The world's top 2000 companies

Forbes has published its Top 2000 companies around the world. Its a useful survey since you can search the list by their ranking, country, industry, sales, profits, assets and market value. I suspect a lot of people would look at such a list and think they should buy the most profitable company, particularly if it has a history of performance. My logic is the opposite. I want to go to the bottom of the 'profit ranking' to see the stock offering the greatest upside. You can be sure that if there is a company making 30-40% growth in sales or profits, its going to be trading at a huge premium in the market. My belief is that things eventually tend to go wrong with these companies, whether success breeds mistakes, or builds strength in the competition. They are destined to make a mistake. Everyone is impressed by Google - as they should be - but I'm waiting for them to fail because they are 'too successful', such that bloggers can't upload photos because their service is so popular. Maybe the age of outsourcing will avoid this issue. I'd be more inclined to invest in Yahoo - though I choose to use Google's services.
Typically stocks that are have been making losses are trading at huge discounts. Shareholders have abandoned the stock, and will be looking for signs of improvement. Typical signs are:
1. Changes in senior management & the board
2. Asset sales
3. Restructuring of debt

Unfortunately the information provided by Forbes is not really in a useful state. We really need to import this data into a spreadsheet. I am assuming that Forbes has applied a consistent format for calculating this data, but since its a new service and not a market advisor, it would be worthwhile to check the figures. By doing that we can perform some simple analysis of financial ratios:
1. Profits as a fraction of sales: This will provide an indication of which companies have low profit margins. Certain industries have better profit margins than others, so its worth comparing the companies with industry peers. Bear in mind that two insurance companies need not be the same. One might be insuring buildings, the other is offering house insurance. We are looking for patterns at first, then we need to explain the discrepancies.
2. Earnings as a fraction of market capitalisation: This will tell you which companies are valued at a discount or premium in the market. Its like a price-earnings ratio (PER). You need to consider why the stock is trading at a premium. These are major stocks, so they tend to be high profile. So you need to know the reason for the under- or over-rating. eg. Oil companies 5 years ago were trading at a discount because because whilst oil prices were historically high, the market thought they would collapse back to $9/barrel. That perception has since changed and oil companies are amongst the largest in the world, with oil at $105/barrel up from $44/barrel at the time.
3. Profits as a fraction of assets: This will provide an indication of which companies have under-performing assets. Assets can be under-performing for a variety of reasons. The profits might be low because those assets have huge liabilities against them. Given the outlook for higher inflation, we would need to consider the risk of higher interest charges. This might be considered a negative, but steps to reduce debt would be a positive if done sooner rather than when its forced.

After identifying anomalies, comparing them with peers, and attempting to explain the anomaly in the market rating, the next step is to look at the stock chart, and to take a closer look at the company. Then I would be trying to find a CFD provider who trades that stock.
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Andrew Sheldon www.sheldonthinks.com