The Roaring Kitty Model + DCF
Every once in a while history and technology come together in a way to allow the individual nearly equal firepower to the “professionally trained”.
Every once in a while, history and technology come together to allow the individual nearly equal firepower to the “professionally trained”. That has been said about the 1873 Winchester rifle. “The gun that won the west” eventually retailed around $19.50 in the late 19th century. This was a pretty penny of its day, but not beyond the reach of the average frontiersman. Likewise, the colt revolver generally sold below $30. These guns were affordable to own, easy to use and began to dissolve the “professional military class” of the 19th century.
Today, in the investing space we see similar financial accessibility with self-managed investment accounts. Commissions, regularly $40/trade as recently as the 90’s, now are commission free, no matter the size. The cost of an institutional Bloomberg terminal can range from 20-25k PER YEAR! Meanwhile, with open-source databases and APIs, a clever individual can build a high percent of those capabilities for mere dollars per month. Not unlike the Winchester, you can blow your face off it you ignore careful study and preparation with the tools. Yeah, let’s not do that…
The Jester as the gunslinger…
If you are not familiar with the rise to investing fame, you can follow his story on how he turned 50k into 40 million a few years ago:
Information on “Roaring Kitty’s” story and the original Gamestop short squeeze can be found here.
If you follow him very closely, you’ll find Roaring Kitty is a better security analyst than the vast majority of the Wall Street professional class. That’s why he’s at home, with his own money. That’s why Mass Mutual was fined 4 million dollars for “not controlling their employee”. He’s creative, independent and contrarian. Most importantly, he knows how to play the poker game from the back row (outsider).
Golden Rule of Retail Investing: Thou shalt not pump and dump without a brokerage license.
Silver Rule of Retail Investing: Thou shalt not transgress the boundary of “smart money” from the webcam milieu of your spare bedroom.
The first key to any retail investor, no matter how capable you think you are, is to recognize that you are not an institutional investor. The rules are written and administered to reward and protect the (incompetent) professional class. There will be no such relief for your mistakes.
Secondly, if you publicly humiliate the professionals (ie: reveal how inept they really are at analysis) be prepared to make a fool out of yourself or forfeit a large portion of your earnings.
Thirdly, if you are not Keith and you have no desire to understand his method, you will be separated from your savings by simply following his trades. He specifically told you not to do that.
Fourth, if you DO become successful enough to draw attention, be prepared to admit before Congress that it was all because of luck. We all know better…
The gates are up but the walls are down.
Incorporating RKs best ideas into a proven model
This is the second piece on “models” after the Stage Analysis Market Model. That model was based on price action, momentum and technical analysis. This model is based on reported business financials their support for current and higher prices. Its should be used in tandem to build stronger base case for our investments.
In previous posts, we published results from the prior version of discounted cash flow forecast model. We’ve recently improved this model and incorporated better long term financial heat maps and screening tools. At the end of the day, its about revealing the hidden things more easily.
Inspiration for these improvements comes from Keith Gill’s (Roaring Kitty) method of screening presented in video below. Keep in mind for 3-4 years he was involved in the development of investing software for a family startup. Full disclosure, I recommend Tradingview over Stockcharts and Excel over Google sheets. The model here is powered by the Wisesheets financial API that plugs into Excel.
My Tradingview affiliate link is here.
Otherwise, the concepts and condition formatting are similar. The ability to rapidly forecast price and analyze trend. …nearly as rapid as reading the chart alone. The full walk-through of his spreadsheet tools are in the video, but the model and analysis pack is mostly covered in the first 45 minutes or so.
The Version 2.0 Model and Analysis
It now takes about 5 to 10 minutes to do a fairly deep financial analysis of a company. Let’s walk through the basic steps.
The purpose of this first page is to snuff out “accounting BS” such as popular debt buy backs and mass stock issuance. If the accounts try to hide bad news, there is a very high chance this screening document will find it.
Let’s walk through the basics of page 1:
What is reasonable expectation of free cash flow in the future? Institutional money will eventually find/follow cash flow. This should be on an upward trend (turning green). What % of future revenue can be assumed to turn into cash flow in the future.
How much cash does the company have on hand to deal with ebb and flow of business? Can they support their dividend and service their debts? (blue is good) What is the trend of the general and administrative expenses? Is the company managing its overhead efficiently? This line item is something management has a degree of control over. How much short-term debt is on the balance sheet? Red is bad and belongs on the “con” side of an investing decision.
What are the fully diluted shares outstanding? This number takes into account options, warrants, common and non-common shares. This number is the divisor that gets us to a per share price. It’s important to represent the fully diluted version of shares outstanding.
Is there risk of this company going bankrupt in 2 years? These are key metrics if you are looking for deep value. Presented is the Z-score and leverage ratio. (I plan to further tune this metric toward the companies that I normally shop)
Does the company pay a dividend and is it sustainable long term (payout ratio below 80%)?
Has there been analyst estimates of revenue, how many and how good a job have analysts predicted forward guidance. (to be used on page 2). The last 3 lines tell us whether the high, average or low estimates have been the most accurate.
The basics of page 2…
Page 2 includes a discounted cashflow projection and appraisal of the price. (some refer to this as the Buffet model… not Jimmy)
Discount rate or WACC (weighted average cost of capital) is calculated automatically.
We can add a load to the discount rate to compensate for things like jurisdiction or other reasons we feel additional conservative measures need to be observed. As an example we might add 4% to companies in Africa or other 3rd world locations. Terminal value assumptions are in this pane. The terminal multiple shouldn’t excede half of the time you think the company has left in business. If the company is in decline you may want to lower the terminal value or exclude it altogether.
The Wisesheets API includes analyst forecasts 5 years provided they exist.
Cash Flow as a percent of revenue can be defined here. We try to be conservative. Any forward cash flow streams can be used as deemed necessary to understand the leverage of the company.
This is the revenue forecast line. We often assume the low end of analyst revenue projections.
This is the estimated value of the stock based on all the prior assumptions and analysis.
The aim of the Kitty model is to prove a heavily discounted price on multiple conservative points, not so much where the price can go on the upside. Investing presents nearly unlimited stock choices. The goal is to get the kind of deal you talk about on Black Friday’s past (RIP Black Friday).
Information Theory and The Kitty Model
Information is surprise. The goal of this model is to flesh out surprise quickly and visually. Surprise is neither good nor bad in and of itself, but merely new information that can be incorporated into an overall impression of price on the screen. This will improve with transmission of information.
Simply put this model is a radio. It should be fined tuned to minimize noise and expose actionable information moving forward. New variables and metrics will be added in the future and others removed. The goal is to keep things as clean as possible.
Information is in price charts. Information is in the reported financials. The better we do at clarifying the signal, the higher our conviction for specific entries and exit prices and the easier to identify new opportunities.
Cheers everybody!
**Disclaimer:**
The information and outputs provided by this 5th generation finance model are for informational purposes only and should not be considered financial advice. While the model utilizes advanced techniques, financial markets are inherently complex and subject to unpredictable changes. Following the model's recommendations does not guarantee positive financial outcomes, and there is a possibility of financial loss.
**Important:**
* It is crucial to conduct your own independent research and due diligence before making any financial decisions.
* Consider seeking professional financial advice tailored to your specific circumstances.
* You are solely responsible for the investment decisions you make and the associated risks.