Expensive IPOs failed due to overpricing
3 Nov 2009, 1045 hrs IST, Supriya Verma Mishra, ET Bureau
Initial public offerings are back, so are investors who have not learnt their lessons. There is nothing more disturbing for an investor than missing More Pictures
out on potentially high returns IPO, which can be flipped in a few weeks. Some have made millions that way, but most seem to have lost money.
Most share sales since 2004 failed to deliver, thanks to robber barons and bankers who took every penny possible out of investors’ pockets, shows an ET Investor’s Guide analysis. Not that those investors were naive. It was greed, when they queued up to shell out hundreds of rupees for a share in companies with no revenues even!
The frenzy among retail investors is not back to where it was in January 2008, but is rearing its head. A risk-return analysis of past IPO’s suggested that investors need caution in a market, which is to see a flood of IPOs. About 20 companies are set to raise Rs 20,000 crores in the next 2-6 months (depending on SEBI clearance).
Legendary investor Warren Buffett is wary of IPOs. Shouldn’t retail investors walk his path? “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer,” Buffett reportedly said on IPOs.
Check out the IPOs that failed to deliver
Methodology
Out of the 277 odd companies that raised funds through an IPO since 2004, we short-listed those that raised more than Rs 100 crore. It led to choosing 114 companies. We then calculated the returns from these investments at IPO price and their current market price. We compared with the returns the Sensex provided from the date the stock listed till Friday. Having done this, we worked out the shortfall, or gains in the returns posted by stock vis-àvis the Sensex starting from the period the stock began trading.
Out of the 114 companies; a little over one-fourth (30) bettered the Sensex return during the period and another half a dozen were in line with the broader market. In a majority of the IPOs, however, investors lost their capital, leave alone getting returns. About two-thirds of all IPO companies (65) are trading below their offer price out of which nearly 60% of them are at half their initial sale price. Investors might have been better off with bank deposits.
The analysis
But why did majority of the IPOs fail to deliver? The usual answer from the companies and bankers will be “that’s the way market is”. Although there’s no single reason, a dominant one is the pricing as sellers try to get the maximum, which, at times may be even higher than their traded peers by sugar-coating prospects. Broadly speaking, the companies that debuted with high valuations compared to their listed peers failed miserably.
A company which has a nascent business and asking for a valuation 60-100 times its latest annual earnings is almost robbery, but have happened. In order to support such a pricing, it will have to more than double its earnings every year on consistent basis. This is well nigh impossible in best of circumstances, not surprisingly most of these high fliers fail to deliver.
Most of the IPOs in our sample however failed to deliver simply because they were priced too aggressively. This includes initial public offers of Suzlon Energy (priced 55 times its preceding year’s earnings), jewellery maker Gitanjali Gems (112x), and multiplex operator PVR (140x) among others. Besides the company specific reasons, the common factor among them was their high price to earnings (P/E) multiple that they were asking.
At a P/E of 140x, PVR would have to grow at least 70-80% to justify such rich valuations. However given the unreasonable valuations and too much expectation built into the price, these stocks were the first ones to be slaughtered at the hint of first trouble in the market.
Other cases of irrational exuberance include Reliance Power and Mundra Port. In Jan’ 08, Reliance Power raised Rs 11,700 crore from the market at More Pictures
five digit earnings multiple and no revenue from operations. It is yet to generate any revenues form electricity. For the year ended March’ 09 it had other income of Rs 360 crore.
The company’s gross block remains at a miniscule Rs 295 crore (on consolidated basis) and the market capitalisation it still has is Rs 38,000 crore, a far cry from the more than 84,000 crore at the IPO price. Similarly for Mundra Port, out of Rs 1,770 crore raised, close to half of the funds still remain unutilised after two years.
Financial services were the worst hit during the last year’s market meltdown. Future Capital listed in 2007 at a price to book value (P/BV) of 35. The company had priced the stock so aggressively that it is down 69%. Today it is trading at a P/BV of 2.5x. Being a new player, this is steep when compared to bigger players like Motilal Oswal (2.98x) and M&M Financial (1.72x). Precisely for this reason Future Capital’s daily compounded return is –33 % as compared to M&M’s 7%.
There are some who were battered by the economic circumstances. Like in case of Jet Airways, which was the only listed airliner. With Rs 400 crore profit in its first year of listing, the stock was reasonably priced at 26 times its trailing year earnings. But within two years of its IPO, its finances were shattered due to a price war and record high crude oil prices. It is struggling.
There were some IPOs where investors made money too, like the public sector companies, which usually don’t price aggressively. Public sector units such as Power Finance Corp (13.2x) and Rural Electrification (15x) were reasonably priced. Undergarments maker Page Industries (27x), and Tulip Telecom (13.9x) were attractively priced and have returned at least 38 %daily annualised returns. Besides pricing, their business model was very unique.
Like Page Industries is the sole manufacturer and marketer for the innerwear brand ‘Jockey’ for the last ten years. Thus it not only plays the role of a contract manufacturer but also actively creates brand awareness for the foreign brand. They raised funds for expanding their business and not setting up a business from scratch, so their gestation time to generate returns was very low.
While it is may not be appropriate to paint all the IPOs with the same brush, investors should be cautious that the majority are over-priced and may choose the ones that are priced at a discount to their listed peers, or wait for the market to arrive at a price, possibly lower than the IPO one.
http://economictimes.indiatimes.com/Features/Investors-Guide/Expensive-IPOs-failed-due-to-overpricing/articleshow/5187660.cms?curpg=1
Friday, 11 December 2009
Valuing bonds and dollar not easy anymore
Valuing bonds and dollar not easy anymore
9 Nov 2009, 0722 hrs IST, Bloomberg
"In price is knowledge," one editor used to scream at me. Whether or not you believed in efficient markets, you could be sure the price of a bond, a currency or a commodity was trying to tell you something about the outlook for growth, inflation or monetary policy; all you had to do was listen and translate. Not anymore. The ad-hoc combination of quantitative easing, government stimulus packages and zero-interest-rate policies has distorted markets beyond recognition.
In short, it is almost impossible to make a coherent argument for what a 10-year Treasury should yield, what a dollar or euro is worth, or whether to buy or sell copper or gold. Following are examples of markets driven mad by the recent enthusiasm for government intervention.
Unshackled from Bondage, Unhinged from Reality
The 10-year US government bond yields about 3.5 per cent, down from a five-year average of 4.14 per cent and its 20-year average of 5.57 per cent. Today's level, though, is about as reliable as the price of a collateralized-debt obligation in the depths of the credit crunch.
The combination of US authorities keeping the fixed- income market on life support by buying debt, plus commercial banks filling their balance-sheet holes with top-quality government securities, makes the Treasury yield an exercise in marking-to-myth.
