Stock Price Influences
Stock prices are vulnerable to many market changes. However, there are three major influences that have an effect on the ups and downs of the prices. You should become familiar with these influences in order to be able to identify whether the change in the price gives you a signal to sell, buy or do nothing with a particular stock.
Business Fundamentals Change
The first influence is a change in the economic conditions in the market. If a particular company experiences a steady increase in its revenue and profits, then it represents an attractive investment to investors. As a result, you can expect that the price of the stock will increase as investors bid for its purchase.
The opposite is true if the particular company experiences a flat trend of its revenue and profits or even there is a decline it them. As a result, investors will show no interest in the stock and the price of the latter will fall.
If a company incurs debt or executes an acquisition its price will be again influenced. However, the effect of these will not be felt immediately.
The important thing to remember is that a change in the business leads to a change in the price of its stock. So, you should learn to notice the underlying business changes before they are reflected in the price of the stock.
Sector Change
Every company is part of a particular sector. Some sectors are influenced by different cycles, which in turn are reflected in the price. Therefore, being a smart investor requires you to be able to spot the cyclical changes that may influence the price of the stock.
The bad news is that if the whole sector experiences a major change, all companies are influenced no matter of their business fundamentals.
This means that no matter how well your stock may perform, if the whole sector sinks your stock will sink too. On the other hand, if you hold a badly performing stock, but the prices of the stocks are artificially inflated, the price of your stock will also increase.
Market Cycle Change
Generally, the market experiences different cycles. It goes up and down or stays flat.
As a result your stock will be influenced by these movements. It may move in accordance with the market or go against it. The latter is especially true about smaller companies, which often times don't follow the market trends. However, large-cap stocks generally move in accordance with the market up to a certain point and then get their own direction.
Stock Influences Application
By studying the changes in the business fundamentals you may get an idea on whether to purchase stocks of a growing company or sell such if the company is getting in a worse position.
Sector changes are most of the time a temporary events. Nevertheless, a major change may require you to reexamine the viability of your stocks. The time may have come to say goodbye to your stocks. You should make a careful analysis on the ability of the company to adapt to the changes that have occurred.
Changes in the market cycles may be beneficial to investors, because they may provide you with the opportunity to add new stocks to your holdings. Additionally, if the price is high enough being pushed by the market cycle, it may be time to sell it and use the proceeds to purchase additional stocks when the price is down again.
http://www.stock-market-investors.com/stock-investing-basics/stock-price-influences.html
Sunday 15 November 2009
Has the Time for Selling Stocks Come?
Has the Time for Selling Stocks Come?
When your stock turns into a winning player you may become frustrated about whether it is time to sell it. Many financial advisors recommend the avoidance of selling a winning stock, whereas other specialists claim that selling is an inseparable part of the trading process.
Consider the following case. You have purchased a stock that has become winning. One of the alternative courses of action that you can undertake is to sell the stock and enjoy its profits. On the other hand, you can keep the stock and wait to see its future development.
However, you should consider the following steps regarding the second option. They are required in order not to lose the profits you have acquired.
1.Examine Company's Fundamentals
The first thing you should examine is the fundamentals of the company that has issued the stock. This is required in order to see whether the company has stable fundamentals. Failure in the latter may lead to a fall in the price of your winning stock.
Make a careful examination on such things as cash flow, debt, sales and etc. If there is a problem don't wait for the market to notice these problems and quickly sell the stock before the price has fallen and you have lost your profits.
2.Set a Target Price
When you purchase a stock it is a good idea to set a target price, which if reached triggers the selling of the stock. The target price of the stock may be both above and below the current level. This means that if the stock increases or decreases to a certain level you should sell it.
The setting of an upper limit is many times required for the purpose of insuring yourself against the potential inability of the stock to sustain a market price that is above a certain level. A bad event may trigger the fall in the price and as a result you may lose your profits.
Additionally, many investors know how much they want to get from a stock and establish the upper level. Once reached, they dump the stock.
3.Watch for Events Suggesting It Is Time for Selling
Many events can have a negative effect on the value of your winning stock. Thus, you should carefully consider them and whenever they occur you should embark on selling. Such events may include:
◦Too much attention from the media
Too much attention on the part of the media may lead to artificially inflated prices of the stock since many investors show interest. After the hype passes the price may start to fall and result in the loss of profits.
◦Slowed growth of the stock.
If you possess a growth stock, it is good to consider its selling after it has reached the point at which its growth speed has started to decrease. This is required because the market shows negative attitude toward growth stocks that are unable to sustain their growth.
◦Better investment opportunities
It may turn out that there are other stocks that provide better returns. The latter may present a lower level of risk as well. Thus, it is recommended that you consider the selling of your stock and purchasing one of these.
◦Decreased or Eliminated Dividends
At one point or another, the company issuing the stock may start to decrease the dividends it pays to shareholders. If they are also completely eliminated, then this may indicate that the company is undergoing some change or problem. This represents a good reason for selling the stock and avoiding losing your profits.
Many financial experts advise the selling of part of the stock. The rest is left to grow further. In this way you get part of your profits and let the rest generate further returns.
Finally, don't be too hasty and make frequent trades just because you have obtained some profits from a stock. The commission fees that you will have to pay for the frequent trades will eat up your profits. Thus, several winning trades per year are just enough to fill your account with profits.
http://www.stock-market-investors.com/stock-strategies-and-systems/has-the-time-for-selling-stocks-come.html
When your stock turns into a winning player you may become frustrated about whether it is time to sell it. Many financial advisors recommend the avoidance of selling a winning stock, whereas other specialists claim that selling is an inseparable part of the trading process.
Consider the following case. You have purchased a stock that has become winning. One of the alternative courses of action that you can undertake is to sell the stock and enjoy its profits. On the other hand, you can keep the stock and wait to see its future development.
However, you should consider the following steps regarding the second option. They are required in order not to lose the profits you have acquired.
1.Examine Company's Fundamentals
The first thing you should examine is the fundamentals of the company that has issued the stock. This is required in order to see whether the company has stable fundamentals. Failure in the latter may lead to a fall in the price of your winning stock.
Make a careful examination on such things as cash flow, debt, sales and etc. If there is a problem don't wait for the market to notice these problems and quickly sell the stock before the price has fallen and you have lost your profits.
2.Set a Target Price
When you purchase a stock it is a good idea to set a target price, which if reached triggers the selling of the stock. The target price of the stock may be both above and below the current level. This means that if the stock increases or decreases to a certain level you should sell it.
The setting of an upper limit is many times required for the purpose of insuring yourself against the potential inability of the stock to sustain a market price that is above a certain level. A bad event may trigger the fall in the price and as a result you may lose your profits.
Additionally, many investors know how much they want to get from a stock and establish the upper level. Once reached, they dump the stock.
3.Watch for Events Suggesting It Is Time for Selling
Many events can have a negative effect on the value of your winning stock. Thus, you should carefully consider them and whenever they occur you should embark on selling. Such events may include:
◦Too much attention from the media
Too much attention on the part of the media may lead to artificially inflated prices of the stock since many investors show interest. After the hype passes the price may start to fall and result in the loss of profits.
◦Slowed growth of the stock.
If you possess a growth stock, it is good to consider its selling after it has reached the point at which its growth speed has started to decrease. This is required because the market shows negative attitude toward growth stocks that are unable to sustain their growth.
◦Better investment opportunities
It may turn out that there are other stocks that provide better returns. The latter may present a lower level of risk as well. Thus, it is recommended that you consider the selling of your stock and purchasing one of these.
◦Decreased or Eliminated Dividends
At one point or another, the company issuing the stock may start to decrease the dividends it pays to shareholders. If they are also completely eliminated, then this may indicate that the company is undergoing some change or problem. This represents a good reason for selling the stock and avoiding losing your profits.
Many financial experts advise the selling of part of the stock. The rest is left to grow further. In this way you get part of your profits and let the rest generate further returns.
Finally, don't be too hasty and make frequent trades just because you have obtained some profits from a stock. The commission fees that you will have to pay for the frequent trades will eat up your profits. Thus, several winning trades per year are just enough to fill your account with profits.
http://www.stock-market-investors.com/stock-strategies-and-systems/has-the-time-for-selling-stocks-come.html
Avoiding Bad Stock
Avoiding Bad Stock
Most investors often fall in the simple trap of believing someone who tells them that a particular stock represents the next winning bet. However, you should be very cautious when examining the possibility of investing in such a "promising" stock.
1. An example of a great looking stock is the one that looks absolutely healthy from the outside, but it is usually hollow and unprofitable in its core. Most investors that are attracted by these shiny stocks eventually find out that the companies that have issued them are not profitable and financially sustainable. These stocks are easily forgotten after a short period of time.
2. Another example of a bad stock is the one that is tied to the cycles of the business. This means that its price is very vulnerable to the changing cycles of the market. If you purchase the stock at a time when its price was high (due to high demand), you will soon end up with a worthless stock because of the changed cycle of the market.
3. Sometimes a stock may be really very profitable and a viable investment. However, you have entered the game too late at a point where the market has increased the price of the stock to a high level. No matter how good the stock may be if you buy high you will soon feel the losses.
Making the Right Investment Decision
In order to make a successful investment decision you should first of all select a company that has a reliable business. Additionally, the company should prove that it has good prospects for success in terms of growth.
Second, you should be able to find a price that coincides with the current state of the company and its future position. You should make a reasonable evaluation in order to avoid paying more than the company is really worth.
In order to determine the current and future value of the company's stock, you can refer to one or several of the many formulas for this purpose. However, you should not fully rely on them and try to develop your common sense feelings in order to pick the stocks that best meet your financial goals.
When you start the stock selection process take your time. Don't be too impatient and if a stock doesn't look very viable don't invest in it. There are plenty of other opportunities in which you can invest your hard-earned money. Analyze all the alternative investments and select the one that best meets your needs and goals.
Remember that you should try to avoid the described above bad stocks, which only look profitable but are financially hollow. Additionally, the best way not to lose your money is to invest reasonably and cautiously by analyzing every opportunity before jumping into it.
http://www.stock-market-investors.com/stock-market-advices-and-tips/avoiding-bad-stock.html
Most investors often fall in the simple trap of believing someone who tells them that a particular stock represents the next winning bet. However, you should be very cautious when examining the possibility of investing in such a "promising" stock.
1. An example of a great looking stock is the one that looks absolutely healthy from the outside, but it is usually hollow and unprofitable in its core. Most investors that are attracted by these shiny stocks eventually find out that the companies that have issued them are not profitable and financially sustainable. These stocks are easily forgotten after a short period of time.
2. Another example of a bad stock is the one that is tied to the cycles of the business. This means that its price is very vulnerable to the changing cycles of the market. If you purchase the stock at a time when its price was high (due to high demand), you will soon end up with a worthless stock because of the changed cycle of the market.
3. Sometimes a stock may be really very profitable and a viable investment. However, you have entered the game too late at a point where the market has increased the price of the stock to a high level. No matter how good the stock may be if you buy high you will soon feel the losses.
Making the Right Investment Decision
In order to make a successful investment decision you should first of all select a company that has a reliable business. Additionally, the company should prove that it has good prospects for success in terms of growth.
Second, you should be able to find a price that coincides with the current state of the company and its future position. You should make a reasonable evaluation in order to avoid paying more than the company is really worth.
In order to determine the current and future value of the company's stock, you can refer to one or several of the many formulas for this purpose. However, you should not fully rely on them and try to develop your common sense feelings in order to pick the stocks that best meet your financial goals.
When you start the stock selection process take your time. Don't be too impatient and if a stock doesn't look very viable don't invest in it. There are plenty of other opportunities in which you can invest your hard-earned money. Analyze all the alternative investments and select the one that best meets your needs and goals.
Remember that you should try to avoid the described above bad stocks, which only look profitable but are financially hollow. Additionally, the best way not to lose your money is to invest reasonably and cautiously by analyzing every opportunity before jumping into it.
http://www.stock-market-investors.com/stock-market-advices-and-tips/avoiding-bad-stock.html
****Bull and Bear Market Strategies - Damn Bloody Good Gems!
The stock market often falls under the conditions of the so called bull and bear markets. Intelligent investors are well familiar with the conditions of both and know exactly what to do.
Under a down market you have several options.
- One of them is to sell immediately in order to minimize your losses.
- Another option is to let the market work its way through the problem with no action from your side.
- A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.
- First of all, you can sell a part of the shares and use the money to repurchase the stock when its price falls again.
- Secondly, you can leave the market work its way through the imbalance with no action from your side.
- Thirdly, you can take advantage of the high prices and sell the stocks for a profit.
Never forget that it is important to base your decisions on knowledge not on feelings. This means that being educated about the company and the industry from which your stocks come from, the market conditions under which you operate will be of small importance to you.
http://www.stock-market-investors.com/stock-strategies-and-systems/bull-and-bear-market-strategies.html
Types of Stock Market Losses
Types of losses
Capital loss
Lost opportunity
Missed profit loss
Tips for Preventing and Dealing with Losses
•Evaluate the worthiness of a certain investment by measuring it against a US Treasury Note, which provides risk-free investment with relatively small returns. This will help you determine how much more the particular stock will bring you and whether the risk of sustaining losses is worth it.
•In order to avoid missed profit losses don't be too greedy and apply common sense when you see the price of your stock rising. Otherwise, you risk missing the high level and you will have to put up with a lower less beneficial one at best.
•Never console yourself that the losses you have sustained are just on paper and are not realized until you sell the stock. If you are convinced that the losing stocks still represent good long-term investment potentials, you should consider holding them disregarding the current lack of good performance. Otherwise, the paper losses will be turned into lost opportunity for each day you keep your stocks.
There is no person who likes losing money. However, you should accept the idea of losing some money from time to time. Additionally, whenever you notice that your stocks are losing their positions and their long-term prospects are not good, it may be better to sell them and move on to a better deal.
http://www.stock-market-investors.com/stock-investment-risk/types-of-stock-market-losses.html
Capital loss
Lost opportunity
Missed profit loss
Tips for Preventing and Dealing with Losses
•Evaluate the worthiness of a certain investment by measuring it against a US Treasury Note, which provides risk-free investment with relatively small returns. This will help you determine how much more the particular stock will bring you and whether the risk of sustaining losses is worth it.
•In order to avoid missed profit losses don't be too greedy and apply common sense when you see the price of your stock rising. Otherwise, you risk missing the high level and you will have to put up with a lower less beneficial one at best.
•Never console yourself that the losses you have sustained are just on paper and are not realized until you sell the stock. If you are convinced that the losing stocks still represent good long-term investment potentials, you should consider holding them disregarding the current lack of good performance. Otherwise, the paper losses will be turned into lost opportunity for each day you keep your stocks.
