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The five rules for successful stock investing Part 6

Now, it's time for the fun part. You now have an investment phisolophy, you know what economic moats are, and you know how to read financial statements and evaluate companies | II Putting It All Together Now it s TIME for the fun part. You now have an investment philosophy you know what economic moats are and you know how to read financial statements and evaluate companies. Let s put all this knowledge to work by analyzing two real-world companies chipmaker Advanced Micro Devices AMD and Biomet a medical device firm. Note All of the financial data in this chapter is available free on Morningstar.com in the same format that you see it here. Advanced Micro Devices At first AMD might look like an attractive investment. It s one of only two companies that manufacture microprocessors the brains in a PC or server and computers are pretty ubiquitous devices. AMD also makes flash memory chips that are used in a variety of devices that should have solid long-term demand such as mobile phones and network routers. In the microprocessor market AMD has caught up to archrival Intel on the technological front over the past several years and for a brief spell in the late 1990s the firm was selling chips that were arguably faster and better than those being sold by Intel. 10 PUTTING IT ALL TOGETHER In addition AMD has been working on a powerful next-generation chip that may be better than anything Intel has to offer. This is the AMD story that you might know if you followed the news a bit and casually flipped through the company s Web site and its recent annual reports. However its not enough information to make a sound investment decision so let s approach the firm systematically to see just how solid an investment AMD really is. Economic Moat First look for evidence of an economic moat. As we discussed in Chapter 3 we can do this by examining how profitable AMD has been in the past by analyzing free cash flow margins return on equity and return on assets see Figure 11.1 . It looks like AMD has had a pretty spotty history of generating free cash flow. After a few good years in the early 1990s free cash flow turned negative as the firm heavily increased .