$12.1 Trillion With bonds as your guide, you would never guess that the US Treasury plans to borrow a net $276 billion for the October-December period and a further $478 billion in the first quarter of next year, or that it expects to hit its $12.1 trillion debt ceiling some time next month.
If anyone is worried that the multi-trillion-dollar global Keynesian experiment we're in the middle of might backfire and ignite inflation, they haven't told the Treasury market. Maybe they have been whispering instead to the gold market. Gold has reached a record $1,095 per ounce this week after a 25 per cent gain so far this year. You know markets have gone mad when the 10-year Treasury couldn't care less that gold is at a record.
Credit Where It Isn't Due
Investors who own European corporate bonds have made more than 15 per cent this year on a total-return basis, according to figures compiled by Deutsche Bank AG. Subordinated debt sold by financial companies has delivered more than 26 per cent. In Europe's high-yield market, junk debt has returned a spectacular 67 per cent. You will struggle, though, to find anyone who trusts the rally. Too much money, with nothing better to buy, indiscriminately rushing back into the credit markets - that seems to be the culprit.
Never mind that the default rate among high-yield companies in Europe reached 9.3 per cent at the end of the third quarter, up from 6.4 per cent in the previous three months, according to Moody's Investors Service. The rating company is predicting speculative grade bond failures will peak at 10.9 per cent this quarter, before almost halving to 6 per cent a year from now. That seems way too optimistic, given the economic carnage wreaked by the credit crunch on corporate creditworthiness.
You know markets have gone mad when corporate bonds promise equity-style returns. It can mean only one thing: Investors should brace themselves for the equity-style risk of losing all of their money, not the security of regular interest payments.
Currency Carnage
The Japanese economy has been a basket case for years, with a second-quarter gross-domestic-product performance that was downgraded to an anemic 2.3 per cent pace from an initial 3.7 per cent estimate. The US economy, meantime, is lauded for its flexibility and endurance, as proven by its bounce out of recession to post 3.5 per cent growth in the third quarter. Nevertheless, the currencies of both countries currently seem yoked together in the hive-mind of the investment community. When risk aversion rises, the yen and the dollar climb, and we're told that investors are seeking the safety of havens. When risk appetite improves, the dollar and the yen both get trashed, unwanted and unloved. Moreover, the US currency is now talked about as a carry-trade favorite, something you borrow because it's cheap and easy, and you want to invest somewhere more lucrative.
You know markets have gone mad when the yen is perceived to be a refuge and the dollar is the catalyst of choice for re- inflating a global bubble.
http://economictimes.indiatimes.com/features/investors-guide/Valuing-bonds-and-dollar-not-easy-anymore/articleshow/5210524.cms
9 Nov 2009, 0722 hrs IST, Bloomberg
"In price is knowledge," one editor used to scream at me. Whether or not you believed in efficient markets, you could be sure the price of a bond, a currency or a commodity was trying to tell you something about the outlook for growth, inflation or monetary policy; all you had to do was listen and translate. Not anymore. The ad-hoc combination of quantitative easing, government stimulus packages and zero-interest-rate policies has distorted markets beyond recognition.
In short, it is almost impossible to make a coherent argument for what a 10-year Treasury should yield, what a dollar or euro is worth, or whether to buy or sell copper or gold. Following are examples of markets driven mad by the recent enthusiasm for government intervention.
Unshackled from Bondage, Unhinged from Reality
The 10-year US government bond yields about 3.5 per cent, down from a five-year average of 4.14 per cent and its 20-year average of 5.57 per cent. Today's level, though, is about as reliable as the price of a collateralized-debt obligation in the depths of the credit crunch.
The combination of US authorities keeping the fixed- income market on life support by buying debt, plus commercial banks filling their balance-sheet holes with top-quality government securities, makes the Treasury yield an exercise in marking-to-myth.
$12.1 Trillion With bonds as your guide, you would never guess that the US Treasury plans to borrow a net $276 billion for the October-December period and a further $478 billion in the first quarter of next year, or that it expects to hit its $12.1 trillion debt ceiling some time next month.
If anyone is worried that the multi-trillion-dollar global Keynesian experiment we're in the middle of might backfire and ignite inflation, they haven't told the Treasury market. Maybe they have been whispering instead to the gold market. Gold has reached a record $1,095 per ounce this week after a 25 per cent gain so far this year. You know markets have gone mad when the 10-year Treasury couldn't care less that gold is at a record.
Credit Where It Isn't Due
Investors who own European corporate bonds have made more than 15 per cent this year on a total-return basis, according to figures compiled by Deutsche Bank AG. Subordinated debt sold by financial companies has delivered more than 26 per cent. In Europe's high-yield market, junk debt has returned a spectacular 67 per cent. You will struggle, though, to find anyone who trusts the rally. Too much money, with nothing better to buy, indiscriminately rushing back into the credit markets - that seems to be the culprit.
Never mind that the default rate among high-yield companies in Europe reached 9.3 per cent at the end of the third quarter, up from 6.4 per cent in the previous three months, according to Moody's Investors Service. The rating company is predicting speculative grade bond failures will peak at 10.9 per cent this quarter, before almost halving to 6 per cent a year from now. That seems way too optimistic, given the economic carnage wreaked by the credit crunch on corporate creditworthiness.
You know markets have gone mad when corporate bonds promise equity-style returns. It can mean only one thing: Investors should brace themselves for the equity-style risk of losing all of their money, not the security of regular interest payments.
Currency Carnage
The Japanese economy has been a basket case for years, with a second-quarter gross-domestic-product performance that was downgraded to an anemic 2.3 per cent pace from an initial 3.7 per cent estimate. The US economy, meantime, is lauded for its flexibility and endurance, as proven by its bounce out of recession to post 3.5 per cent growth in the third quarter. Nevertheless, the currencies of both countries currently seem yoked together in the hive-mind of the investment community. When risk aversion rises, the yen and the dollar climb, and we're told that investors are seeking the safety of havens. When risk appetite improves, the dollar and the yen both get trashed, unwanted and unloved. Moreover, the US currency is now talked about as a carry-trade favorite, something you borrow because it's cheap and easy, and you want to invest somewhere more lucrative.
You know markets have gone mad when the yen is perceived to be a refuge and the dollar is the catalyst of choice for re- inflating a global bubble.
http://economictimes.indiatimes.com/features/investors-guide/Valuing-bonds-and-dollar-not-easy-anymore/articleshow/5210524.cms
Mark Mobius eyes Gulf stocks
Mark Mobius eyes Gulf stocks
3 Dec 2009, 1215 hrs IST, Bloomberg
SINGAPORE: The worst plunge in Dubai stocks in a year and record retreat for Abu Dhabi are luring Mark Mobius to “bombed out” Emaar Properties PJSC while investors say phone companies, airlines and port operators have become bargains.