There is no person who likes losing money. However, you should accept the idea of losing some money from time to time. Additionally, whenever you notice that your stocks are losing their positions and their long-term prospects are not good, it may be better to sell them and move on to a better deal.
http://www.stock-market-investors.com/stock-investment-risk/types-of-stock-market-losses.html
Before You Buy Stocks
Before You Buy Stocks
No stock investment should be done without a thorough preliminary check on its potentials. This is required in order not to wake up in the next morning and wonder why you have put your money in this stock at all.
This is especially true when the question comes to long-term investing. It will never hurt you to make a close examination of the stocks you are about to purchase. If you don't do that your potential of losing money is highly increased.
In order to determine whether a certain company's stock is worth the investment you should consider the following criteria:
1.Company growth potential
What you should pay attention to is the growth in earnings and revenue. Additionally, the company growth should be sustained over longer periods of time.
In case the revenue lags behind with respect to earnings, you should dig deeper and try to find the reasons why this is so.
On the other hand, if the earnings are declining or keeping one and the same level while the revenue is increasing, it may mean that:
◦The company is launching a new product
◦The company is entering a new market
◦There are management inefficiencies
◦The company cannot compete efficiently in the current market
2.Company understanding
You should be well aware of the activities and purposes of the company and be possible to state them in simple words so that even a child can understand you.
You are not required to know the subtleties of the particular business, but you should educate yourself on its operations and functions. Additionally, don't direct your attention to companies with sophisticated business models. They don't guarantee you higher profits. The latter can be gained even from companies with less sophisticated business models that provide almost the same efficiency.
3.Cost of investment
Now that you have done the necessary research on the company and have gained a thorough understanding of its structure and operations, it is time to see how much the deal will cost you.
Before paying for the stock, check whether the stock is not currently at its "hot" state, which may mean paying a high price.
A good tactic may be to wait until the market suffers the negative consequences of some bad event and its prices are down. In such a way you gain the opportunity of enjoying higher profits later.
If the price of the stock is too low, but you cannot see anything wrong with the company don't hesitate and buy it.
On the other hand, you should always assume the chance that your analysis has some flaws. In such a case, it is better to abandon the research for the sake of saving your money and not risking losing them just because you have been impatient.
Final Piece of Advice
Apply as much patience as possible and observe the stock for a while. Make all the necessary checks and analysis before jumping into the deal. If the conditions have changed it may be better to abandon your research and stock and head for the next opportunity by learning from the mistakes you have committed.
http://www.stock-market-investors.com/stock-strategies-and-systems/before-you-buy-stocks.html
No stock investment should be done without a thorough preliminary check on its potentials. This is required in order not to wake up in the next morning and wonder why you have put your money in this stock at all.
This is especially true when the question comes to long-term investing. It will never hurt you to make a close examination of the stocks you are about to purchase. If you don't do that your potential of losing money is highly increased.
In order to determine whether a certain company's stock is worth the investment you should consider the following criteria:
1.Company growth potential
What you should pay attention to is the growth in earnings and revenue. Additionally, the company growth should be sustained over longer periods of time.
In case the revenue lags behind with respect to earnings, you should dig deeper and try to find the reasons why this is so.
On the other hand, if the earnings are declining or keeping one and the same level while the revenue is increasing, it may mean that:
◦The company is launching a new product
◦The company is entering a new market
◦There are management inefficiencies
◦The company cannot compete efficiently in the current market
2.Company understanding
You should be well aware of the activities and purposes of the company and be possible to state them in simple words so that even a child can understand you.
You are not required to know the subtleties of the particular business, but you should educate yourself on its operations and functions. Additionally, don't direct your attention to companies with sophisticated business models. They don't guarantee you higher profits. The latter can be gained even from companies with less sophisticated business models that provide almost the same efficiency.
3.Cost of investment
Now that you have done the necessary research on the company and have gained a thorough understanding of its structure and operations, it is time to see how much the deal will cost you.
Before paying for the stock, check whether the stock is not currently at its "hot" state, which may mean paying a high price.
A good tactic may be to wait until the market suffers the negative consequences of some bad event and its prices are down. In such a way you gain the opportunity of enjoying higher profits later.
If the price of the stock is too low, but you cannot see anything wrong with the company don't hesitate and buy it.
On the other hand, you should always assume the chance that your analysis has some flaws. In such a case, it is better to abandon the research for the sake of saving your money and not risking losing them just because you have been impatient.
Final Piece of Advice
Apply as much patience as possible and observe the stock for a while. Make all the necessary checks and analysis before jumping into the deal. If the conditions have changed it may be better to abandon your research and stock and head for the next opportunity by learning from the mistakes you have committed.
http://www.stock-market-investors.com/stock-strategies-and-systems/before-you-buy-stocks.html
When to Buy and Sell Stocks
Sound stock decisions should be made on the basis of thorough company knowledge, not just on the basis of the price of the stock. A rising price most of the times means that the time to sell the stock is nearing. On the other hand, a falling price may signal that the time to purchase stocks is coming.
http://www.stock-market-investors.com/stock-strategies-and-systems/when-to-buy-and-sell-stocks.html
http://www.stock-market-investors.com/stock-strategies-and-systems/when-to-buy-and-sell-stocks.html
Pump and Dump Scams - All too familiar in our local bourse
How to Avoid Pump and Dump Scams
Advertisement If you have experienced the flooding of your mail box with offers and recommendations for the purchase of a particular stock that promises huge returns, be very cautious because you may fall in the common scam that is referred to as "pump and dump".
How Pump and Dump Stock Scam Works
Under this scam crooks purchase large number of a company stocks that are extremely cheap. They do it in such a way that no attention is attracted to their purchase.
After this the crooks embark on a vast campaign of pumping up the price of the stocks by telling stories of how the price will raise leading to high returns. Additionally, it presents the stocks as an opportunity to become an owner of very profitable business. The crooks predict the potentially high returns happening within the next few days.
The crooks encourage their victims to purchase the stocks until the price is low and thus take advantage of the eventual high profits. If they are persuasive enough and manage to attract people to the particular stocks, the prices of the latter will start to rise. This will be used by the crooks to support their predictions and further pump up the price by attracting more people.
Such scams as false press releases and analysts commentaries may be used to further increase the price and gain credibility.
After the price reaches a particular point the crooks sell their stocks making huge profits. This is also the time when company officials have expressed their concerns about the rising prices of their stocks.
As a result of the sold by the crooks stocks, the price starts to fall, which leads to the selling by the other shareholders. Eventually, the shareholders are burned by the scam and the company receives sometimes undeserved bad reputation.
How to Avoid Pump and Dump Scams
In order to avoid falling into such a scam, consider the person, who recommends you the purchase of particular stocks. If you don't know him/her or s/he doesn't possess the required credentials you'd better not purchase the stocks. Additionally, beware when you are offered quick and huge profits. They rarely turn out to be huge if profits at all. Finally, new products, big announcements and etc. may also be a sign of the next scam that you may fall into.
http://www.stock-market-investors.com/stock-market-advices-and-tips/how-to-avoid-pump-and-dump-scams.html
Advertisement If you have experienced the flooding of your mail box with offers and recommendations for the purchase of a particular stock that promises huge returns, be very cautious because you may fall in the common scam that is referred to as "pump and dump".
How Pump and Dump Stock Scam Works
Under this scam crooks purchase large number of a company stocks that are extremely cheap. They do it in such a way that no attention is attracted to their purchase.
After this the crooks embark on a vast campaign of pumping up the price of the stocks by telling stories of how the price will raise leading to high returns. Additionally, it presents the stocks as an opportunity to become an owner of very profitable business. The crooks predict the potentially high returns happening within the next few days.
The crooks encourage their victims to purchase the stocks until the price is low and thus take advantage of the eventual high profits. If they are persuasive enough and manage to attract people to the particular stocks, the prices of the latter will start to rise. This will be used by the crooks to support their predictions and further pump up the price by attracting more people.
Such scams as false press releases and analysts commentaries may be used to further increase the price and gain credibility.
After the price reaches a particular point the crooks sell their stocks making huge profits. This is also the time when company officials have expressed their concerns about the rising prices of their stocks.
As a result of the sold by the crooks stocks, the price starts to fall, which leads to the selling by the other shareholders. Eventually, the shareholders are burned by the scam and the company receives sometimes undeserved bad reputation.
How to Avoid Pump and Dump Scams
In order to avoid falling into such a scam, consider the person, who recommends you the purchase of particular stocks. If you don't know him/her or s/he doesn't possess the required credentials you'd better not purchase the stocks. Additionally, beware when you are offered quick and huge profits. They rarely turn out to be huge if profits at all. Finally, new products, big announcements and etc. may also be a sign of the next scam that you may fall into.
http://www.stock-market-investors.com/stock-market-advices-and-tips/how-to-avoid-pump-and-dump-scams.html
The Long-Term Scope of Stocks
In order to become an educated stock investor you should always keep in mind that stocks are an investment tool that gives the best results over the long-term. Only then their positive rewards can be felt.
It is advisable to move your assets to more secure investments when you foresee that you will need some cash out of your stock investments. Some potential parking places include fixed income investments (e.g. bonds, bank CDs) or other products that are characterized by substantial stability.
A planning of three to five years ahead of the time you will need the money is recommended. Reasonable judgment is required in order to make a good prediction on when exactly you will need the money so that you can plan ahead the reallocation of assets. After you have determined that you should select the stable products to which you can transfer your assets.
http://www.stock-market-investors.com/stock-strategies-and-systems/long-term-scope-of-stocks.html
It is advisable to move your assets to more secure investments when you foresee that you will need some cash out of your stock investments. Some potential parking places include fixed income investments (e.g. bonds, bank CDs) or other products that are characterized by substantial stability.
A planning of three to five years ahead of the time you will need the money is recommended. Reasonable judgment is required in order to make a good prediction on when exactly you will need the money so that you can plan ahead the reallocation of assets. After you have determined that you should select the stable products to which you can transfer your assets.
http://www.stock-market-investors.com/stock-strategies-and-systems/long-term-scope-of-stocks.html
Stock Analyst Recommendations - Should We Trust Them?
To conclude, the fact that analysts, or their firm, may face a conflict of interest does not necessarily mean that the stock analyst recommendations are flawed or unwise. And yet, don't rely solely on them for your investment decisions. Do your own research, such as reading companies' prospectus, quarterly and annual reports that are filed with the SEC, etc.
http://www.stock-market-investors.com/pick-a-stock-guides/stock-analyst-recommendations-should-we-trust-them.html
Protecting Yourself from Analyst Conflicts of Interest
Here are some tips that will help you protect yourself from analyst conflicts of interest when researching investments.
•Always read all disclosures about the types of research recommendations that the analyst firm has made and the conflicts of interest.
•Check whether the analyst's firm has underwritten the company's stock offerings.
•Check the lock-up agreements and see if the lock-up period is about to expire or has been waived by the underwriter.
•Research the company's financial reports (you can use the SEC's EDGAR database for this purpose) and if it is hard for you to analyze them turn to a professional for help.
•Gather as much information as you can about the company you are considering by reading independent news reports, reference books, commercial databases, etc.
Finally, always have in mind that even the most unbiased and sound analyst recommendation may not be suitable for your individual financial circumstances.
http://www.stock-market-investors.com/pick-a-stock-guides/stock-analyst-recommendations-should-we-trust-them.html
Protecting Yourself from Analyst Conflicts of Interest
Here are some tips that will help you protect yourself from analyst conflicts of interest when researching investments.
•Always read all disclosures about the types of research recommendations that the analyst firm has made and the conflicts of interest.
•Check whether the analyst's firm has underwritten the company's stock offerings.
•Check the lock-up agreements and see if the lock-up period is about to expire or has been waived by the underwriter.
•Research the company's financial reports (you can use the SEC's EDGAR database for this purpose) and if it is hard for you to analyze them turn to a professional for help.
•Gather as much information as you can about the company you are considering by reading independent news reports, reference books, commercial databases, etc.
Finally, always have in mind that even the most unbiased and sound analyst recommendation may not be suitable for your individual financial circumstances.
Earnings Season Investor Importance
If you are a buy and hold investor then you should not be very concerned about the earnings season since its focus is on short-term goals. Earnings season affects the prices over the short term. So, it is important to active traders who may seize different opportunities.
http://www.stock-market-investors.com/stock-investing-basics/earnings-season-basics.html
http://www.stock-market-investors.com/stock-investing-basics/earnings-season-basics.html
Investment Opportunities in Times of Financial Crisis
Investment Opportunities in Times of Financial Crisis
It looks like the stock market is not the favorite place for anyone these days. Every day brings another disturbing news or commentary. Another stock tanked. Another bank failed. And so on.
The financial marketplace is now marked with extreme volatility and investments resemble quite a lot lottery tickets - unpredictable and surprising rallies in the value of stocks and bonds are followed by sudden significant drops. No wonder that so many investors sell up and run away from the stock market, which only worsens the situation and further pushes the stock market down.
So why should you be the one to go against the current? Is it wise to invest in stocks right now?
Actually, it is. Now that everyone else is selling it is one of the best times to invest in stocks.
"Be Greedy When Others Are Fearful"
Remember that famous Warren Buffet's quote?
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
Right now fear has seized the stock market and to many investors it seems like it is the end of the world now. However, it is not. The economy and the market will recover even if it takes longer than expected. Thus, what you can do in times of crisis like the current one is take advantage of the attractive prices and fearful environment.
Of course, this does not mean that you should invest in companies with bad outlook. Before you make a major, long-term investment, do your homework and find companies with strong and experienced management teams, good track records of profitability and growth, and innovative R&D.
You may not find extraordinary bargains but there are certainly some nice bargains for patient investors committed to gains over the long term. There are many companies that the general market has dragged down to very low prices despite their great product lines.
Invest Based on Your Objectives and Age
Do not forget that both your age and objectives should play role when you are choosing your investments.
If you are young, far from your retirement years, you can afford a little bit bigger risk. Surely, it is painful to watch your investments drop significantly. And it is very easy to give in to the fear when a stock in your portfolio drops 50%. But fear is not a good guide to decision making. While sudden financial losses may be indeed indicators that even worse drops in value lie ahead, they can just as easily be followed by an upswing.
Selling now and moving to safer investments (such as US treasuries) that will provide only 2 or 3% rate of return will not get you to your goals and will certainly take you too much time to even get back to where you were before the market went down.
