverts to pre-covid levels, that doesn't raise my projected intrinsic valuation. More importantly, I'm looking to see how Pumpkin Insurance does. I think it could be a real game-changer and be very beneficial to all shareholders. At this point, however, it's too new a venture to project out, and I think that incorporating that revenue would be irresponsible. Thus, I'll be maintaining my position in Zoetis, and looking to see how trends impact Zoetis' current offerings. If more people adopt pets still, even if Pumpkin is a flop, Zoetis could be a stock worth buying in my opinion. For me though, the key is Pumpkin Insurance, if that catches on, I'll be slowly adding more over time, as I believe that would make it the undisputed leader in the companion animal space.

Feel free to reach out if you want to see more of my work on Zoetis, and also feel free to follow me on Twitter @theaustincox. I'd love to get any questions or feedback as well, definitely helps make me a better investor!

I think that as investors, a lot of us are chasing the next big thing, and it’s easy to fall into a trap of under diversifying. A lot of investors have done really well for themselves in the tech sector this year, but a worrying amount of people have a huge majority of their portfolio in a couple tech stocks, which may not be the best option long-term.

I’ve long advocated that we need to rethink our understanding of the tech industry, as risk is very different between $AMZN, $TSLA, and $NET, but constantly chasing huge gains leads to underexposure in other areas, increasing risk, while not proportionally increasing reward.

There’s nothing wrong with chasing growth. I chase growth myself, but I also know that I can’t time the market, and if my portfolio is all growth, there’s a very real chance that it could mostly vanish just as fast.

I think we really need to reevaluate how we view index funds. For many people, it’s an effective way to build diversification cheaply while still maintaining a section of your portfolio devoted to high growth.

Why do I believe that this will result in higher long-term returns?

We live among one of the most exciting eras in human history with a constant stream of innovation. This has resulted in an incredible amount of new and exciting companies popping up left and right. While this tech revolution has been building for decades, it’s only recently that it’s been booming.

The problem? Winners now could just as easily become losers tomorrow. Apple wasn’t the first computer manufacturer, and 20 years ago, IBM was a huge home PC manufacturer. The first mover advantage, long-term, is overblown, and that doesn’t always bode well for new and innovative companies.

If you look at my portfolios, most of my holdings are in index funds, and I like that. I still chase (and have gotten) massive growth in many of my holdings, boosting my returns to a level I’m very happy with, but I also feel comfortable knowing that I’ll be just fine in economic downturns or if my big winners don’t actually turn out to be big winners long-term. Index funds also allow me to invest in companies I may not know as much about, as I think you’re kidding yourself if you think you can invest in companies and have success if you don’t do weeks or months of research first to understand how they make money.

I realize many may disagree with this viewpoint, but this rapid growth doesn’t last forever. For the last few years, investing has been easy: just invest in tech and make 40% each year. At some point though, the growth will slow, stocks may not crash, but undervalued companies now will likely drive future gains then.

(Sometime in the next week, I’m going to be posting my analysis and complete modeling of $ZTS, so stay tuned for that)

I’m all about value, and I’ve been working towards diversifying more, but I think this tiktok thing with $FSLY is overblown. It could hurt, yes, but they, along with $NET are leaders in edge computing. Great opportunity to DCA into some shares at a discount

I know it’s cliche, but one of the benefits of being a long term investor is knowing that everything is going to be ok. I look for growth, but in companies I want to hold for 10 years. You better believe I’m adding onto some positions today