Dubai isn’t likely to go bankrupt and will be “bailed out,” Mobius, who oversees more than $30 billion of developing-nation assets as chairman of Templeton Asset Management, told Bloomberg Television in Hong Kong on Wednesday. “From a longer-term perspective, you’ve got to look at these really bombed out sectors.”
Emirates Telecom, the biggest operator in the United Arab Emirates, is attractive after falling to its cheapest level since July, said hedge-fund firm Gulfmena Alternative Investments. Dubai-based courier Aramex will rally after a 7.4% drop the past two days left shares at a 32% discount to the average price-to-earnings ratio since 2006, according to Duet Mena.
Abu Dhabi’s ADX General Index sank 12% and the Dubai Financial Market Index fell 13% since Dubai said November 25 it would seek a “standstill” agreement on debt owed by state-run Dubai World. The measures are now the cheapest after Nigeria’s among 71 benchmark indexes tracked by Bloomberg. Dubai-based Emaar, the UAE’s largest developer, plunged 19%.
“I particularly like companies like Emaar, property companies,” said Mobius. “There are many of those properties that are cash-flow rich, that are doing quite well. Not all of the properties are in trouble. If you ever tried to stay at a hotel in Dubai you realise what the prices are, which should come down, but even with half the prices that they’re charging, they can make money.”
STOCKS REBOUND
Qatar’s DSM 20 Index led gains globally today, climbing 5.3%, as Commercial Bank of Qatar, the Gulf country’s second-biggest bank by assets, said it has no exposure to Dubai World or its unit Nakheel. Dubai and Abu Dhabi markets are closed until December 6 for the UAE National Day. The MSCI Emerging Markets Index rose for a third day, extending its longest rally in three weeks.
The cost of credit-default swaps protecting Dubai debt against a government default fell 9 basis points to 451, extending the steepest decline in nine months on Tuesday, according to prices from CMA Datavision. The contracts decline as perceptions of credit quality improve, with one basis point equivalent to $1,000 a year to insure $10 million of debt.
ARAMEX, AIR ARABIA
Mobius predicted on November 27 that Dubai’s attempt to delay debt payments may spur a “correction” in developing-nation equities, adding that a 20% slide is “quite possible.” “Now as the dust settles, a few companies in the UAE stand out,” said Rabih Sultani, a fund manager at Duet Mena in Dubai, a unit of Duet Group, which oversees about $2.1 billion. Sultani said he favours shares of Emirates Telecom, known as Etisalat, Aramex and Air Arabia, the UAE’s largest low-cost carrier. While Mobius expects Dubai property shares to lead a recovery, some areas in China and India may become the “next Dubai” because of too much spending and borrowing, Mobius said, citing the cities of Shanghai and Mumbai.
“It wouldn’t be a country-wide situation, isolated pockets of disaster because of over-spending and over-leveraging,” Mobius said. “It’s not going to happen tomorrow but with the kind of money supply that’s coming in, with the IPO activity that we’re seeing, that’s definitely in the cards.”
http://economictimes.indiatimes.com/markets/global-markets/Mark-Mobius-eyes-Gulf-stocks/articleshow/5293887.cms
3 Dec 2009, 1215 hrs IST, Bloomberg
SINGAPORE: The worst plunge in Dubai stocks in a year and record retreat for Abu Dhabi are luring Mark Mobius to “bombed out” Emaar Properties PJSC while investors say phone companies, airlines and port operators have become bargains.
Dubai isn’t likely to go bankrupt and will be “bailed out,” Mobius, who oversees more than $30 billion of developing-nation assets as chairman of Templeton Asset Management, told Bloomberg Television in Hong Kong on Wednesday. “From a longer-term perspective, you’ve got to look at these really bombed out sectors.”
Emirates Telecom, the biggest operator in the United Arab Emirates, is attractive after falling to its cheapest level since July, said hedge-fund firm Gulfmena Alternative Investments. Dubai-based courier Aramex will rally after a 7.4% drop the past two days left shares at a 32% discount to the average price-to-earnings ratio since 2006, according to Duet Mena.
Abu Dhabi’s ADX General Index sank 12% and the Dubai Financial Market Index fell 13% since Dubai said November 25 it would seek a “standstill” agreement on debt owed by state-run Dubai World. The measures are now the cheapest after Nigeria’s among 71 benchmark indexes tracked by Bloomberg. Dubai-based Emaar, the UAE’s largest developer, plunged 19%.
“I particularly like companies like Emaar, property companies,” said Mobius. “There are many of those properties that are cash-flow rich, that are doing quite well. Not all of the properties are in trouble. If you ever tried to stay at a hotel in Dubai you realise what the prices are, which should come down, but even with half the prices that they’re charging, they can make money.”
STOCKS REBOUND
Qatar’s DSM 20 Index led gains globally today, climbing 5.3%, as Commercial Bank of Qatar, the Gulf country’s second-biggest bank by assets, said it has no exposure to Dubai World or its unit Nakheel. Dubai and Abu Dhabi markets are closed until December 6 for the UAE National Day. The MSCI Emerging Markets Index rose for a third day, extending its longest rally in three weeks.
The cost of credit-default swaps protecting Dubai debt against a government default fell 9 basis points to 451, extending the steepest decline in nine months on Tuesday, according to prices from CMA Datavision. The contracts decline as perceptions of credit quality improve, with one basis point equivalent to $1,000 a year to insure $10 million of debt.
ARAMEX, AIR ARABIA
Mobius predicted on November 27 that Dubai’s attempt to delay debt payments may spur a “correction” in developing-nation equities, adding that a 20% slide is “quite possible.” “Now as the dust settles, a few companies in the UAE stand out,” said Rabih Sultani, a fund manager at Duet Mena in Dubai, a unit of Duet Group, which oversees about $2.1 billion. Sultani said he favours shares of Emirates Telecom, known as Etisalat, Aramex and Air Arabia, the UAE’s largest low-cost carrier. While Mobius expects Dubai property shares to lead a recovery, some areas in China and India may become the “next Dubai” because of too much spending and borrowing, Mobius said, citing the cities of Shanghai and Mumbai.