On the other hand, if you are near your retirement you should choose more stable and safer investments. First, you might never be able to recover from a significant drop since you have much shorter timeframe to work with. Second, since you are going to need your money sooner, you may be forced to sell your assets at their lows.
Conclusion:
Surely the current financial/credit/housing crisis caused tremendous losses and sent many investors "racing" for the exits. Yet, remember, when the real estate and the stock market are going down, this is still equal to both crisis and opportunity.
http://www.stock-market-investors.com/stock-market-advices-and-tips/investment-opportunities-in-times-of-financial-crisis.html
It looks like the stock market is not the favorite place for anyone these days. Every day brings another disturbing news or commentary. Another stock tanked. Another bank failed. And so on.
The financial marketplace is now marked with extreme volatility and investments resemble quite a lot lottery tickets - unpredictable and surprising rallies in the value of stocks and bonds are followed by sudden significant drops. No wonder that so many investors sell up and run away from the stock market, which only worsens the situation and further pushes the stock market down.
So why should you be the one to go against the current? Is it wise to invest in stocks right now?
Actually, it is. Now that everyone else is selling it is one of the best times to invest in stocks.
"Be Greedy When Others Are Fearful"
Remember that famous Warren Buffet's quote?
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
Right now fear has seized the stock market and to many investors it seems like it is the end of the world now. However, it is not. The economy and the market will recover even if it takes longer than expected. Thus, what you can do in times of crisis like the current one is take advantage of the attractive prices and fearful environment.
Of course, this does not mean that you should invest in companies with bad outlook. Before you make a major, long-term investment, do your homework and find companies with strong and experienced management teams, good track records of profitability and growth, and innovative R&D.
You may not find extraordinary bargains but there are certainly some nice bargains for patient investors committed to gains over the long term. There are many companies that the general market has dragged down to very low prices despite their great product lines.
Invest Based on Your Objectives and Age
Do not forget that both your age and objectives should play role when you are choosing your investments.
If you are young, far from your retirement years, you can afford a little bit bigger risk. Surely, it is painful to watch your investments drop significantly. And it is very easy to give in to the fear when a stock in your portfolio drops 50%. But fear is not a good guide to decision making. While sudden financial losses may be indeed indicators that even worse drops in value lie ahead, they can just as easily be followed by an upswing.
Selling now and moving to safer investments (such as US treasuries) that will provide only 2 or 3% rate of return will not get you to your goals and will certainly take you too much time to even get back to where you were before the market went down.
On the other hand, if you are near your retirement you should choose more stable and safer investments. First, you might never be able to recover from a significant drop since you have much shorter timeframe to work with. Second, since you are going to need your money sooner, you may be forced to sell your assets at their lows.
Conclusion:
Surely the current financial/credit/housing crisis caused tremendous losses and sent many investors "racing" for the exits. Yet, remember, when the real estate and the stock market are going down, this is still equal to both crisis and opportunity.
http://www.stock-market-investors.com/stock-market-advices-and-tips/investment-opportunities-in-times-of-financial-crisis.html
Introduction to Stocks
The price of the stock is set following certain rules. Generally, stocks are traded on the stock market, which tends to determine the value of the company on daily basis.
- A positive attitude is awarded to companies that report quick growth in their earnings as well as earnings growth that is stable.
- Many investors target companies that don't experience positive earnings, but are predicted to shift their losing position into a winning one in the near future.
- What is not looked at with a good eye is if the company sustains losses for which no good reasons are provided.
- Additionally, the market will not accept companies that have a declining earnings trade.
http://www.stock-market-investors.com/stock-investing-basics/introduction-to-stocks.html
****Price to Earnings Growth Ratio (PEG) Explanation
Price to Earnings Growth Ratio (PEG) Explanation
High growth rates are one of the factors that greatly attract investors to a particular stock. As a result of the increased attention, the price of the stock may hit the skies. However, this doesn't indicate an overvaluation of the stock, because if a company is experiencing higher than the average growth it deserves the attention and the subsequent higher prices.
A ratio that manages to explain this attention is the price/earnings growth ratio (PEG). In order to calculate it you should divide the P/E by the projected earnings growth rate. If the value of the PEG is above 1, you should approach this stock with caution, because this higher value may indicate a company that trades above its growth rate allows. The value you should look for is 1 or below it.
When you compare the P/Es of different companies you may notice that the P/E of one is greater than the other. One company may appear far more expensive than the other operating in the same industry. However, if you make a closer examination and see that the one company is expected to grow more than the other, you will definitely have to choose the first.
So, when you make your analysis of a stock, you look for a forward P/E in the PEG. However, a low PEG should be searched for if a trailing P/E is applied. You should also look for a PEG that has an amount of 1 or less.
However, you should keep in mind that there are differences in the industries in which companies operate. You should not forget that a comparison between companies of the same industry should be done.
Another word of caution concerns large cap companies for which PEG is applied with a lower success. This is caused by the fact that such companies due to their size grow much slowly.
PEG has its disadvantages. One of them is its heavy reliance on earnings estimates. This is considered drawback since estimates are characterized with uncertainty until the actual numbers are reported. Since projections may not be the same as the actual numbers at the end of the year, the PEG may have totally wrong results.
Thus, you should include a margin for error. 15% is a good margin you can consider.
http://www.stock-market-investors.com/stock-investing-basics/price-to-earnings-growth-ratio-peg-explanation.html
High growth rates are one of the factors that greatly attract investors to a particular stock. As a result of the increased attention, the price of the stock may hit the skies. However, this doesn't indicate an overvaluation of the stock, because if a company is experiencing higher than the average growth it deserves the attention and the subsequent higher prices.
A ratio that manages to explain this attention is the price/earnings growth ratio (PEG). In order to calculate it you should divide the P/E by the projected earnings growth rate. If the value of the PEG is above 1, you should approach this stock with caution, because this higher value may indicate a company that trades above its growth rate allows. The value you should look for is 1 or below it.
When you compare the P/Es of different companies you may notice that the P/E of one is greater than the other. One company may appear far more expensive than the other operating in the same industry. However, if you make a closer examination and see that the one company is expected to grow more than the other, you will definitely have to choose the first.
So, when you make your analysis of a stock, you look for a forward P/E in the PEG. However, a low PEG should be searched for if a trailing P/E is applied. You should also look for a PEG that has an amount of 1 or less.
However, you should keep in mind that there are differences in the industries in which companies operate. You should not forget that a comparison between companies of the same industry should be done.
Another word of caution concerns large cap companies for which PEG is applied with a lower success. This is caused by the fact that such companies due to their size grow much slowly.
PEG has its disadvantages. One of them is its heavy reliance on earnings estimates. This is considered drawback since estimates are characterized with uncertainty until the actual numbers are reported. Since projections may not be the same as the actual numbers at the end of the year, the PEG may have totally wrong results.
Thus, you should include a margin for error. 15% is a good margin you can consider.
http://www.stock-market-investors.com/stock-investing-basics/price-to-earnings-growth-ratio-peg-explanation.html
Stock Price Volatility
Stock Price Volatility
Stock prices are characterized by volatility. When significant changes occur, investors tend to panic.
Different factors influence the movement in stock prices. For example, when the events in Asia of 1998 occurred, the prices of stocks got really dynamic, which was reflected in a negative way even on investors that held high expertise. During the following months the S&P 500 experienced one of its highest drops of 20% observed in recent times. This fall was later followed by a huge increase of 30%, which in itself represented a record climb.
The media concentrated its attention to the Dow and spoke of stocks as if they were deprived of any volatility. What happened actually was that different companies experienced the events in different ways since they were affected in varying degrees.
Going back to the 1998 crisis, investors generally bought stocks of companies that have proven their consistency and were part of the Dow. They preferred them because they represented a higher degree of stability. On the other hand, negatively influenced were companies of a smaller size.
During these times, the technology industry enjoyed positive attitude since the Internet has gained more popularity. However, oil-equipment companies sustained losses since they were greatly affected by the Asian crisis.
So, having in mind these factors, the prices of stocks are very volatile. They tend to be influenced by the news going around. Investors try to determine the influence of different news on the price of stocks. Additionally, the stock market is susceptible to the influence of different events both of economic and political character.
http://www.stock-market-investors.com/stock-investing-basics/stock-price-volatility.html
Stock prices are characterized by volatility. When significant changes occur, investors tend to panic.
Different factors influence the movement in stock prices. For example, when the events in Asia of 1998 occurred, the prices of stocks got really dynamic, which was reflected in a negative way even on investors that held high expertise. During the following months the S&P 500 experienced one of its highest drops of 20% observed in recent times. This fall was later followed by a huge increase of 30%, which in itself represented a record climb.
The media concentrated its attention to the Dow and spoke of stocks as if they were deprived of any volatility. What happened actually was that different companies experienced the events in different ways since they were affected in varying degrees.
Going back to the 1998 crisis, investors generally bought stocks of companies that have proven their consistency and were part of the Dow. They preferred them because they represented a higher degree of stability. On the other hand, negatively influenced were companies of a smaller size.
During these times, the technology industry enjoyed positive attitude since the Internet has gained more popularity. However, oil-equipment companies sustained losses since they were greatly affected by the Asian crisis.
So, having in mind these factors, the prices of stocks are very volatile. They tend to be influenced by the news going around. Investors try to determine the influence of different news on the price of stocks. Additionally, the stock market is susceptible to the influence of different events both of economic and political character.
http://www.stock-market-investors.com/stock-investing-basics/stock-price-volatility.html
****Common Stock Investing Strategies
Common Stock Investing Strategies
This article aims to familiarize you with several investing strategies for common stocks. You can choose for yourself the ones that best meet your needs and financial goals.
Investing Strategy 1 - Buy and Hold
If you choose this investing strategy you will have to purchase a stock and be ready to hold it over a long period of time, since buy and hold strategy is based on the assumption that the price of the stock will rise with time. However, due to the dynamics of the market you can never be sure that this will happen. This investing strategy elaborates on the idea that the market will continue to expand due to its capitalist nature. As a result it assumes that the stock prices will continue to rise and shareholders will enjoy higher dividends.
The market fluctuations and inflation levels are smoothed over the long-term. The advantage of this investing strategy is that you pay less commission fees and taxes since you trade less. You hold the stocks for a long time and don't trade on frequent basis.
Investing Strategy 2 - Growth Investing Strategy
This strategy aims to identify the growth potential of a company. Companies with high earnings growth are very attractive to investors who believe that such companies will experience continuing rise in their stock price since more and more investors will want to take advantage of the regular and large dividend paying.
One of the most important factors for consideration in growth investing is the earnings per share of the company. Investors observe the changes in the earnings per share over the years not neglecting the revenue growth as well.
What is more, in order to get a clear view on the willingness of the market to pay for a given earnings growth, investors examine the relationship between the price/earnings ratio and the annual earnings growth.
Keep in mind that this strategy carries a certain degree of risk, since the target companies are usually young. However, as you know risk and reward go hand in hand, meaning the higher the risk the higher the potential reward from the investment.
Investing Strategy 3 - Value Investing Strategy
Value investors are often referred to as bargain seekers. This means that they search for stocks that are sold at a price that is below the real value of the company.
No matter what the current price of the stock is, be it $20 or $100, it should be below the real value of the company. Value stocks are those that have been overlooked by the market and as a result their price is lower. The latter may be caused by the chasing of the market after stocks that are currently considered to be more attractive.
Generally, growth and value investing are considered to be positioned in opposite sides of the investment spectrum.
Investing Strategy 4 - Timing the Market
The major idea behind market timing is the buying low and selling high. Market timers believe that they can successfully predict the behavior of the market regarding the price movement of stocks. This makes timing the market the opposite of the buy and hold strategy.
If you are to time the market, you should familiarize yourself with such tools as technical and fundamental analysis as well as even intuition.
Most financial experts are against timing the market because it is difficult to identify whether a particular stock price has reached its peak or bottom. It may eventually go even higher or lower.
Additionally, with the often trades that are executed under this strategy commission fees will greatly reduce your profits especially of you make frequent trades of small amounts.
Another disadvantage of timing the market is that in theory over the long-term the market goes up. Therefore, it is better to stay fully invested during the time in order not to miss the long-term stock rewards.
Investing Strategy 5 - GARP Investing Strategy
Growth at Reasonable Price (GARP) represents a combination between the value and growth investing strategies. Therefore, applying this strategy will involve the search of a stock that is both undervalued and has a potential for future growth. You may find it difficult to find such a stock due to the opposing characteristics of growth and value investing. However, it is not unattainable. Investors applying this strategy use the PEG (price-to-earnings-growth) ratio as an indicator for a stock that possesses a growth potential at a price that is below the real value of the company.
http://www.stock-market-investors.com/stock-strategies-and-systems/common-stock-investing-strategies.html
This article aims to familiarize you with several investing strategies for common stocks. You can choose for yourself the ones that best meet your needs and financial goals.
Investing Strategy 1 - Buy and Hold
If you choose this investing strategy you will have to purchase a stock and be ready to hold it over a long period of time, since buy and hold strategy is based on the assumption that the price of the stock will rise with time. However, due to the dynamics of the market you can never be sure that this will happen. This investing strategy elaborates on the idea that the market will continue to expand due to its capitalist nature. As a result it assumes that the stock prices will continue to rise and shareholders will enjoy higher dividends.
The market fluctuations and inflation levels are smoothed over the long-term. The advantage of this investing strategy is that you pay less commission fees and taxes since you trade less. You hold the stocks for a long time and don't trade on frequent basis.
Investing Strategy 2 - Growth Investing Strategy
This strategy aims to identify the growth potential of a company. Companies with high earnings growth are very attractive to investors who believe that such companies will experience continuing rise in their stock price since more and more investors will want to take advantage of the regular and large dividend paying.
One of the most important factors for consideration in growth investing is the earnings per share of the company. Investors observe the changes in the earnings per share over the years not neglecting the revenue growth as well.
What is more, in order to get a clear view on the willingness of the market to pay for a given earnings growth, investors examine the relationship between the price/earnings ratio and the annual earnings growth.
Keep in mind that this strategy carries a certain degree of risk, since the target companies are usually young. However, as you know risk and reward go hand in hand, meaning the higher the risk the higher the potential reward from the investment.
Investing Strategy 3 - Value Investing Strategy
Value investors are often referred to as bargain seekers. This means that they search for stocks that are sold at a price that is below the real value of the company.
No matter what the current price of the stock is, be it $20 or $100, it should be below the real value of the company. Value stocks are those that have been overlooked by the market and as a result their price is lower. The latter may be caused by the chasing of the market after stocks that are currently considered to be more attractive.
Generally, growth and value investing are considered to be positioned in opposite sides of the investment spectrum.
