Cash Flow, EPS, Moats and Magic

A couple of years, my son called and told me I should buy the chip maker AMD. He is big into computers, and he was convinced that AMD's new chips were going to be game changers. At the time, it was a $2 stock.

When I evaluate a stock, the first 3 things I look at is cash flow, EPS (earnings per share/profit) and if it has a moat. Moat, a Warren Buffett term, is a distinct advantage a company has over its competitors which allows it to protect its market share and profitability. It is often an advantage that is difficult to mimic or duplicate (brand identity, patents) and thus creates an effective barrier against competition from other firms. Moats can be magical.

When looking at AMD, they had negative cash flow (a bad thing), a negative EPS, and a mountain of debt. Yet, my son was convinced that AMD had a strong Moat. What should I do?

When I evaluate a basketball player, the first 3 stats that I look at are ts%, usg%, and on/off stats. In many ways, ts% and usg% are like EPS and cash flow. Odds are, if you are high in both numbers, you probably are a blue chip.

I associate on/offs with moats. Harder to explain, but have some hidden magic. Don't confuse on/off with plus/minus. For example Steve Kerr in his final 7 seasons had a great +5.0 plus/minus (helps playing with Jordan and Duncan), but a poor -4.7 on/off. I think Bryn Forbes has a chance to put up some positive Kerr-like results playing next to Giannis.

On/off is how does the team do when player A is on the court, vs when they are off the court. IMO, it can measure some of the hidden qualities that more traditional stats do not. But, under small sample sizes, on/off can be very deceiving.

Now why am I bring up on/offs and Moats? Because Jrue Holiday might be low EPS/ high Moat player. In seven seasons with NOLA, he had a 54 ts% on 25 usg%. To put it kindly, not great. Considering, what we gave up, John Hadl comes to mind.

However, looking at his +8.8 on/offs in NOLA, a different picture emerges. NOLA was 55 win team with him on the court and 30 win team when he sat. How does such a low efficient player, make such a positive impact on the score board?

Have there been other low EPS/high Moat players? Two players come to mind, Draymond Green and Rondo when he was with the Big 3 Celtics. Draymond with GSW has low 53 ts%, but a great +9.8 on/off. Rondo, when Boston won their ring had a 47 ts%, and a +8.7 on/off.

Which brings us back to that $2 AMD Moat-like stock. I wonder how it is doing two years later? $91.33 as of the close on Friday. Lets hope the Bucks can have the same profit.

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