“It wouldn’t be a country-wide situation, isolated pockets of disaster because of over-spending and over-leveraging,” Mobius said. “It’s not going to happen tomorrow but with the kind of money supply that’s coming in, with the IPO activity that we’re seeing, that’s definitely in the cards.”
http://economictimes.indiatimes.com/markets/global-markets/Mark-Mobius-eyes-Gulf-stocks/articleshow/5293887.cms
Common mistakes that careless investors make
Common mistakes that careless investors make
11 Dec 2009, 0128 hrs IST,
Lovaii Navlakhi,
Last week, on a road trip from Bangalore to Puducherry, I wondered why investors do not plan the same way as holiday-makers. After all, they are the same individuals. We normally think about where we wish to reach and at what time. Which mode of transport to use and where to stay? And most importantly, the total budget for the holiday? This gave rise to the first list of common mistakes that investors make.
Not having a planned financial goal
If we do not know where we wish to reach, we’ll never know when we have. There are speed breakers on our journey, traffic lights and ‘dashing’ pedestrians. We may be a bit delayed in reaching, with a higher fuel consumption (investments may not deliver the desired returns), but we should never lose sight of the final destination.
Taking more risks than that are necessary: It is imprudent to budget three hours to complete a 300 km road journey on Indian roads, where the maximum speed limit is 80 km/hour. There is a possibility that you may reach faster, conversely, you may not reach at all. Keep a close watch on your asset allocation.
Targeting maximum returns on all investments at all times
How often have we changed lanes to the ‘faster-moving’ one in city, driving only to realise that our original ‘investment’ was better! It will be unwise to bet the savings that we need for a committed payment in the next three months in the equity market, irrespective of the euphoria prevailing. Equities are only meant for the long-term.
Aiming for maximum safety
October 2008 was as close to doomsday as we may possibly imagine. We proceed albeit at a slower pace when the road is dotted with potholes; but we do not abandon driving altogether. For financial goals, that are some distance away (three years or plus), we need to benchmark investments suitably, rather than compare them on a weekly basis. Keep in mind your returns post-tax and the net of inflation.
Relying on tips & neighbours
When one of my colleagues boasted of his conquests in trading, I was at first envious of him. Then I wanted to emulate him. As I grew wiser, I realised that he would only publicise his successes, and never his failures. Don’t we get tips of what to buy and when, but never when to sell? And that’s how dud stocks adorn our demat statements.
Do-it-Yourself Mania
Ever wondered where India would have been if the world did not seek outsourcing? Handing over what you can’t do best to an expert is an accepted norm. But with the recent media explosion, we do feel that we have the ammunition to manage finances on our own.
My mantra is that three conditions need to co-exist:
(The author is the managing director and chief financial planner of International Money Matters Pvt Ltd)
http://economictimes.indiatimes.com/markets/analysis/Common-mistakes-that-careless-investors-make/articleshow/5324722.cms
Lovaii Navlakhi,
Last week, on a road trip from Bangalore to Puducherry, I wondered why investors do not plan the same way as holiday-makers. After all, they are the same individuals. We normally think about where we wish to reach and at what time. Which mode of transport to use and where to stay? And most importantly, the total budget for the holiday? This gave rise to the first list of common mistakes that investors make.
If we do not know where we wish to reach, we’ll never know when we have. There are speed breakers on our journey, traffic lights and ‘dashing’ pedestrians. We may be a bit delayed in reaching, with a higher fuel consumption (investments may not deliver the desired returns), but we should never lose sight of the final destination.
How often have we changed lanes to the ‘faster-moving’ one in city, driving only to realise that our original ‘investment’ was better! It will be unwise to bet the savings that we need for a committed payment in the next three months in the equity market, irrespective of the euphoria prevailing. Equities are only meant for the long-term.
October 2008 was as close to doomsday as we may possibly imagine. We proceed albeit at a slower pace when the road is dotted with potholes; but we do not abandon driving altogether. For financial goals, that are some distance away (three years or plus), we need to benchmark investments suitably, rather than compare them on a weekly basis. Keep in mind your returns post-tax and the net of inflation.
When one of my colleagues boasted of his conquests in trading, I was at first envious of him. Then I wanted to emulate him. As I grew wiser, I realised that he would only publicise his successes, and never his failures. Don’t we get tips of what to buy and when, but never when to sell? And that’s how dud stocks adorn our demat statements.
Ever wondered where India would have been if the world did not seek outsourcing? Handing over what you can’t do best to an expert is an accepted norm. But with the recent media explosion, we do feel that we have the ammunition to manage finances on our own.
- detailed understanding of finance;
- (full) time at our disposal; and
- ability to remove our emotions from our investment decisions (can sell poor selections at a loss)
John Burr Williams Stock Valuation Calculator
John Burr Williams Stock Valuation Calculator
By Stock Research Pro • September 4th, 2009
John Burr Williams (1900 – 1989) was one of the first economists to advocate the need to arrive at a stock’s “intrinsic” value when considering it for investment. Williams believed that, due to the inherent volatility of the stock market, investors should consider the ability of the company to pay dividends over the long-term. It was Williams who popularized the dividend discount model (DDM) as a conservative approach to stock valuation; discounting future cash flows (dividends) to a present day value to arrive at the real value of a stock.
Who was John Burr Williams?
John Burr Williams was a student of chemistry and mathematics at Harvard University. He then went on to graduate from Harvard Business School in 1923. After graduation, Williams went to work as a security analyst before returning to Harvard to earn a Ph.D in economics in 1940. William’s work, The Theory of Investment Value, provides mathematical models case studies regarding stock valuation and is considered a much-underappreciated work on the subject. Williams spent his entire professional life working in the management of security analysis and privately-held investment portfolios. He was also a visiting professor of economics at the University of Wisconsin-Madison.
Williams’ Approach to Stock Valuation
Williams’ writings and teachings did not attempt to teach investors to beat the stock market or obtain great wealth from stock investing. Instead, they served as a wake-up call to stock investors by encouraging them to take a less speculative approach to the market and focus instead on investment value. In Williams’ view, reported earnings were far too imprecise to be trusted and the only thing an investor could count on was a check in the mail.
The John Burr Williams Formula
Williams’ equation for discounting future dividends accounts for current dividends, a target rate of return defined by the investor, and a projected growth rate for company dividends over an infinite time period.
The formula can be written as:
Intrinsic Value = D / (I – G)
Where:
D = current dividend
I = required rate of return
G= growth rate
For this formula to work, the growth rate cannot exceed the investor’s target rate of return.
Click here to use the calculator:
John Burr Williams Stock Valuation Calculator
http://www.stockresearchpro.com/john-burr-williams-stock-valuation-calculator
By Stock Research Pro • September 4th, 2009
John Burr Williams (1900 – 1989) was one of the first economists to advocate the need to arrive at a stock’s “intrinsic” value when considering it for investment. Williams believed that, due to the inherent volatility of the stock market, investors should consider the ability of the company to pay dividends over the long-term. It was Williams who popularized the dividend discount model (DDM) as a conservative approach to stock valuation; discounting future cash flows (dividends) to a present day value to arrive at the real value of a stock.