Investing Strategy 4 - Timing the Market
The major idea behind market timing is the buying low and selling high. Market timers believe that they can successfully predict the behavior of the market regarding the price movement of stocks. This makes timing the market the opposite of the buy and hold strategy.
If you are to time the market, you should familiarize yourself with such tools as technical and fundamental analysis as well as even intuition.
Most financial experts are against timing the market because it is difficult to identify whether a particular stock price has reached its peak or bottom. It may eventually go even higher or lower.
Additionally, with the often trades that are executed under this strategy commission fees will greatly reduce your profits especially of you make frequent trades of small amounts.
Another disadvantage of timing the market is that in theory over the long-term the market goes up. Therefore, it is better to stay fully invested during the time in order not to miss the long-term stock rewards.
Investing Strategy 5 - GARP Investing Strategy
Growth at Reasonable Price (GARP) represents a combination between the value and growth investing strategies. Therefore, applying this strategy will involve the search of a stock that is both undervalued and has a potential for future growth. You may find it difficult to find such a stock due to the opposing characteristics of growth and value investing. However, it is not unattainable. Investors applying this strategy use the PEG (price-to-earnings-growth) ratio as an indicator for a stock that possesses a growth potential at a price that is below the real value of the company.
http://www.stock-market-investors.com/stock-strategies-and-systems/common-stock-investing-strategies.html
Saturday 14 November 2009
A New World Of Hospital Finance
Bond-Market Skepticism And Stock-Market Exuberance In The Hospital Industry
http://content.healthaffairs.org/cgi/content/full/21/1/104
http://content.healthaffairs.org/cgi/content/full/21/1/104
Wilmar Delays $3.5 Bln China IPO, to Invest in Africa
Food Industry News
Wilmar Delays $3.5 Bln China IPO, to Invest in Africa
Source: Reuters
12/11/2009
Singapore, Nov 12 - Wilmar International, the world's largest listed palm oil firm, signalled a promising outlook for its earnings but said the $3.5 billion listing of its China unit is on hold due to its concern over valuations.
The palmoil giant's listing plan was the recent trigger for a rally in its shares, which retreated on Thursday despite a quarterly profit that beat expectations.
"We will shelve it for the time being and wait for market conditions to improve," Wilmar's Chairman and CEO Kuok Khoon Hong told Reuters after a media and analysts' briefing for its third quarter results.
"We only will list the China operation if it commands better price than what Wilmar is commanding right now in the stock market," he added.
Analysts have estimated that Wilmar's China unit could be valued as by much as 20 times earnings, matching the parent company's current price-to-earnings multiple.
With more than 30 firms eyeing listings in either Hong Kong or India over the next few months, leading to more than $10 billion in share sales, companies wanting to list have had to keep their hopes for high prices in check..
Analysts have said Wilmar, which has a market value of $30 billion, has no immediate need for funds.
The company said it was optimistic about prospects for the rest of this year after a one-off gain helped it post a better-than-expected 35 percent rise in its third quarter profit.
Analysts were less impressed.
"Excluding exceptional and one-off items, Wilmar's operating performance in 3Q09 was not as strong as we would expect from normal seasonality," Goldman Sachs analyst Patrick Tiah said in a research note.
"Notwithstanding, given the market's low expectations we believe consensus earnings could rise following the results," he added.
Wilmar's Kuok said the company plans to invest at least $1 billion in China, Indonesia and Africa to expand its plantations and plants.
The company has raised profits in the last few quarters thanks to its processing and refining capabilities, outperforming rival palm oil firms that depend primarily on plantations.
LISTING
Wilmar's shares have more than doubled this year, but some analysts cut their ratings after the company delayed plans in late September to float its China unit due to volatile markets. The listing would have raised around $3.5 billion.
CEO Kuok said earlier in a statement that he was optimistic about the firm's prospects for the rest of the financial year given the diversity of its business segments.
Wilmar, derives about half of its total sales from China, and owns oil palm plantations and runs crushing and refining plants in Indonesia and Malaysia.
The company, the second-largest on the Singapore Exchange after Singapore Telecommunications, earned $653 million in July-September, up from $483 million a year ago.
Wilmar's earnings were higher than the average forecast of $500 million provided by three analysts surveyed by Reuters.
Wilmar's shares have jumped 136 percent so far this year, outperforming the broader index which rose around 54 percent.
On Thursday its share price traded 1.06 percent lower while the broader market was down by 0.4 percent.
http://www.flex-news-food.com/pages/26906/Palm-Oil/Singapore/wilmar-delays-$35-bln-china-ipo-invest-africa.html
Wilmar Delays $3.5 Bln China IPO, to Invest in Africa
Source: Reuters
12/11/2009
Singapore, Nov 12 - Wilmar International, the world's largest listed palm oil firm, signalled a promising outlook for its earnings but said the $3.5 billion listing of its China unit is on hold due to its concern over valuations.
The palmoil giant's listing plan was the recent trigger for a rally in its shares, which retreated on Thursday despite a quarterly profit that beat expectations.
"We will shelve it for the time being and wait for market conditions to improve," Wilmar's Chairman and CEO Kuok Khoon Hong told Reuters after a media and analysts' briefing for its third quarter results.
"We only will list the China operation if it commands better price than what Wilmar is commanding right now in the stock market," he added.
Analysts have estimated that Wilmar's China unit could be valued as by much as 20 times earnings, matching the parent company's current price-to-earnings multiple.
With more than 30 firms eyeing listings in either Hong Kong or India over the next few months, leading to more than $10 billion in share sales, companies wanting to list have had to keep their hopes for high prices in check..
Analysts have said Wilmar, which has a market value of $30 billion, has no immediate need for funds.
The company said it was optimistic about prospects for the rest of this year after a one-off gain helped it post a better-than-expected 35 percent rise in its third quarter profit.
Analysts were less impressed.
"Excluding exceptional and one-off items, Wilmar's operating performance in 3Q09 was not as strong as we would expect from normal seasonality," Goldman Sachs analyst Patrick Tiah said in a research note.
"Notwithstanding, given the market's low expectations we believe consensus earnings could rise following the results," he added.
Wilmar's Kuok said the company plans to invest at least $1 billion in China, Indonesia and Africa to expand its plantations and plants.
The company has raised profits in the last few quarters thanks to its processing and refining capabilities, outperforming rival palm oil firms that depend primarily on plantations.
LISTING
Wilmar's shares have more than doubled this year, but some analysts cut their ratings after the company delayed plans in late September to float its China unit due to volatile markets. The listing would have raised around $3.5 billion.
CEO Kuok said earlier in a statement that he was optimistic about the firm's prospects for the rest of the financial year given the diversity of its business segments.
Wilmar, derives about half of its total sales from China, and owns oil palm plantations and runs crushing and refining plants in Indonesia and Malaysia.
The company, the second-largest on the Singapore Exchange after Singapore Telecommunications, earned $653 million in July-September, up from $483 million a year ago.
Wilmar's earnings were higher than the average forecast of $500 million provided by three analysts surveyed by Reuters.
Wilmar's shares have jumped 136 percent so far this year, outperforming the broader index which rose around 54 percent.
On Thursday its share price traded 1.06 percent lower while the broader market was down by 0.4 percent.
http://www.flex-news-food.com/pages/26906/Palm-Oil/Singapore/wilmar-delays-$35-bln-china-ipo-invest-africa.html
Merger and Acquisition
A merger takes place when two companies decide to combine into a single entity. An acquisition involves one company essentially taking over another company. While the motivations may differ, the essential feature of both mergers and acquisitions involves one firm emerging where once there existed two firms. Another term frequently employed within discussions on this topic is takeover. Essentially, the difference rests in the attitude of the incumbent management of firms that are targeted. A so-called friendly takeover is often a euphemism for a merger. A hostile takeover refers to unwanted advances by outsiders. Thus, the reaction of management to the overtures from another firm tends to be the main influence on whether the resulting activities are labeled friendly or hostile.
MOTIVATIONS FOR MERGERS
AND ACQUISITIONS
There are a number of possible motivations that may result in a merger or acquisition. One of the most oft cited reasons is to achieve economies of scale. Economies of scale may be defined as a lowering of the average cost to produce one unit due to an increase in the total amount of production. The idea is that the larger firm resulting from the merger can produce more cheaply than the previously separate firms. Efficiency is the key to achieving economies of scale, through the sharing of resources and technology and the elimination of needless duplication and waste. Economies of scale sounds good as a rationale for merger, but there are many examples to show that combining separate entities into a single, more efficient operation is not easy to accomplish in practice.
A similar idea is economies of vertical integration. This involves acquiring firms through which the parent firm currently conducts normal business operations, such as suppliers and distributors. By combining different elements involved in the production and delivery of the product to the market, acquiring firms gain control over raw materials and distribution out-lets. This may result in centralized decisions and better communications and coordination among the various business units. It may also result in competitive advantages over rival firms that must negotiate with and rely on outside firms for inputs and sales of the product.
A related idea to economies of vertical integration is a merger or acquisition to achieve greater market presence or market share. The combined, larger entity may have competitive advantages such as the ability to buy bulk quantities at discounts, the ability to store and inventory needed production inputs, and the ability to achieve mass distribution through sheer negotiating power. Greater market share also may result in advantageous pricing, since larger firms are able to compete effectively through volume sales with thinner profit margins. This type of merger or acquisition often results in the combining of complementary resources, such as a firm that is very good at distribution and marketing merging with a very efficient producer. The shared talents of the combined firm may mean competitive advantages versus other, smaller competition.
The ideas above refer to reasons for mergers or acquisitions among firms in similar industries. There are several additional motivations for firms that may not necessarily be in similar lines of business. One of the often-cited motivations for acquisitions involves excess cash balances. Suppose a firm is in a mature industry, and has little opportunities for future investment beyond the existing business lines. If profitable, the firm may acquire large cash balances as managers seek to find outlets for new investment opportunities. One obvious outlet to acquire other firms. The ostensible reason for using excess cash to acquire firms in different product markets is diversification of business risk. Management may claim that by acquiring firms in unrelated businesses the total risk associated with the firm's operations declines. However, it is not always clear for whom the primary benefits of such activities accrue. A shareholder in a publicly traded firm who wishes to diversify business risk can always do so by investing in other companies shares. The investor does not have to rely on incumbent management to achieve the diversification goal. On the other hand, a less risky business strategy is likely to result in less uncertainty in future business performance, and stability makes management look good. The agency problem resulting from incongruent incentives on the part of management and shareholders is always an issue in public corporations. But, regardless of the motivation, excess cash is a primary motivation for corporate acquisition activity.
To reverse the perspective, an excess of cash is also one of the main reasons why firms become the targets of takeover attempts. Large cash balances make for attractive potential assets; indeed, it is often implied that a firm which very large amount of cash is not being efficiently managed. Obviously, that conclusion is situation specific, but what is clear is that cash is attractive, and the greater the amount of cash the greater the potential to attract attention. Thus, the presence of excess cash balances in either acquiring or target firms is often a primary motivating influence in subsequent merger or takeover activity.
Another feature that makes firms attractive as potential merger partners is the presence of unused tax shields. The corporate tax code allows for loss carry-forwards; if a firm loses money in one year, the loss can be carried forward to offset earned income in subsequent years. A firm that continues to lose money, however, has no use for the loss carry-forwards. However, if the firm is acquired by another firm that is profitable, the tax shields from the acquired may be used to shelter income generated by the acquiring firm. Thus the presence of unused tax shields may enhance the attractiveness of a firm as a potential acquisition target.
A similar idea is the notion that the combined firm from a merger will have lower absolute financing costs. Suppose two firms, X and Y, have each issued bonds as a normal part of the financing activities. If the two firms combine, the cash flows from the activities of X can be used to service the debt of Y, and vice versa. Therefore, with less default risk the cost of new debt financing for the combined firm should be lower. It may be argued that there is no net gain to the combined firm; since shareholders have to guarantee debt service on the combined debt, the savings on the cost of debt financing may be offset by the increased return demanded by equity holders. Nevertheless, lower financing costs are often cited as rationale for merger activity.
One rather dubious motivation for merger activity is to artificially boost earnings per share. Consider two firms, A and B. Firm A has earnings of $1,000, 100 shares outstanding, and thus $10 earnings per share. With a price-earnings ratio of 20, its shares are worth $200. Firm B also has earnings of $1,000, 100 shares outstanding, but due to poorer growth opportunities its shares trade at 10 times earnings, or $100. If A acquires B, it will only take one-half share of A for each share of B purchased, so the combined firm will have 150 total shares outstanding. Combined earnings will be $2,000, so the new earnings per share of the combined firm are $13.33 per share. It appears that the merger has enhanced earnings per share, when in fact the result is due to inconsistency in the rate of increase of earnings and shares outstanding. Such manipulations were common in the 1960s, but investors have learned to be more wary of mergers instigated mainly to manipulate per share earnings. It is questionable whether such activity will continue to fool a majority of investors.
Finally, there is the ever-present hubris hypothesis concerning corporate takeover activity. The main idea is that the target firm is being run inefficiently, and the management of acquiring firm should certainly be able to do a better job of utilizing the target's assets and strategic business opportunities. In addition, there is additional prestige in managing a larger firm, which may include additional perquisites such as club memberships or access to amenities such as corporate jets or travel to distant business locales. These factors cannot be ignored in detailing the set of factors motivating merger and acquisition activity.
TYPES OF TAKEOVER DEFENSES
As the previous section suggests, some merger activity is unsolicited and not desired on the part of the target firm. Often, the management of the target firm will be replaced or let go as the acquiring firm's management steps in to make their own mark and implement their plans for the new, combined entity. In reaction to hostile takeover attempts, a number of defense mechanisms have been devised and used to try and thwart unwanted advances.
To any offer for the firm's shares, several actions may be taken which make it difficult or unattractive to subsequently pursue a takeover attempt. One such action is the creation of a staggered board of directors. If an outside firm can gain a controlling interest on the board of directors of the target, it will be able to influence the decisions of the board. Control of the board often results in de facto control of the company. To avoid an outside firm attempting to put forward an entire slate of their own people for election to the target firm's board, some firms have staggered the terms of the directors. The result is that only a portion of the seats is open annually, preventing an immediate takeover attempt. If a rival does get one of its own elected, they will be in a minority and the target firm's management has the time to decide how to proceed and react to the takeover threat.
Another defense mechanism is to have the board pass an amendment requiring a certain number of shares needed to vote to approve any merger proposal. This is referred to as a supermajority, since the requirement is usually set much higher than a simple majority vote total. A supermajority amendment puts in place a high hurdle for potential acquirers to clear if they wish to pursue the acquisition.