Who was John Burr Williams?
John Burr Williams was a student of chemistry and mathematics at Harvard University. He then went on to graduate from Harvard Business School in 1923. After graduation, Williams went to work as a security analyst before returning to Harvard to earn a Ph.D in economics in 1940. William’s work, The Theory of Investment Value, provides mathematical models case studies regarding stock valuation and is considered a much-underappreciated work on the subject. Williams spent his entire professional life working in the management of security analysis and privately-held investment portfolios. He was also a visiting professor of economics at the University of Wisconsin-Madison.
Williams’ Approach to Stock Valuation
Williams’ writings and teachings did not attempt to teach investors to beat the stock market or obtain great wealth from stock investing. Instead, they served as a wake-up call to stock investors by encouraging them to take a less speculative approach to the market and focus instead on investment value. In Williams’ view, reported earnings were far too imprecise to be trusted and the only thing an investor could count on was a check in the mail.
The John Burr Williams Formula
Williams’ equation for discounting future dividends accounts for current dividends, a target rate of return defined by the investor, and a projected growth rate for company dividends over an infinite time period.
The formula can be written as:
Intrinsic Value = D / (I – G)
Where:
D = current dividend
I = required rate of return
G= growth rate
For this formula to work, the growth rate cannot exceed the investor’s target rate of return.
Click here to use the calculator:
John Burr Williams Stock Valuation Calculator
http://www.stockresearchpro.com/john-burr-williams-stock-valuation-calculator
Valuation: Case Overview
Valuation: Case Overview
How do you value the family business? This is an issue that comes up in various ways and is a topic I anticipate discussing in future postings. Probably the largest number of cases reporting on valuations are those dealing with estate and gift tax issues. However, the issue comes up in shareholder disputes, divorces, and an election of a spouse to take his or her statutory share rather than that provided under the will. Generally the method of valuation will be selected by the appraiser. A critical question will be whether a marketability and/or minority discount should be applied.
A recent case out of the Kansas Supreme Court provides an interesting discussion on the topic. The case is In the Estate of Norman B. Hjersted, deceased, 175 P. 810 (2008).
http://www.jerrysblawg.com/2009/07/valuation-case-overview.html
How do you value the family business? This is an issue that comes up in various ways and is a topic I anticipate discussing in future postings. Probably the largest number of cases reporting on valuations are those dealing with estate and gift tax issues. However, the issue comes up in shareholder disputes, divorces, and an election of a spouse to take his or her statutory share rather than that provided under the will. Generally the method of valuation will be selected by the appraiser. A critical question will be whether a marketability and/or minority discount should be applied.
A recent case out of the Kansas Supreme Court provides an interesting discussion on the topic. The case is In the Estate of Norman B. Hjersted, deceased, 175 P. 810 (2008).
http://www.jerrysblawg.com/2009/07/valuation-case-overview.html
Business Valuations [Methods and Approaches]
The three top associations for valuation professionals — the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National Association of Certified Valuation Analysts (NACVA) — agree on three major approaches to business valuation:
http://accounting-financial-tax.com/2009/11/business-valuations-methods-and-approaches/
How to value a young startup?
http://blog.qrce.org/how-to-value-a-young-startup/
- The Asset Approach
- The Market Approach
- The Income Approach
How to value a young startup?
http://blog.qrce.org/how-to-value-a-young-startup/
The 4 Basic Elements Of Stock Value
No Element Stands Alone
P/E, P/B, PEG, and dividend yields are too narrowly focused to stand alone as a single measure of a stock. By combining these methods of valuation, you can get a better view of a stock's worth. Any one of these can be influenced by creative accounting - as can more complex ratios like cash flow. As you add more tools to your valuation methods though, discrepancies get easier to spot.
In investing, however, these four main ratios may be overshadowed by thousands of customized metrics, but they will always be useful stepping stones for finding out whether a stock's worth buying.
http://www.investopedia.com/articles/fundamental-analysis/09/elements-stock-value.asp?viewed=1
P/E, P/B, PEG, and dividend yields are too narrowly focused to stand alone as a single measure of a stock. By combining these methods of valuation, you can get a better view of a stock's worth. Any one of these can be influenced by creative accounting - as can more complex ratios like cash flow. As you add more tools to your valuation methods though, discrepancies get easier to spot.
In investing, however, these four main ratios may be overshadowed by thousands of customized metrics, but they will always be useful stepping stones for finding out whether a stock's worth buying.
http://www.investopedia.com/articles/fundamental-analysis/09/elements-stock-value.asp?viewed=1
Buffet's success doesn't just lie in mathematical models.
"Buffettology" by Mary Buffet.
In my opinion, the secret of Buffet's success doesn't just lie in mathematical models.
The secret also lies in his ability to identify businesses that have exceptionally strong positions in their respective industries and geographies.
The biggest advantage of choosing such businesses, is that the investor can afford to go wrong on growth projections.
Coca Cola is no different.
You can make a better tasting product, but it is very difficult to create a brand like Coca Cola.
Not all of Buffet's picks are mega-brands, but most of them have strong positions in their respective industries.
In my opinion, the secret of Buffet's success doesn't just lie in mathematical models.
The secret also lies in his ability to identify businesses that have exceptionally strong positions in their respective industries and geographies.
The biggest advantage of choosing such businesses, is that the investor can afford to go wrong on growth projections.
Coca Cola is no different.
You can make a better tasting product, but it is very difficult to create a brand like Coca Cola.
Not all of Buffet's picks are mega-brands, but most of them have strong positions in their respective industries.
Are You Paying Too Much For Stocks?
Are You Paying Too Much For Stocks?
By Joe Bechtel
Market Value Not Equal to Actual Value
If you are a lemming investor, please don't use small loans to finance your lack of creativity. You'll be shocked at how much it can cost you.
A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why is that?
As you will see, the market value of the share does not equal actual value of the same share in terms of a company’s value.
Market Price Based on Emotions, Not Logic
One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains why the market fluctuates so much, and why so many people claim that the stock market is risky. What makes it risky is the constant buying and selling that goes on day after day, hour after hour. This constant buying and selling is what either drives the share price up or down, and it’s what creates the risk.
Ben Graham suggested in his book “The Intelligent Investor” that if you want to build your wealth from the stock market, you need to use a “dollar cost averaging” technique, meaning to consistently buy more shares at a lower price over time. As inflation and company values grow over time, your investments will be worth more in the long run. It’s also known as the “buy low and sell high” technique. Unfortunately, most people tend to bring their emotions into their investing, and will panic and sell when the price is going down, because they are afraid to lose any more money on their investments, leaving them open to take out a small loan to survive.