A third defensive mechanism is a fair price amendment. Such an amendment restricts the firm from merging with any shareholders holding more than some set percentage of the outstanding shares, unless some formula-determined price per share is paid. The formula price is typically prohibitively high, so that a takeover can take place only in the effect of a huge premium payment for outstanding shares. If the formula price is met, managers with shares and stockholders receive a significant premium over fair market value to compensate them for the acquisition.
Finally, another preemptive strike on the part of existing management is a poison pill provision. A poison pill gives existing shareholders rights that may be used to purchase outstanding shares of the firms stock in the event of a takeover attempt. The purchase price using the poison pill is a significant discount from fair market value, giving shareholders strong incentives to gobble up outstanding shares, and thus preventing an outside firm from purchasing enough stock on the open market to obtain a controlling interest in the target.
Once a takeover attempt has been identified as underway, incumbent management can initiate measures designed to thwart the acquirer. One such measure is a dual-class recapitalization; whereby a new class of equity securities is issued which contains superior voting rights to previously outstanding shares. The superior voting rights allow the target firm's management to effectively have voting control, even without a majority of actual shares in hand. With voting control, they can effectively decline unsolicited attempts by outsiders to acquire the firm.
Another reaction to undesired advances is an asset restructuring. Here, the target firm initiates the sale or disposal of the assets that are of primary interest to the acquiring firm. By selling desirable assets, the firm becomes less attractive to outside bidders, often resulting in an end to the acquisition activity. On the other side of the balance sheet, the firm can solicit help from a third party, friendly firm. Such a firm is commonly referred to as a "white knight," the implication being that the knight comes to the rescue of the targeted firm. A white knight may be issued a new set of equity securities such as preferred stock with voting rights, or may instead agree to purchase a set number of existing common shares at a premium price. The white knight is, of course, supportive of incumbent management; so by purchasing a controlling interest in the firm unwanted takeovers are effectively avoided.
One of the most prominent takeover activities associated with liability restructuring involves the issuance of junk bonds. "Junk" is used to describe debt with high default risk, and thus junk bonds carry very high coupon yields to compensate investors for the high risk involved. During the 1980s, the investment-banking firm Drexel Burnham Lambert led by Michael Milken pioneered the development of the junk-bond market as a vehicle for financing corporate takeover activity. Acquisition groups, which often included the incumbent management group, issued junk bonds backed by the firm's assets to raise the capital needed to acquire a controlling interest in the firm's equity shares. In effect, the firm's balance sheet was restructured with debt replacing equity financing. In several instances, once the acquisition was successfully completed the acquiring management subsequently sold off portions of the firm's assets or business divisions at large premiums, using the proceeds to retire some or all of the junk bonds. The takeover of RJR Nabisco by the firm Kohlberg Kravis Roberts & Co. in the late 1980s was one of the most celebrated takeovers involving the use of junk-bond financing.
VALUING A POTENTIAL MERGER
There are several alternative methods that may be used to value a firm targeted for merger or acquisition. One method involves discounted cash flow analysis. First, the present value of the equity of the target firm must be established. Next, the present value of the expected synergies from the merger, in the form of cost savings or increased after-tax earnings, should be evaluated. Finally, summing the present value of the existing equity with the present value of the future synergies results in a present valuation of the target firm.
Another method involves valuation as an expected earnings multiple. First, the expected earnings in the first year of operations for the combined or merged firm should be estimated. Next, an appropriate price-earnings multiple must be determined. This figure will likely come from industry standards or from competitors in similar business lines. Now, the PE ratio can be multiplied by the expected combined earnings per share to estimate an expected price per share of the merged firm's common stock. Multiplying the expected share price by the number of shares outstanding gives a valuation of the expected firm value. Actual acquisition price can then be negotiated based on this expected firm valuation.
Another technique that is sometimes employed is valuation in relation to book value, which is the difference between the net assets and the outstanding liabilities of the firm. A related idea is valuation as a function of liquidation, or breakup, value. Breakup value can be defined as the difference between the market value of the firm's assets and the cost to retire all outstanding liabilities. The difference between book value and liquidation value is that the book value of assets, taken from the firm's balance sheet, are carried at historical cost. Liquidation value involves the current, or market, value of the firm's assets
Some valuations, particularly for individual business units or divisions, are based on replacement cost. This is the estimated cost of duplicating or purchasing the assets of the division at current market prices. Obviously, some premium is usually applied to account for the value of having existing and established business in place.
Finally, in the instances where firms that have publicly traded common stock are targeted, the market value of the stock is used as a starting point in acquisition negotiations. Earlier, a number of takeover defense activities were outlined that incumbent management may employ to restrict or reject unsolicited takeover bids. These types of defenses are not always in the best interests of existing shareholders. If the firm's existing managers take seriously the corporate goal of maximizing shareholder wealth, then a bidding war for the firm's stock often results in huge premiums for existing shareholders. It is not always clear that the shareholders interests are primary, since many of the takeover defenses prevent the use of the market value of the firm's common stock as a starting point for takeover negotiations. It is difficult to imagine the shareholder who is not happy about being offered a premium of 20 percent or more over the current market value of the outstanding shares.
CURRENT TRENDS IN MERGERS
AND ACQUISITIONS
Mergers and Acquisitions were at an all-time high from the late 1990s to 2000. They have slowed down since then—a direct result of the economic slowdown. The reason is simple, companies did not have the cash to buy other companies. In 2005, however, we are seeing a robust economy and corporate profits, which means that businesses have cash. This cash is being used to buy companies—mergers and acquisitions. The end of 2004 saw several deals: Sprint is combining with Nextel, K-Mart Holding Corp is buying Sears, Roebuck & Co., Johnson & Johnson is planning to buy Guidant. These big corporation deals are spurring on an environment triggering more acquisitions. The telecom industry, the banking industry, and the software industry are potential areas for big mergers.
Read more:
http://www.referenceforbusiness.com/management/Mar-No/Mergers-and-Acquisitions.html#ixzz0WmWdCjTV
http://www.referenceforbusiness.com/management/Mar-No/Mergers-and-Acquisitions.html
MOTIVATIONS FOR MERGERS
AND ACQUISITIONS
There are a number of possible motivations that may result in a merger or acquisition. One of the most oft cited reasons is to achieve economies of scale. Economies of scale may be defined as a lowering of the average cost to produce one unit due to an increase in the total amount of production. The idea is that the larger firm resulting from the merger can produce more cheaply than the previously separate firms. Efficiency is the key to achieving economies of scale, through the sharing of resources and technology and the elimination of needless duplication and waste. Economies of scale sounds good as a rationale for merger, but there are many examples to show that combining separate entities into a single, more efficient operation is not easy to accomplish in practice.
A similar idea is economies of vertical integration. This involves acquiring firms through which the parent firm currently conducts normal business operations, such as suppliers and distributors. By combining different elements involved in the production and delivery of the product to the market, acquiring firms gain control over raw materials and distribution out-lets. This may result in centralized decisions and better communications and coordination among the various business units. It may also result in competitive advantages over rival firms that must negotiate with and rely on outside firms for inputs and sales of the product.
A related idea to economies of vertical integration is a merger or acquisition to achieve greater market presence or market share. The combined, larger entity may have competitive advantages such as the ability to buy bulk quantities at discounts, the ability to store and inventory needed production inputs, and the ability to achieve mass distribution through sheer negotiating power. Greater market share also may result in advantageous pricing, since larger firms are able to compete effectively through volume sales with thinner profit margins. This type of merger or acquisition often results in the combining of complementary resources, such as a firm that is very good at distribution and marketing merging with a very efficient producer. The shared talents of the combined firm may mean competitive advantages versus other, smaller competition.
The ideas above refer to reasons for mergers or acquisitions among firms in similar industries. There are several additional motivations for firms that may not necessarily be in similar lines of business. One of the often-cited motivations for acquisitions involves excess cash balances. Suppose a firm is in a mature industry, and has little opportunities for future investment beyond the existing business lines. If profitable, the firm may acquire large cash balances as managers seek to find outlets for new investment opportunities. One obvious outlet to acquire other firms. The ostensible reason for using excess cash to acquire firms in different product markets is diversification of business risk. Management may claim that by acquiring firms in unrelated businesses the total risk associated with the firm's operations declines. However, it is not always clear for whom the primary benefits of such activities accrue. A shareholder in a publicly traded firm who wishes to diversify business risk can always do so by investing in other companies shares. The investor does not have to rely on incumbent management to achieve the diversification goal. On the other hand, a less risky business strategy is likely to result in less uncertainty in future business performance, and stability makes management look good. The agency problem resulting from incongruent incentives on the part of management and shareholders is always an issue in public corporations. But, regardless of the motivation, excess cash is a primary motivation for corporate acquisition activity.
To reverse the perspective, an excess of cash is also one of the main reasons why firms become the targets of takeover attempts. Large cash balances make for attractive potential assets; indeed, it is often implied that a firm which very large amount of cash is not being efficiently managed. Obviously, that conclusion is situation specific, but what is clear is that cash is attractive, and the greater the amount of cash the greater the potential to attract attention. Thus, the presence of excess cash balances in either acquiring or target firms is often a primary motivating influence in subsequent merger or takeover activity.
Another feature that makes firms attractive as potential merger partners is the presence of unused tax shields. The corporate tax code allows for loss carry-forwards; if a firm loses money in one year, the loss can be carried forward to offset earned income in subsequent years. A firm that continues to lose money, however, has no use for the loss carry-forwards. However, if the firm is acquired by another firm that is profitable, the tax shields from the acquired may be used to shelter income generated by the acquiring firm. Thus the presence of unused tax shields may enhance the attractiveness of a firm as a potential acquisition target.
A similar idea is the notion that the combined firm from a merger will have lower absolute financing costs. Suppose two firms, X and Y, have each issued bonds as a normal part of the financing activities. If the two firms combine, the cash flows from the activities of X can be used to service the debt of Y, and vice versa. Therefore, with less default risk the cost of new debt financing for the combined firm should be lower. It may be argued that there is no net gain to the combined firm; since shareholders have to guarantee debt service on the combined debt, the savings on the cost of debt financing may be offset by the increased return demanded by equity holders. Nevertheless, lower financing costs are often cited as rationale for merger activity.
One rather dubious motivation for merger activity is to artificially boost earnings per share. Consider two firms, A and B. Firm A has earnings of $1,000, 100 shares outstanding, and thus $10 earnings per share. With a price-earnings ratio of 20, its shares are worth $200. Firm B also has earnings of $1,000, 100 shares outstanding, but due to poorer growth opportunities its shares trade at 10 times earnings, or $100. If A acquires B, it will only take one-half share of A for each share of B purchased, so the combined firm will have 150 total shares outstanding. Combined earnings will be $2,000, so the new earnings per share of the combined firm are $13.33 per share. It appears that the merger has enhanced earnings per share, when in fact the result is due to inconsistency in the rate of increase of earnings and shares outstanding. Such manipulations were common in the 1960s, but investors have learned to be more wary of mergers instigated mainly to manipulate per share earnings. It is questionable whether such activity will continue to fool a majority of investors.
Finally, there is the ever-present hubris hypothesis concerning corporate takeover activity. The main idea is that the target firm is being run inefficiently, and the management of acquiring firm should certainly be able to do a better job of utilizing the target's assets and strategic business opportunities. In addition, there is additional prestige in managing a larger firm, which may include additional perquisites such as club memberships or access to amenities such as corporate jets or travel to distant business locales. These factors cannot be ignored in detailing the set of factors motivating merger and acquisition activity.
TYPES OF TAKEOVER DEFENSES
As the previous section suggests, some merger activity is unsolicited and not desired on the part of the target firm. Often, the management of the target firm will be replaced or let go as the acquiring firm's management steps in to make their own mark and implement their plans for the new, combined entity. In reaction to hostile takeover attempts, a number of defense mechanisms have been devised and used to try and thwart unwanted advances.
To any offer for the firm's shares, several actions may be taken which make it difficult or unattractive to subsequently pursue a takeover attempt. One such action is the creation of a staggered board of directors. If an outside firm can gain a controlling interest on the board of directors of the target, it will be able to influence the decisions of the board. Control of the board often results in de facto control of the company. To avoid an outside firm attempting to put forward an entire slate of their own people for election to the target firm's board, some firms have staggered the terms of the directors. The result is that only a portion of the seats is open annually, preventing an immediate takeover attempt. If a rival does get one of its own elected, they will be in a minority and the target firm's management has the time to decide how to proceed and react to the takeover threat.
Another defense mechanism is to have the board pass an amendment requiring a certain number of shares needed to vote to approve any merger proposal. This is referred to as a supermajority, since the requirement is usually set much higher than a simple majority vote total. A supermajority amendment puts in place a high hurdle for potential acquirers to clear if they wish to pursue the acquisition.
A third defensive mechanism is a fair price amendment. Such an amendment restricts the firm from merging with any shareholders holding more than some set percentage of the outstanding shares, unless some formula-determined price per share is paid. The formula price is typically prohibitively high, so that a takeover can take place only in the effect of a huge premium payment for outstanding shares. If the formula price is met, managers with shares and stockholders receive a significant premium over fair market value to compensate them for the acquisition.
Finally, another preemptive strike on the part of existing management is a poison pill provision. A poison pill gives existing shareholders rights that may be used to purchase outstanding shares of the firms stock in the event of a takeover attempt. The purchase price using the poison pill is a significant discount from fair market value, giving shareholders strong incentives to gobble up outstanding shares, and thus preventing an outside firm from purchasing enough stock on the open market to obtain a controlling interest in the target.
Once a takeover attempt has been identified as underway, incumbent management can initiate measures designed to thwart the acquirer. One such measure is a dual-class recapitalization; whereby a new class of equity securities is issued which contains superior voting rights to previously outstanding shares. The superior voting rights allow the target firm's management to effectively have voting control, even without a majority of actual shares in hand. With voting control, they can effectively decline unsolicited attempts by outsiders to acquire the firm.
Another reaction to undesired advances is an asset restructuring. Here, the target firm initiates the sale or disposal of the assets that are of primary interest to the acquiring firm. By selling desirable assets, the firm becomes less attractive to outside bidders, often resulting in an end to the acquisition activity. On the other side of the balance sheet, the firm can solicit help from a third party, friendly firm. Such a firm is commonly referred to as a "white knight," the implication being that the knight comes to the rescue of the targeted firm. A white knight may be issued a new set of equity securities such as preferred stock with voting rights, or may instead agree to purchase a set number of existing common shares at a premium price. The white knight is, of course, supportive of incumbent management; so by purchasing a controlling interest in the firm unwanted takeovers are effectively avoided.