Beyond the Smoke and Mirrors
The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. All this is just smoke and mirrors designed to keep most people in the dark and dependent on high-priced brokers to navigate the investing maze for them. However, if you were to peek behind the curtain, you would see that all the confusion is just smoke and mirrors.
Inflated Price? Inflated Value!
In an effort to control the market prices, brokers and fund managers will either buy or sell enough shares to drive the price back up or down, depending on where the prices are going. Maybe it’s because a company got some bad news, or even good news, and investors are trying to position themselves to either make or avoid losing a lot of money. However, this tends to skew the value of the share price, making the market unbalanced.
P/E Ratio Tells it All
There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a valuation method that takes the company’s current share price on the market divided by the per-share earnings over a certain time frame, usually one year. So, if a company’s share price is $24 and the earnings per share over the past 12 months have been $2, the P/E ratio is 12. Generally, the higher the P/E ratio, the higher the expectations of investors for company growth. This means that you will be able to see higher earnings within the next year with this company. However, the lower the ratio, the slower the growth regardless of what the market is doing.
Buy Low, Sell High
When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After the share price tops out, you can sell your shares and pocket the difference without needing a small loan. If you do this, you will be able to make money on the stock market when everyone else is losing money.
http://personalmoneystore.com/moneyblog/2009/12/08/small-loan-value-investing/
By Joe Bechtel
Market Value Not Equal to Actual Value
A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why is that?
- Have you ever noticed how much the stock market fluctuates over the course of a day, and how much the share prices go up and down?
- Does that mean that the companies’ values goes up and down as much as the share price, or does that mean that there may be some other force at work here?
As you will see, the market value of the share does not equal actual value of the same share in terms of a company’s value.
One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains why the market fluctuates so much, and why so many people claim that the stock market is risky. What makes it risky is the constant buying and selling that goes on day after day, hour after hour. This constant buying and selling is what either drives the share price up or down, and it’s what creates the risk.
The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. All this is just smoke and mirrors designed to keep most people in the dark and dependent on high-priced brokers to navigate the investing maze for them. However, if you were to peek behind the curtain, you would see that all the confusion is just smoke and mirrors.
In an effort to control the market prices, brokers and fund managers will either buy or sell enough shares to drive the price back up or down, depending on where the prices are going. Maybe it’s because a company got some bad news, or even good news, and investors are trying to position themselves to either make or avoid losing a lot of money. However, this tends to skew the value of the share price, making the market unbalanced.
- Therefore, if a share price is going up too high, brokers or fund managers will sell several million shares to drive the price back down.
- Likewise, if a share price is going down too fast, they will buy as many shares to make it even.
There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a valuation method that takes the company’s current share price on the market divided by the per-share earnings over a certain time frame, usually one year. So, if a company’s share price is $24 and the earnings per share over the past 12 months have been $2, the P/E ratio is 12. Generally, the higher the P/E ratio, the higher the expectations of investors for company growth. This means that you will be able to see higher earnings within the next year with this company. However, the lower the ratio, the slower the growth regardless of what the market is doing.
When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After the share price tops out, you can sell your shares and pocket the difference without needing a small loan. If you do this, you will be able to make money on the stock market when everyone else is losing money.
Stocks are composed of two major valuations
Stocks are composed of two major valuations.
As investors alter the way they analyze the stock then the occurrence of the changes in these types of valuations is definite. Fundamental valuation is used to justify stock prices while the other depends on supply and demand; the more the buyers the higher the prices of the stock and vise versa.
- First, a cash flow is created using fundamental analysis, cash flow or sales.
- The second one is determined by how much the investor is willing to pay for a specific share of stock and how much his fellow investors are willing to sell stock (supply and demand).
As investors alter the way they analyze the stock then the occurrence of the changes in these types of valuations is definite. Fundamental valuation is used to justify stock prices while the other depends on supply and demand; the more the buyers the higher the prices of the stock and vise versa.
When to invest in stocks?
So make sure you do what everyone else will do before they do it.
When to Invest in Stocks?
Answer to this question is very very short. NOW!
So when to invest in stocks?
Invest when you will get the most stocks for your money!
http://www.sayeconomy.com/when-to-invest-in-stocks/
But back to our economic cycles. I will now try to explain economic growth cycles through movements of stocks.
Let’s start our story when the prices are low. For example Company X has its stock value of €100 for one stock.
But as everyone could guess this cannot go on forever.
However the good news is that the economy is not just one cycle. There is whole bunch of economic growth cycles and that cycle that is going on at the moment will end sooner or later as well.
Because many investors are now expecting that the prices will go up they start buying stocks.
I hope I managed to explain the logic of economic growth cycles. The most important thing to know about economic growth cycles is that when investing you must not do what everyone else is doing. Because once everyone else is doing it there is not much time left before the whole cycle will change and turn around. So make sure you do what everyone else will do before they do it. That will give you a head start and a chance to earn lots and lots of money.
Economic Growth Cycle
http://www.sayeconomy.com/economic-growth-cycle/
When to Invest in Stocks?
But back to our economic cycles. I will now try to explain economic growth cycles through movements of stocks.
Let’s start our story when the prices are low. For example Company X has its stock value of €100 for one stock.
- The price is very low so many people start buying.
- Because everyone is buying the price goes up.
- And because price is going up and up and up more and more people are buying.
- This is a positive growth part of the cycle.
But as everyone could guess this cannot go on forever.
- Sooner or later people are happy with what they have earned from stocks and they start selling.
- And when one of the big stock investors sell their share, the stock price drops.
- Of course it doesn’t drop for much but it drops enough that more people get scared.
- Once more people get scared those people sell as well because they’re trying to protect their investment.
- That then cause that the price drops a little bit more and once the price drops a little bit more and more people get scared, more people sell and price drops a little bit more, again more people get scared and so on and so on.
- As you might have figured it out already we have entered the negative economic growth part of the cycle.
- The prices are dropping and dropping and dropping and this is what we are looking right now on our socks every day.
However the good news is that the economy is not just one cycle. There is whole bunch of economic growth cycles and that cycle that is going on at the moment will end sooner or later as well.
- The prices are going down and once they’re down enough people decide to buy again.
- Once one of the bigger investors decide that the price is low enough to buy and buys a big share of stocks the price goes up a little bit.
- That is a signal for smaller investors that the cycle has turned and the time of positive economic growth is coming.
- And as everyone knows when a lot of people are buying stocks prices of stocks are going up.
- Because prices are going up more and more people are buying stocks.
- That then causes that prices are going up a little bit more and as you have noticed we are again in the part of the cycle of positive economic growth.
- Our cycle has ended and the new one has began.