One of the most prominent takeover activities associated with liability restructuring involves the issuance of junk bonds. "Junk" is used to describe debt with high default risk, and thus junk bonds carry very high coupon yields to compensate investors for the high risk involved. During the 1980s, the investment-banking firm Drexel Burnham Lambert led by Michael Milken pioneered the development of the junk-bond market as a vehicle for financing corporate takeover activity. Acquisition groups, which often included the incumbent management group, issued junk bonds backed by the firm's assets to raise the capital needed to acquire a controlling interest in the firm's equity shares. In effect, the firm's balance sheet was restructured with debt replacing equity financing. In several instances, once the acquisition was successfully completed the acquiring management subsequently sold off portions of the firm's assets or business divisions at large premiums, using the proceeds to retire some or all of the junk bonds. The takeover of RJR Nabisco by the firm Kohlberg Kravis Roberts & Co. in the late 1980s was one of the most celebrated takeovers involving the use of junk-bond financing.
VALUING A POTENTIAL MERGER
There are several alternative methods that may be used to value a firm targeted for merger or acquisition. One method involves discounted cash flow analysis. First, the present value of the equity of the target firm must be established. Next, the present value of the expected synergies from the merger, in the form of cost savings or increased after-tax earnings, should be evaluated. Finally, summing the present value of the existing equity with the present value of the future synergies results in a present valuation of the target firm.
Another method involves valuation as an expected earnings multiple. First, the expected earnings in the first year of operations for the combined or merged firm should be estimated. Next, an appropriate price-earnings multiple must be determined. This figure will likely come from industry standards or from competitors in similar business lines. Now, the PE ratio can be multiplied by the expected combined earnings per share to estimate an expected price per share of the merged firm's common stock. Multiplying the expected share price by the number of shares outstanding gives a valuation of the expected firm value. Actual acquisition price can then be negotiated based on this expected firm valuation.
Another technique that is sometimes employed is valuation in relation to book value, which is the difference between the net assets and the outstanding liabilities of the firm. A related idea is valuation as a function of liquidation, or breakup, value. Breakup value can be defined as the difference between the market value of the firm's assets and the cost to retire all outstanding liabilities. The difference between book value and liquidation value is that the book value of assets, taken from the firm's balance sheet, are carried at historical cost. Liquidation value involves the current, or market, value of the firm's assets
Some valuations, particularly for individual business units or divisions, are based on replacement cost. This is the estimated cost of duplicating or purchasing the assets of the division at current market prices. Obviously, some premium is usually applied to account for the value of having existing and established business in place.
Finally, in the instances where firms that have publicly traded common stock are targeted, the market value of the stock is used as a starting point in acquisition negotiations. Earlier, a number of takeover defense activities were outlined that incumbent management may employ to restrict or reject unsolicited takeover bids. These types of defenses are not always in the best interests of existing shareholders. If the firm's existing managers take seriously the corporate goal of maximizing shareholder wealth, then a bidding war for the firm's stock often results in huge premiums for existing shareholders. It is not always clear that the shareholders interests are primary, since many of the takeover defenses prevent the use of the market value of the firm's common stock as a starting point for takeover negotiations. It is difficult to imagine the shareholder who is not happy about being offered a premium of 20 percent or more over the current market value of the outstanding shares.
CURRENT TRENDS IN MERGERS
AND ACQUISITIONS
Mergers and Acquisitions were at an all-time high from the late 1990s to 2000. They have slowed down since then—a direct result of the economic slowdown. The reason is simple, companies did not have the cash to buy other companies. In 2005, however, we are seeing a robust economy and corporate profits, which means that businesses have cash. This cash is being used to buy companies—mergers and acquisitions. The end of 2004 saw several deals: Sprint is combining with Nextel, K-Mart Holding Corp is buying Sears, Roebuck & Co., Johnson & Johnson is planning to buy Guidant. These big corporation deals are spurring on an environment triggering more acquisitions. The telecom industry, the banking industry, and the software industry are potential areas for big mergers.
Read more:
http://www.referenceforbusiness.com/management/Mar-No/Mergers-and-Acquisitions.html#ixzz0WmWdCjTV
http://www.referenceforbusiness.com/management/Mar-No/Mergers-and-Acquisitions.html
Why private companies tend to be valued lower than public firms
Valuation of Private vs. Public Firms
Why private companies tend to be valued lower than public firms
By Loraine MacDonald | July 03, 2001
Q: Why are public companies in my industry valued so highly, often times at price/earnings multiples of more than 20, when a recent valuation of my privately held business says I'm worth only four to five times my earnings?
A: There are a number of factors that are considered differently in the valuation of privately held vs. public companies-even those that are in the same industry-making a direct comparison for valuation purposes difficult. In some cases, it's like comparing apples to oranges. Following is a list of some of the issues that may result in differences between the valuations of public and private firms:
1. Market liquidity. A lack of market liquidity is usually the biggest factor contributing to a discount in the value of companies. With public companies, you can, if you choose, switch your investment to the stock of a different public company on a daily (if not more frequent) basis. The stock of privately held firms, however, is more difficult to sell quickly, making the value drop accordingly.
2. Profit measurement. While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income (after taxes), while private-company multiples are often based on pre-tax (and many times, pre-debt) income. This discrepancy can result in an inaccurate formula for the valuation of a private company.
3. Capitalization/capital structure. Public companies within a specific industry generally maintain capital structures (debt/equity mixes) that are fairly similar. That means the relative price/earnings ratios (where earnings include the servicing of debt) are usually comparable. Private companies within the same industry, however, can vary widely in capital structure. The valuation of a privately held business is therefore frequently based on "enterprise value," or the pre-debt value of a business rather than the value of the stock of the business, like public companies. This is another reason why private-company multiples are generally based on pre-tax profits and may not be directly comparable to the price/earnings ratio of public firms.
4. Risk profile. Public companies usually provide an assurance of continuing operations above that of smaller, privately held firms. Downturns in the economy or a change in the environment (such as an increase in competition or regulatory changes) often have a greater impact on private firms than public firms in terms of performance and market positioning. That higher risk may result in a discount in value for private firms.
5. Differences in operations. It is often difficult to find a public company operating in the same niches as private firms. Public companies typically have operations spanning a broader range of products and services than do private companies. In addition, even if the products and services are the same, the revenue mix is often different.
6. Operational control. Although private companies are more likely to receive valuation discounts than public companies, there is at least one area where they may receive a value premium. While the sale of a private company usually results in the purchase of the controlling interest in the business, ownership of public-company stock generally consists of a minority-share ownership-which may be construed to be less valuable than a controlling-interest position.
Given all these examples, you can see how the valuation of private companies is complex and often cannot be determined through the direct application of public company price/earnings ratios. Due to the complexities involved, I'd advise you to find yourself a professional well-versed in private-company valuations to help you with this task.
Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.
http://www.entrepreneur.com/growyourbusiness/sellingyourbusiness/article41972.html
Why private companies tend to be valued lower than public firms
By Loraine MacDonald | July 03, 2001
Q: Why are public companies in my industry valued so highly, often times at price/earnings multiples of more than 20, when a recent valuation of my privately held business says I'm worth only four to five times my earnings?
A: There are a number of factors that are considered differently in the valuation of privately held vs. public companies-even those that are in the same industry-making a direct comparison for valuation purposes difficult. In some cases, it's like comparing apples to oranges. Following is a list of some of the issues that may result in differences between the valuations of public and private firms:
1. Market liquidity. A lack of market liquidity is usually the biggest factor contributing to a discount in the value of companies. With public companies, you can, if you choose, switch your investment to the stock of a different public company on a daily (if not more frequent) basis. The stock of privately held firms, however, is more difficult to sell quickly, making the value drop accordingly.
2. Profit measurement. While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income (after taxes), while private-company multiples are often based on pre-tax (and many times, pre-debt) income. This discrepancy can result in an inaccurate formula for the valuation of a private company.
3. Capitalization/capital structure. Public companies within a specific industry generally maintain capital structures (debt/equity mixes) that are fairly similar. That means the relative price/earnings ratios (where earnings include the servicing of debt) are usually comparable. Private companies within the same industry, however, can vary widely in capital structure. The valuation of a privately held business is therefore frequently based on "enterprise value," or the pre-debt value of a business rather than the value of the stock of the business, like public companies. This is another reason why private-company multiples are generally based on pre-tax profits and may not be directly comparable to the price/earnings ratio of public firms.
4. Risk profile. Public companies usually provide an assurance of continuing operations above that of smaller, privately held firms. Downturns in the economy or a change in the environment (such as an increase in competition or regulatory changes) often have a greater impact on private firms than public firms in terms of performance and market positioning. That higher risk may result in a discount in value for private firms.
5. Differences in operations. It is often difficult to find a public company operating in the same niches as private firms. Public companies typically have operations spanning a broader range of products and services than do private companies. In addition, even if the products and services are the same, the revenue mix is often different.
6. Operational control. Although private companies are more likely to receive valuation discounts than public companies, there is at least one area where they may receive a value premium. While the sale of a private company usually results in the purchase of the controlling interest in the business, ownership of public-company stock generally consists of a minority-share ownership-which may be construed to be less valuable than a controlling-interest position.
Given all these examples, you can see how the valuation of private companies is complex and often cannot be determined through the direct application of public company price/earnings ratios. Due to the complexities involved, I'd advise you to find yourself a professional well-versed in private-company valuations to help you with this task.
Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.
http://www.entrepreneur.com/growyourbusiness/sellingyourbusiness/article41972.html
Earnings multiplier of 2 equals 50% ROI.
What Is The Multiplier?
At times when I use the term “multiplier” or “multiple” as a business broker, many business owners screw up their faces and go “What?”. So I thought I might explain it here for your benefit.
The multiplier is the number of years it takes to recoup an investment in a business, based on the value of money today. For example, if I bought a business at $350,000 and EBIT (earnings before interest & tax) is $100,000 a year, then the multiplier for that business is the purchase price of the business divided by EBIT, which is 350K / 100K = 3.5x.
If we raise the profit to $150,000 a year, then the multiplier lowers to about 2.3x.
So a rule of thumb is – the smaller the multiplier, the more money it makes (and vice versa). But always keep in mind… if a business makes more money in a shorter amount of time, there’s probably a higher level of risk involved as well.
It’s Not All About Earnings!
However, the word “multiplier” need not only apply to earnings. It can also apply to sales, or to put another way, a business can be roughly appraised on its weekly or annual turnover. As an example, convenience stores are generally appraised on their weekly sales. So if a store does $15,000 a week, you might obtain a very rough indication of its value by multiplying it by 10 – the industry average in Queensland, Australia (as of October 2009). So an indicative price of the business might be $150,000.
So whenever you hear the word ‘multiplier’, you should clarify whether they’re talking about earnings or sales.
How About ROI or P/E?
You can also convert the earnings multiplier into a ROI (return on investment) figure by calculating 1 divided by the multiplier. So if you have an earnings multiplier of 2, 1 divided by 2 equals 50% ROI.
And also for all you share investors out there, the earnings multiplier is exactly the same as the P/E ratio (price earnings ratio).
http://www.businessforsaleblog.com.au/what-is-the-multiplier/
At times when I use the term “multiplier” or “multiple” as a business broker, many business owners screw up their faces and go “What?”. So I thought I might explain it here for your benefit.
The multiplier is the number of years it takes to recoup an investment in a business, based on the value of money today. For example, if I bought a business at $350,000 and EBIT (earnings before interest & tax) is $100,000 a year, then the multiplier for that business is the purchase price of the business divided by EBIT, which is 350K / 100K = 3.5x.
If we raise the profit to $150,000 a year, then the multiplier lowers to about 2.3x.
So a rule of thumb is – the smaller the multiplier, the more money it makes (and vice versa). But always keep in mind… if a business makes more money in a shorter amount of time, there’s probably a higher level of risk involved as well.
It’s Not All About Earnings!
However, the word “multiplier” need not only apply to earnings. It can also apply to sales, or to put another way, a business can be roughly appraised on its weekly or annual turnover. As an example, convenience stores are generally appraised on their weekly sales. So if a store does $15,000 a week, you might obtain a very rough indication of its value by multiplying it by 10 – the industry average in Queensland, Australia (as of October 2009). So an indicative price of the business might be $150,000.
So whenever you hear the word ‘multiplier’, you should clarify whether they’re talking about earnings or sales.
How About ROI or P/E?
You can also convert the earnings multiplier into a ROI (return on investment) figure by calculating 1 divided by the multiplier. So if you have an earnings multiplier of 2, 1 divided by 2 equals 50% ROI.
And also for all you share investors out there, the earnings multiplier is exactly the same as the P/E ratio (price earnings ratio).
http://www.businessforsaleblog.com.au/what-is-the-multiplier/
Friday 13 November 2009
The goal is to make good returns over the long-term.
Making Money In The Stock Market - Demystified
posted December 9, 2008 - 1:36am
The key to making money in the stock market is to earn a high-level finance degree, or listen to those on TV who already have one… right?
Of course not. You don’t need a financial degree to make good money in the stock market. Neither do you need to listen to the so called “gurus” on TV, in fact you would be better off ignoring what the gurus are saying. All you need to make money in the stock market is a little knowledge, and a check on your emotions. The toughest enemy that investors face is their own emotions. Let me throw out an example:
John Q. Investor watches a stock market expert on TV and hears, “Sales of XYZ software company has tripled over the last six months and the stock price has skyrocketed to its 52-week high. The company is expected to increase revenue another 25% in the next year. There looks to be a lot more upside for this company.” This news sounds great! So a very excited John Q. Investor calls up his stock broker, or logs into his online brokerage account the next day, and buys 100 shares of XYZ company at $50.00 per share. Confident that making a lot of money on this stock is a sure thing (after all, a financial guru is pushing it) John Q. prepares to watch the stock price soar. Maybe this is the stock that will enable an early retirement! Two weeks later, some bad news is revealed. A fortune 100 company installed the latest version of XYZ’s software, only to discover a security glitch that exposed top secret product design drawings on their website. Immediately, XYZ’s stock price plummets to $30.00 per share. John Q. is very concerned when he sees his $5,000 investment drop to $3,000 over night. The next day doesn’t help the stock at all and it drops another $10 per share. John Q. Investor is strapped with fear as he sees that his $5,000 investment is now only worth $2,000 and still dropping quickly. He panics, and by the time he can sell all 100 shares it has dropped to $15 per share. So his “sure thing” $5,000 investment lost him $3,500 in two weeks. John Q. is determined that he has no business investing in the stock market and pledges to never invest in the market again.
The scenario above is quite common… especially with the recent problems in the economy. People have just gotten hammered by this current market! But here is the problem with the above scenario. What prompted John Q. Investor to purchase stock in XYZ company? He heard a supposed expert saying that the stock was soaring higher and higher… a sure thing, and he got “greedy” and bought the stock. Greed is an emotion that needs to be kept in check. Something that is overlooked by many people trying to make money in the stock market, is that making money is only half of the equation. The other half of the equation is the possible down-side risk of a stock. This stock was up at its 52-week high… its most expensive price. If you look at buying stocks the same way you would look at buying a car, or a washing machine you would make wiser decisions in your stock picking. Let me explain what I mean. If you are in the market for a new washing machine, do you go buy it at the most expensive price that you can find? Of course not. You may call or visit different stores, or go online looking for the “best price” that you can find for that particular washing machine. Stocks should be bought the same way. You buy them, ideally, at the lowest possible price. This reduces the “down-side” part of that equation. You don’t buy a stock at, or even near, its 52-week high… the down-side risk is too high. When you buy stocks, you look for companies that are financially strong; with history of good growth, good revenue, little to no debt, nice profit margins, and a low profit/earnings ratio for its industry. The lower the profit/earnings ratio (Profits divided by Earnings), the least expensive that stock is. If you are comparing two consumer goods companies with comparable revenue and debt, but company A has a P/E of 16 and company B has a P/E of 11. Company B has less down-side potential (less risk) than company A. Company B is less expensive than company A… even if company B’s stock price is higher than company A’s.
So when you are looking to invest your hard-earned money into the stock market, don’t be frightened away by recent price fluctuations or even by the current economy. Study the financials of strong businesses; compare companies within the same industries and choose the ones with the strongest financials, and the least amount of down-side potential and put your money on those companies… then don’t worry about short-term price fluctuations. The goal is to make good returns over the long-term. This investing style is what is known as “value investing”, and it has been proven the most successful style of investing since its inception in the 1930’s.
http://www.xomba.com/making_money_stock_market_demystified
posted December 9, 2008 - 1:36am
The key to making money in the stock market is to earn a high-level finance degree, or listen to those on TV who already have one… right?
Of course not. You don’t need a financial degree to make good money in the stock market. Neither do you need to listen to the so called “gurus” on TV, in fact you would be better off ignoring what the gurus are saying. All you need to make money in the stock market is a little knowledge, and a check on your emotions. The toughest enemy that investors face is their own emotions. Let me throw out an example:
John Q. Investor watches a stock market expert on TV and hears, “Sales of XYZ software company has tripled over the last six months and the stock price has skyrocketed to its 52-week high. The company is expected to increase revenue another 25% in the next year. There looks to be a lot more upside for this company.” This news sounds great! So a very excited John Q. Investor calls up his stock broker, or logs into his online brokerage account the next day, and buys 100 shares of XYZ company at $50.00 per share. Confident that making a lot of money on this stock is a sure thing (after all, a financial guru is pushing it) John Q. prepares to watch the stock price soar. Maybe this is the stock that will enable an early retirement! Two weeks later, some bad news is revealed. A fortune 100 company installed the latest version of XYZ’s software, only to discover a security glitch that exposed top secret product design drawings on their website. Immediately, XYZ’s stock price plummets to $30.00 per share. John Q. is very concerned when he sees his $5,000 investment drop to $3,000 over night. The next day doesn’t help the stock at all and it drops another $10 per share. John Q. Investor is strapped with fear as he sees that his $5,000 investment is now only worth $2,000 and still dropping quickly. He panics, and by the time he can sell all 100 shares it has dropped to $15 per share. So his “sure thing” $5,000 investment lost him $3,500 in two weeks. John Q. is determined that he has no business investing in the stock market and pledges to never invest in the market again.
The scenario above is quite common… especially with the recent problems in the economy. People have just gotten hammered by this current market! But here is the problem with the above scenario. What prompted John Q. Investor to purchase stock in XYZ company? He heard a supposed expert saying that the stock was soaring higher and higher… a sure thing, and he got “greedy” and bought the stock. Greed is an emotion that needs to be kept in check. Something that is overlooked by many people trying to make money in the stock market, is that making money is only half of the equation. The other half of the equation is the possible down-side risk of a stock. This stock was up at its 52-week high… its most expensive price. If you look at buying stocks the same way you would look at buying a car, or a washing machine you would make wiser decisions in your stock picking. Let me explain what I mean. If you are in the market for a new washing machine, do you go buy it at the most expensive price that you can find? Of course not. You may call or visit different stores, or go online looking for the “best price” that you can find for that particular washing machine. Stocks should be bought the same way. You buy them, ideally, at the lowest possible price. This reduces the “down-side” part of that equation. You don’t buy a stock at, or even near, its 52-week high… the down-side risk is too high. When you buy stocks, you look for companies that are financially strong; with history of good growth, good revenue, little to no debt, nice profit margins, and a low profit/earnings ratio for its industry. The lower the profit/earnings ratio (Profits divided by Earnings), the least expensive that stock is. If you are comparing two consumer goods companies with comparable revenue and debt, but company A has a P/E of 16 and company B has a P/E of 11. Company B has less down-side potential (less risk) than company A. Company B is less expensive than company A… even if company B’s stock price is higher than company A’s.
So when you are looking to invest your hard-earned money into the stock market, don’t be frightened away by recent price fluctuations or even by the current economy. Study the financials of strong businesses; compare companies within the same industries and choose the ones with the strongest financials, and the least amount of down-side potential and put your money on those companies… then don’t worry about short-term price fluctuations. The goal is to make good returns over the long-term. This investing style is what is known as “value investing”, and it has been proven the most successful style of investing since its inception in the 1930’s.
http://www.xomba.com/making_money_stock_market_demystified
Combining P/E and P/Sales to determine a stock's valuation
Stock Valuation - The Price to Earnings Ratio
In my previous article, I wrote about the Price to Sales Ratio, a very valuable tool in a value investor's toolbox. I now continue the Stock Valuation series with another valuable tool - The Price to Earnings Ratio. All of the tools in this series are valuable by themselves, but when combined together, they make the task of stock picking methodical and very profitable.
The Price to Earnings Ratio is also known as the Earnings Multiple or Price Multiple. Most people refer to the ratio simply as the "P/E".
The formula for calculating the P/E is simple: P/E Ratio = Share Price / Earnings per Share
For example, if a stock is trading at $22.00 per share, and trailing earnings is $1.15 per share, the P/E ratio is 19.13 (22.00/1.15).
Typically, the lower the P/E, the more attractive the stock is to a value investor. Just like the Price to Sales Ratio, the P/E is very useful for comparing multiple companies within the same industry.
Let's compare the P/E's for two companies:
Pear Computer:
Share Price: 54.27
Earnings per share: 5.72
P/E Ratio: 54.27 / 5.72 = 9.49
Fastway Computers:
Share Price: 38.12
Earnings per share: 1.96
P/E Ratio: 38.12 / 1.96 = 19.45
As you can see, Pear Computer has a much lower P/E than Fastway Computers.
The P/E is referred to as the "multiple", because it indicates how much investors are willing to pay per dollar of earnings. If a stock is trading at a multiple (P/E) of 15, that means that an investor is willing to pay $15.00 for every $1.00 of earnings. A high P/E is a warning sign that a stock may be over bought, which means it may be "hyped up" and valued too high.
Even though the P/E is a valuable tool, it is very important that you don't base the value of a stock on its P/E alone. The reason for this is, the earnings figure is based on the honesty of the company's accounting practices and is susceptible to manipulation. You should always use the Price to Sales Ratio, that I wrote about previously, in addition to the P/E to determine a stock's valuation.
Let's add in the Price to Sales Ratio to our two stocks and see how they compare (see my previous article for the Price to Sales calculation:
Pear Computer:
P/E = 9.49
Price to Sales = 1.46
Fastway Computers:
P/E = 19.45
Price to Sales = 3.15
By comparing the ratios of these two stocks, it is clear which one has the better value. Both the P/E and the Price to Sales are more than double for Fastway compared to Pear. When it comes to picking stocks for a portfolio of value stocks, Pear Computer is the clear winner.
http://www.xomba.com/stock_valuation_price_earnings_ratio
http://www.xomba.com/stock_valuation_price_sales_ratio
In my previous article, I wrote about the Price to Sales Ratio, a very valuable tool in a value investor's toolbox. I now continue the Stock Valuation series with another valuable tool - The Price to Earnings Ratio. All of the tools in this series are valuable by themselves, but when combined together, they make the task of stock picking methodical and very profitable.
The Price to Earnings Ratio is also known as the Earnings Multiple or Price Multiple. Most people refer to the ratio simply as the "P/E".
The formula for calculating the P/E is simple: P/E Ratio = Share Price / Earnings per Share
For example, if a stock is trading at $22.00 per share, and trailing earnings is $1.15 per share, the P/E ratio is 19.13 (22.00/1.15).
Typically, the lower the P/E, the more attractive the stock is to a value investor. Just like the Price to Sales Ratio, the P/E is very useful for comparing multiple companies within the same industry.
Let's compare the P/E's for two companies:
Pear Computer:
Share Price: 54.27
Earnings per share: 5.72
P/E Ratio: 54.27 / 5.72 = 9.49
Fastway Computers:
Share Price: 38.12
Earnings per share: 1.96
P/E Ratio: 38.12 / 1.96 = 19.45
As you can see, Pear Computer has a much lower P/E than Fastway Computers.
The P/E is referred to as the "multiple", because it indicates how much investors are willing to pay per dollar of earnings. If a stock is trading at a multiple (P/E) of 15, that means that an investor is willing to pay $15.00 for every $1.00 of earnings. A high P/E is a warning sign that a stock may be over bought, which means it may be "hyped up" and valued too high.
Even though the P/E is a valuable tool, it is very important that you don't base the value of a stock on its P/E alone. The reason for this is, the earnings figure is based on the honesty of the company's accounting practices and is susceptible to manipulation. You should always use the Price to Sales Ratio, that I wrote about previously, in addition to the P/E to determine a stock's valuation.
Let's add in the Price to Sales Ratio to our two stocks and see how they compare (see my previous article for the Price to Sales calculation:
Pear Computer:
P/E = 9.49
Price to Sales = 1.46
Fastway Computers:
P/E = 19.45
Price to Sales = 3.15
By comparing the ratios of these two stocks, it is clear which one has the better value. Both the P/E and the Price to Sales are more than double for Fastway compared to Pear. When it comes to picking stocks for a portfolio of value stocks, Pear Computer is the clear winner.
http://www.xomba.com/stock_valuation_price_earnings_ratio
http://www.xomba.com/stock_valuation_price_sales_ratio
Difference in Expert Opinion on Valuation of a closely held firm
Valuation of Closely Held Firm: Difference in Expert Opinion
http://www.nafe.net/JFE/j02_1_03.pdf
The paper reviews four basic approaches to the valuation of the equity of a closely-helf firm: net asset value, discounted cash flow, earnings multiples, and captialized earnings. Financial and narrative information on an anonymous closely-held firm were evaluated by 18 valutaion experts.
Findings:
1. All respondents reported valuation methods; 15 recommended values ranging from $6.0 million to $17.5 million.
2. The dispersion of values was not consistent with our expectation of convergence of value estimates.
3. The professional training and background of the experts proved significant in the valuation methodology and estimate. The 8 experts who are investors fvoured, by 7 to 1, a non-DCF approach, such as an earnings multiple or capitalized earnings. The 10 consultants/appraisers expressed a slight preference, 6 to 4, for the DCF approach.
4. The greatest disparity between investor experts and consultants was in the recommended value of the firm. The average value recommende by the consultants was $14.7 million, almost 50 percent higher than the investors' average estimate of $9.87 million.
Conclusions:
Three implications of the study.
1. The substantial variation in valuation opinions suggests that courts cannot expect convergence of expert valuation of a firm even from a large number of experts.
2. The variation in opinion may be related to the professional training and background of the experts. Consultants, those who are not investors or risk bearers, offered significantly higher valutaion opinions than investor experts.
3. The valuation expert who are interested in economically sound valuation opinons would be well-advised to use more than one valuation approach, if circumstances permit, cross verify valuation estimates. The dispersion of values provided by the sample of experts suggests that the expert who can demonstrate the soundness of an opinion by the independent application of two or more methods is likely to have more credibility.
http://www.nafe.net/JFE/j02_1_03.pdf
The paper reviews four basic approaches to the valuation of the equity of a closely-helf firm: net asset value, discounted cash flow, earnings multiples, and captialized earnings. Financial and narrative information on an anonymous closely-held firm were evaluated by 18 valutaion experts.
Findings:
1. All respondents reported valuation methods; 15 recommended values ranging from $6.0 million to $17.5 million.
2. The dispersion of values was not consistent with our expectation of convergence of value estimates.
3. The professional training and background of the experts proved significant in the valuation methodology and estimate. The 8 experts who are investors fvoured, by 7 to 1, a non-DCF approach, such as an earnings multiple or capitalized earnings. The 10 consultants/appraisers expressed a slight preference, 6 to 4, for the DCF approach.
4. The greatest disparity between investor experts and consultants was in the recommended value of the firm. The average value recommende by the consultants was $14.7 million, almost 50 percent higher than the investors' average estimate of $9.87 million.
Conclusions:
Three implications of the study.
1. The substantial variation in valuation opinions suggests that courts cannot expect convergence of expert valuation of a firm even from a large number of experts.
2. The variation in opinion may be related to the professional training and background of the experts. Consultants, those who are not investors or risk bearers, offered significantly higher valutaion opinions than investor experts.
3. The valuation expert who are interested in economically sound valuation opinons would be well-advised to use more than one valuation approach, if circumstances permit, cross verify valuation estimates. The dispersion of values provided by the sample of experts suggests that the expert who can demonstrate the soundness of an opinion by the independent application of two or more methods is likely to have more credibility.
****Earnings Multiples by Aswath Damodaran
PE Ratio and Fundamentals
Proposition: Other things held equal, higher growth firms will have higher PE ratios than lower growth firms.
Proposition: Other things held equal, higher risk firms will have lower PE ratios than lower risk firms
Proposition: Other things held equal, firms with lower reinvestment needs will have higher PE ratios than firms with higher reinvestment rates.
Of course, other things are difficult to hold equal since high growth firms, tend to have risk and high reinvestment rates.
PEG Ratios and Fundamentals: Propositions
Proposition 1: High risk companies will trade at much lower PEG ratios than low risk companies with the same expected growth rate.