Economic Growth Cycle
http://www.sayeconomy.com/economic-growth-cycle/
Stock Valuation by Dividends
Stock Valuation by Dividends
Posted by Matt on Nov 10, 2009 • (0)
There are two reasons why people by stocks. First one is investing to earn money from dividends and the second one is buying stocks out of speculations to make profit on capital gains. Now how do we value stocks? I will show you how to value stocks and I will try to show you why should stocks be valued by dividends.
So one decides to buy stocks in order to raise his value of capital, to make profit. He buys it by 100$ and he sells it after one year. Now how did he make money from it? One source of profit are dividends, which are the most important ones. Let’s first tell what dividends actually are and then I will tell you why are the dividends the only source of profit when investing in stocks that matters.
Companies make profit (at least they should) and this profit can go into many places. Let’s split those places into two groups. First one is “Stays in company” and second one is “Goes to stock owners”. Now the profit that goes out of a company and is splited onto all stocks and then payed to stock owners is named dividends. So dividends are nothing but profit of a company payed to stockholders.
Now the other source of income for out investor is the capital gain. Capital gain is the price that he sold the stock for minus the price that he bought the stock for. As you might have figured it out already, he can earn money if he buys cheaper then he sells and he can lose money if he sells cheaper than he bought. Becouse we cannot know how much stocks will be worth after one year (when we decide to sell) we valuate stocks only by its dividends. We can assume a certain amount of growth in value, since the companies usually grow with time, but this is higher valuation and I will speak about it in a different article coming out soon. Let’s tell a little bit more about how to value stocks by dividends.
First we need to know how much we want to make out of buying a stock for one year. This is usually given in a percent, like 5% profit in one year. We then turn this into koeficient (5% - 0.05) and they move on to predicting the dividend that will come to us by owning the stock for one year. Let’s assume that the dividend will be the same as it was last year and we know that last year it was 7 $. We then calculate the price of the stock we are willing to pay for by this formula:
Price=Dividend/r
, where r is koeficient of our wanted profit (0.05 in our case). If we do the math for our example, we get that the valuation of this stock shows 140 $ worth. So if we can buy this stock for 140 $ or less, we are going to buy it.
Now the interpretation of this stock valuation by dividends. If we know we are going to get 7 $ in dividend and if we want this 7 $ to be 5% return on our investment then we are willing to invest 140 $ into this stock.
Hope this gave you a brief idea on how to valuate stock and I hope you now understand why stocks should be valuated only by its dividends and not its capital gains as well.
http://www.sayeconomy.com/stock-valuation-by-dividends/
Posted by Matt on Nov 10, 2009 • (0)
There are two reasons why people by stocks. First one is investing to earn money from dividends and the second one is buying stocks out of speculations to make profit on capital gains. Now how do we value stocks? I will show you how to value stocks and I will try to show you why should stocks be valued by dividends.
So one decides to buy stocks in order to raise his value of capital, to make profit. He buys it by 100$ and he sells it after one year. Now how did he make money from it? One source of profit are dividends, which are the most important ones. Let’s first tell what dividends actually are and then I will tell you why are the dividends the only source of profit when investing in stocks that matters.
Companies make profit (at least they should) and this profit can go into many places. Let’s split those places into two groups. First one is “Stays in company” and second one is “Goes to stock owners”. Now the profit that goes out of a company and is splited onto all stocks and then payed to stock owners is named dividends. So dividends are nothing but profit of a company payed to stockholders.
Now the other source of income for out investor is the capital gain. Capital gain is the price that he sold the stock for minus the price that he bought the stock for. As you might have figured it out already, he can earn money if he buys cheaper then he sells and he can lose money if he sells cheaper than he bought. Becouse we cannot know how much stocks will be worth after one year (when we decide to sell) we valuate stocks only by its dividends. We can assume a certain amount of growth in value, since the companies usually grow with time, but this is higher valuation and I will speak about it in a different article coming out soon. Let’s tell a little bit more about how to value stocks by dividends.
First we need to know how much we want to make out of buying a stock for one year. This is usually given in a percent, like 5% profit in one year. We then turn this into koeficient (5% - 0.05) and they move on to predicting the dividend that will come to us by owning the stock for one year. Let’s assume that the dividend will be the same as it was last year and we know that last year it was 7 $. We then calculate the price of the stock we are willing to pay for by this formula:
Price=Dividend/r
, where r is koeficient of our wanted profit (0.05 in our case). If we do the math for our example, we get that the valuation of this stock shows 140 $ worth. So if we can buy this stock for 140 $ or less, we are going to buy it.
Now the interpretation of this stock valuation by dividends. If we know we are going to get 7 $ in dividend and if we want this 7 $ to be 5% return on our investment then we are willing to invest 140 $ into this stock.
Hope this gave you a brief idea on how to valuate stock and I hope you now understand why stocks should be valuated only by its dividends and not its capital gains as well.
http://www.sayeconomy.com/stock-valuation-by-dividends/
3 Simple Techniques to Value Stock
Stock Valuation Model – 3 Simple Techniques to Value Stock
28. Nov, 2009
Stock valuation models are methods to value stocks. Everybody knows the stock price but only few understand how much it worth and the other investors do not even care. The reason can be due to
Discounted Cash Flow (DCF)
Nevertheless, you can use this method in valuing stock by projecting future cash flow; from the sales and costs, and discount back to current value with Weighted Average Cost of Capital (WACC).
Dividend Discount Model (DD)
Nonetheless, the stocks must have very strong business performances that can guarantee the dividend payments 10 years down the road. And normally, penny stocks cannot be evaluated this way.
Earnings Growth Model (EG)
This is my favourite method as it is very practical and easy to do. Initially, I project its future earnings using constant or variable growth rate. Either constant or variable growth rate is depends on the expectation of its business performance within that period. Often than not, I normally use the historical business performance as a baseline provided its fundamental value remain intact. Then, I discount the future earnings with the expected return on investment (ROI).
I found this model as highly valuable since the stock price is easily reflected by its earnings. For example, the stock price will reflect its earnings and earnings growth. Assuming the P/E is the same throughout the year, you can expect the stock price to increase the same rate as the company’s growth rate.
So, before buying anymore shares in the future, put some efforts to value the stock. You can reduce the risk of losing money significantly if you buy the stock at much cheaper price than its intrinsic value.
http://www.moneyhelpyou.com/stock-valuation-model-3-simple-techniques-to-value-stock/
28. Nov, 2009
- different strategies,
- do not know how to value stock or
- just do not care how much it worth as long as the price increase the next day.
This is probably the most common model that you ever heard when it comes to stock valuation. However, I found it a bit tough to do it. Simply because the discounted cash flow model have to consider revenue growth and the escalated cost at the same time, which can be too difficult to estimate and forecast as an outside investor.