• Corollary 1: The company that looks most under valued on a PEG ratio basis in a sector may be the riskiest firm in the sector
Proposition 2: Companies that can attain growth more efficiently by investing less in better return projects will have higher PEG ratios than companies that grow at the same rate less efficiently.
• Corollary 2: Companies that look cheap on a PEG ratio basis may be companies with high reinvestment rates and poor project returns.
Proposition 3: Companies with very low or very high growth rates will tend to have higher PEG ratios than firms with average growth rates. This bias is worse for low growth stocks.
• Corollary 3: PEG ratios do not neutralize the growth effect.
Relative PE: Definition
The relative PE ratio of a firm is the ratio of the PE of the firm to the PE of the market.
Relative PE = PE of Firm / PE of Market
While the PE can be defined in terms of current earnings, trailing earnings or forward earnings, consistency requires that it be estimated using the same measure of earnings for both the firm and the market.
Relative PE ratios are usually compared over time. Thus, a firm or sector which has historically traded at half the market PE (Relative PE = 0.5) is considered over valued if it is trading at a relative PE of 0.7.
The average relative PE is always one.
The median relative PE is much lower, since PE ratios are skewed towards higher values. Thus, more companies trade at PE ratios less than the market PE and have relative PE ratios less than one.
Read: 103 slides on earnings multiples
http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/earnmult.pdf
Proposition: Other things held equal, higher growth firms will have higher PE ratios than lower growth firms.
Proposition: Other things held equal, higher risk firms will have lower PE ratios than lower risk firms
Proposition: Other things held equal, firms with lower reinvestment needs will have higher PE ratios than firms with higher reinvestment rates.
Of course, other things are difficult to hold equal since high growth firms, tend to have risk and high reinvestment rates.
PEG Ratios and Fundamentals: Propositions
Proposition 1: High risk companies will trade at much lower PEG ratios than low risk companies with the same expected growth rate.
• Corollary 1: The company that looks most under valued on a PEG ratio basis in a sector may be the riskiest firm in the sector
Proposition 2: Companies that can attain growth more efficiently by investing less in better return projects will have higher PEG ratios than companies that grow at the same rate less efficiently.
• Corollary 2: Companies that look cheap on a PEG ratio basis may be companies with high reinvestment rates and poor project returns.
Proposition 3: Companies with very low or very high growth rates will tend to have higher PEG ratios than firms with average growth rates. This bias is worse for low growth stocks.
• Corollary 3: PEG ratios do not neutralize the growth effect.
Relative PE: Definition
The relative PE ratio of a firm is the ratio of the PE of the firm to the PE of the market.
Relative PE = PE of Firm / PE of Market
While the PE can be defined in terms of current earnings, trailing earnings or forward earnings, consistency requires that it be estimated using the same measure of earnings for both the firm and the market.
Relative PE ratios are usually compared over time. Thus, a firm or sector which has historically traded at half the market PE (Relative PE = 0.5) is considered over valued if it is trading at a relative PE of 0.7.
The average relative PE is always one.
The median relative PE is much lower, since PE ratios are skewed towards higher values. Thus, more companies trade at PE ratios less than the market PE and have relative PE ratios less than one.
Read: 103 slides on earnings multiples
http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/earnmult.pdf
''We don't buy the cheapest stocks or the fastest-growing businesses. We buy the highest-quality companies.''
INVESTING WITH/Robert A. Schwarzkopf And Sandi L. Gleason; Kayne Anderson Rudnick Small-Mid Cap Fund
By CAROLE GOULD
Published: Sunday, June 17, 2001
AMERICA'S biggest blue-chip companies were once small businesses -- the kind that Robert A. Schwarzkopf and Sandi L. Gleason want for their $69.2 million Kayne Anderson Rudnick Small-Mid Cap fund.
''In an industry where most people classify themselves as growth or value investors, we decided to take another road,'' Mr. Schwarzkopf said from their offices in Century City in Los Angeles. ''We don't buy the cheapest stocks or the fastest-growing businesses. We buy the highest-quality companies in America.''
The companies' returns have been substantial. The fund rose 30.4 percent in the 12 months ended Thursday, compared with a 15.4 percent loss for the small-cap growth group and a 16.1 percent loss for the Standard & Poor's 500-stock index. For the three years ended Thursday, the fund gained 14.8 percent a year, on average, versus 10.4 percent for its group and 4.9 percent for the S.& P.
Mr. Schwarzkopf, 52, and Ms. Gleason, 36, also manage $2 billion for institutions and individuals for Kayne Anderson Rudnick Investment Management, the fund's adviser.
To find businesses with sustainable competitive advantages, the managers screen 8,000 United States companies for consistent earnings and revenue growth. They look for growth rates that have exceeded the industry average over 10 years.
The portfolio companies have a weighted average market capitalization of $2 billion, comparable to that of the benchmark Russell 2500 index.
The analysts look for rising free cash flow and low debt levels. ''Companies that have lots of cash and little debt are less financially risky,'' Mr. Schwarzkopf said, ''and they can take advantage of opportunities during difficult times, when other companies are struggling.''
The managers trim the pool to 250 companies by eliminating those whose management does not seem focused on building shareholder value, and those that do not dominate their markets. Further research helps them choose the 25 to 35 stocks in the fund. ''We want to find the best businesses, understand what makes them great so we can assess how long they will stay great companies, and determine how much we should pay for them,'' Mr. Schwarzkopf said.
The managers work with sector analysts and visit the companies. ''We want to understand how a company differentiates itself from competition,'' Ms. Gleason said, ''how it creates value for customers, and how it does that in a way that excludes competition.''
To reduce risk, they aim for a diversified portfolio that roughly replicates the Russell 2500 index.
They call their strategy ''quality at a reasonable price.'' The managers prefer companies with above-average return on equity and profit margins, but with below-average valuations based on price-to-sales and price-to-book ratios. Those correlations ''give you a good sense of how your company is valued relative to its industry,'' Ms. Gleason said.
They also review ranges of price-to-earnings multiples over 5 or 10 years. ''You get a P/E band range around which the stock trades,'' Ms. Gleason said. ''You can apply the high and low multiple to target earnings for each of five years to get a target price.''
They trim positions in stocks that reach their target price, and companies whose market capitalization grows too large or that cannot sustain their target growth rates.
IN March, the managers bought shares of the Black Box Corporation of Lawrence, Pa., at $43.42. Black Box, a global marketer of cable, networking and other communications equipment, has carved out a market niche by basing its selling primarily on service, not price, Mr. Schwarzkopf said. It offers technical service 365 days a year in 132 countries. In its last fiscal year, 99.2 percent of calls were answered within 20 seconds, according to the company.
The strategy has let Black Box generate double-digit net profit margins, he said, adding that it avoids economic cycles because it concentrates on the aftermarket, not infrastructure building. He expects 20 percent annual growth in earnings over the next three years.
On Friday, the stock closed at $62.94, compared with their 12-month target price of $75.
Another favorite is the Catalina Marketing Corporation of St. Petersburg, Fla., a leader in customized electronic coupons generated at checkout counters. The company's systems are used in about 15,000 supermarkets, she added, and it has annual and multiyear contracts with major consumer goods companies. It is also expanding into health care advertising linked to drug purchases. She expects earnings per share to grow 22 percent in each of the next three years.
The fund bought shares in March 2000 at a split-adjusted price of $30.14; they now trade at $31.68, compared with the managers' price target of $49.
The managers also like C. H. Robinson Worldwide, a transportation company based in Eden Prairie, Minn. The company dominates a domestic market, Mr. Schwarzkopf said, by using its data processing systems to match small local trucking companies with the needs of large packaged-goods companies.
''They serve as a marketing and information technology department for thousands of small truckers,'' he said.
Unlike most companies in the transportation industry, he added, it carries no debt on its balance sheet. And because it specializes in the food industry, he said, the company can continue growing during bad economic times. He projects annual earnings growth of 20 percent over the next three years.
The managers first bought shares in January 2000 at a split-adjusted price of $19.70. The stock closed at $28.26 on Friday; their price target is $34 within 12 months.
Photo: For their fund, Sandi L. Gleason and Robert A. Schwarzkopf buy small stocks that he calls ''the highest-quality companies in America.'' (Kim Kulish/Saba, for The New York Times) Chart: ''Kayne Anderson Rudnick Small-Mid Cap'' Category: Small growth Net assets: $69 million Inception: October 1996 Managers: Robert A. Schwarzkopf and Sandi L. Gleason Minimum purchase: $2,000 ($1,000 I.R.A.) Portfolio turnover: 50% 3-year annualized return through Thursday: 14.8% Category average: 10.4% SECTOR BREAKDOWN Financial services: 11% Other: 57% Banks: 10% Computers: 9% Medical information systems: 7% Drugs/hospital supplies: 6% FEES Front-end load: None Deferred load: None 12b-1 fee: None Expense ratio: 1.29% (Sources: Morningstar Inc.; company reports)
http://www.nytimes.com/2001/06/17/business/investing-with-robert-schwarzkopf-sandi-l-gleason-kayne-anderson-rudnick-small.html
By CAROLE GOULD
Published: Sunday, June 17, 2001
AMERICA'S biggest blue-chip companies were once small businesses -- the kind that Robert A. Schwarzkopf and Sandi L. Gleason want for their $69.2 million Kayne Anderson Rudnick Small-Mid Cap fund.
''In an industry where most people classify themselves as growth or value investors, we decided to take another road,'' Mr. Schwarzkopf said from their offices in Century City in Los Angeles. ''We don't buy the cheapest stocks or the fastest-growing businesses. We buy the highest-quality companies in America.''
The companies' returns have been substantial. The fund rose 30.4 percent in the 12 months ended Thursday, compared with a 15.4 percent loss for the small-cap growth group and a 16.1 percent loss for the Standard & Poor's 500-stock index. For the three years ended Thursday, the fund gained 14.8 percent a year, on average, versus 10.4 percent for its group and 4.9 percent for the S.& P.
Mr. Schwarzkopf, 52, and Ms. Gleason, 36, also manage $2 billion for institutions and individuals for Kayne Anderson Rudnick Investment Management, the fund's adviser.
To find businesses with sustainable competitive advantages, the managers screen 8,000 United States companies for consistent earnings and revenue growth. They look for growth rates that have exceeded the industry average over 10 years.
The portfolio companies have a weighted average market capitalization of $2 billion, comparable to that of the benchmark Russell 2500 index.
The analysts look for rising free cash flow and low debt levels. ''Companies that have lots of cash and little debt are less financially risky,'' Mr. Schwarzkopf said, ''and they can take advantage of opportunities during difficult times, when other companies are struggling.''
The managers trim the pool to 250 companies by eliminating those whose management does not seem focused on building shareholder value, and those that do not dominate their markets. Further research helps them choose the 25 to 35 stocks in the fund. ''We want to find the best businesses, understand what makes them great so we can assess how long they will stay great companies, and determine how much we should pay for them,'' Mr. Schwarzkopf said.
The managers work with sector analysts and visit the companies. ''We want to understand how a company differentiates itself from competition,'' Ms. Gleason said, ''how it creates value for customers, and how it does that in a way that excludes competition.''
To reduce risk, they aim for a diversified portfolio that roughly replicates the Russell 2500 index.
They call their strategy ''quality at a reasonable price.'' The managers prefer companies with above-average return on equity and profit margins, but with below-average valuations based on price-to-sales and price-to-book ratios. Those correlations ''give you a good sense of how your company is valued relative to its industry,'' Ms. Gleason said.
They also review ranges of price-to-earnings multiples over 5 or 10 years. ''You get a P/E band range around which the stock trades,'' Ms. Gleason said. ''You can apply the high and low multiple to target earnings for each of five years to get a target price.''
They trim positions in stocks that reach their target price, and companies whose market capitalization grows too large or that cannot sustain their target growth rates.
IN March, the managers bought shares of the Black Box Corporation of Lawrence, Pa., at $43.42. Black Box, a global marketer of cable, networking and other communications equipment, has carved out a market niche by basing its selling primarily on service, not price, Mr. Schwarzkopf said. It offers technical service 365 days a year in 132 countries. In its last fiscal year, 99.2 percent of calls were answered within 20 seconds, according to the company.
The strategy has let Black Box generate double-digit net profit margins, he said, adding that it avoids economic cycles because it concentrates on the aftermarket, not infrastructure building. He expects 20 percent annual growth in earnings over the next three years.
On Friday, the stock closed at $62.94, compared with their 12-month target price of $75.
Another favorite is the Catalina Marketing Corporation of St. Petersburg, Fla., a leader in customized electronic coupons generated at checkout counters. The company's systems are used in about 15,000 supermarkets, she added, and it has annual and multiyear contracts with major consumer goods companies. It is also expanding into health care advertising linked to drug purchases. She expects earnings per share to grow 22 percent in each of the next three years.
The fund bought shares in March 2000 at a split-adjusted price of $30.14; they now trade at $31.68, compared with the managers' price target of $49.
The managers also like C. H. Robinson Worldwide, a transportation company based in Eden Prairie, Minn. The company dominates a domestic market, Mr. Schwarzkopf said, by using its data processing systems to match small local trucking companies with the needs of large packaged-goods companies.
''They serve as a marketing and information technology department for thousands of small truckers,'' he said.
Unlike most companies in the transportation industry, he added, it carries no debt on its balance sheet. And because it specializes in the food industry, he said, the company can continue growing during bad economic times. He projects annual earnings growth of 20 percent over the next three years.
The managers first bought shares in January 2000 at a split-adjusted price of $19.70. The stock closed at $28.26 on Friday; their price target is $34 within 12 months.
Photo: For their fund, Sandi L. Gleason and Robert A. Schwarzkopf buy small stocks that he calls ''the highest-quality companies in America.'' (Kim Kulish/Saba, for The New York Times) Chart: ''Kayne Anderson Rudnick Small-Mid Cap'' Category: Small growth Net assets: $69 million Inception: October 1996 Managers: Robert A. Schwarzkopf and Sandi L. Gleason Minimum purchase: $2,000 ($1,000 I.R.A.) Portfolio turnover: 50% 3-year annualized return through Thursday: 14.8% Category average: 10.4% SECTOR BREAKDOWN Financial services: 11% Other: 57% Banks: 10% Computers: 9% Medical information systems: 7% Drugs/hospital supplies: 6% FEES Front-end load: None Deferred load: None 12b-1 fee: None Expense ratio: 1.29% (Sources: Morningstar Inc.; company reports)
http://www.nytimes.com/2001/06/17/business/investing-with-robert-schwarzkopf-sandi-l-gleason-kayne-anderson-rudnick-small.html
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