This model suits best for income investors. The idea is to project future dividend distribution based on the average historical dividend payout ratio and discount it back to present value. Although this is the simplest among all, it works best for high dividend yield stocks.
How Laura's loss was Glenn's gain
How Laura's loss was Glenn's gain
The stock began to climb. Last Friday, it looked like we had a clean shot at walking away with a 100%-plus gain.
But there was no announcement.
The company waited until Monday morning before market open to sneak out a release that the FDA had withheld approval. We sent out an alert to sell the stock for the best price our readers could get.
The stock opened dramatically lower: Instead of taking a triple-digit gain, we had to mark our closed positions portfolio with a 50% loss.
(The problem with a stop loss in this situation was the dramatic drop in the stock's valuation right off the bat! If a stock opens 60% below the previous trading day's close, your chances of selling at your 20% trailing stop are almost nil.)
http://investmentsthatwork.blogspot.com/2009/12/how-lauras-loss-was-glenns-gain.html
The stock began to climb. Last Friday, it looked like we had a clean shot at walking away with a 100%-plus gain.
But there was no announcement.
The company waited until Monday morning before market open to sneak out a release that the FDA had withheld approval. We sent out an alert to sell the stock for the best price our readers could get.
The stock opened dramatically lower: Instead of taking a triple-digit gain, we had to mark our closed positions portfolio with a 50% loss.
(The problem with a stop loss in this situation was the dramatic drop in the stock's valuation right off the bat! If a stock opens 60% below the previous trading day's close, your chances of selling at your 20% trailing stop are almost nil.)
http://investmentsthatwork.blogspot.com/2009/12/how-lauras-loss-was-glenns-gain.html
How to Value Stocks using DCF
Valuing a Stock with the DCF Method
You may have found a great company that you feel has outstanding potential but always end up getting stuck at what price you should purchase the company. Finding the value of a stock is a critical part of investing successfully. Valuing stocks is not hard, but it does require logic and practice.
Calculating stock values surprising should not consist of lengthy and complicated formulas. If you understand the concepts of how to go about thinking through a stock valuation, you will understand that you don’t need to understand the derivation of the formula to apply it well and to achieve profits off your investments.
Let me give you an example.
The real formula to perform a discounted cash flow is:
DCF = CFo x SUM[(1 + g)/(1 + r)]^n (for x = 0 to n)
Now this formula will excite a few, but for the rest, my advice is to just understand what a DCF calculation is and what variables you need to include and adjust.
I won’t explain what a DCF or discounted cash flow is as you can follow the link for a fuller discussion.
How to Value a Stock with DCF
DCF Discount Rate
The purpose of a discounted cash flow is to find the sum of the future cash flow of the business and discount it back to the present value. To do this you need to decide upon a discount rate.
Simply put, a discount rate is another phrase for “rate of return”. i.e. what is your return requirement for this investment to be worth the risk?
You wouldn’t expect a return of 3% off your stock investment because you could easily get that from a Certificate of Deposit (CD) or even just your normal bank account. A treasury bond will probably give you a better return.
If the bank and fed are risk free investments at 3%, then why bother using 3% as a discount rate?
So what would be a good rate?
Considering that the “average” market return is about 9-10%, a minimum discount rate should be set to 9%. I use 9% as a minimum for stable and predictable companies such as KO while 15% is a good return for less predictable companies such as NTRI.
A somewhat more difficult and confusing definition of discount rate would be, how much emphasis you place on the future cash in terms of today’s dollars rather than the future dollars.
E.g. What price would you pay for an investment today if company XYZ future cash flow is worth $100 after 1 year?
Discount Rate: 5% = 100/1.05 = $95.24
Discount Rate: 10% = 100/1.1 = $90.90
Discount Rate: 15% = 100/1.15 = $86.96
Discount Rate: 30% = 100/1.3 = $76.92
As you can see the higher the discount rate, the cheaper you have to purchase the stock because your required rate of return is much higher. This means that since you are willing to pay less now, you are placing more emphasis on the current cash flows of the company.
DCF Growth Rate
Growth rate is going to be the Achilles heel to any stock calculation. By growth rate, I mean the FCF growth rate.
I prefer to value stocks based on the present data rather than what will happen in the future. Anything could happen even in 1 year, and if the growth rate is too high and the company cannot meet those expectations, there is no where to go but down.
The best practice is to keep growth rates as low as possible. If the company looks to be undervalued with 0% growth rate, you have more upside than downside. The higher you set the growth rate, the higher you set up the downside potential.
Look at what happened to SPWR and FSLR. Solar energy was the rage in 2008 and growth was estimated to be at 50% and above, but these lofty expectations only make the fall harder.
Growth rates doesn’t have to be accurate. Just be reasonable and use common sense.
On most of the stocks I value, I rarely go above 20%, and that’s only for something like AAPL.
Adjusting Numbers
What I failed to do in the beginning when I started valuing stocks was to adjust the FCF numbers for cycles and one time events.
If you start a discounted cash flow calculation based on either a year with higher than normal FCF or much lower FCF, as is the case in 2008, the stock calculation will also be wrong.
Be sure to consider taking the median or average for the past few years to determine the normalized free cash flow.
The point of the stock valuation is to be realistic, not pessimistic or optimistic.
Margin of Safety
Whatever rate you choose, never, never forget to apply a margin of safety. This is the equivalent of a kill switch on the treadmill. It’s there to prevent you from getting hurt.
An important point is to not confuse a high discount rate for a margin of safety.
For lower discount rates it is advised that you use at least 50% margin of safety while for discount rates of 15%, a 25% margin of safety may be adequate.
Summary
http://www.oldschoolvalue.com/valuation-methods/how-value-stocks-dcf/?source=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+OldSchoolValue+%28Old+School+Value%29
You may have found a great company that you feel has outstanding potential but always end up getting stuck at what price you should purchase the company. Finding the value of a stock is a critical part of investing successfully. Valuing stocks is not hard, but it does require logic and practice.
Now this formula will excite a few, but for the rest, my advice is to just understand what a DCF calculation is and what variables you need to include and adjust.
How to Value a Stock with DCF
DCF Discount Rate
The purpose of a discounted cash flow is to find the sum of the future cash flow of the business and discount it back to the present value. To do this you need to decide upon a discount rate.
Discount Rate: 10% = 100/1.1 = $90.90
Discount Rate: 15% = 100/1.15 = $86.96
Discount Rate: 30% = 100/1.3 = $76.92
Growth rate is going to be the Achilles heel to any stock calculation. By growth rate, I mean the FCF growth rate.
The best practice is to keep growth rates as low as possible. If the company looks to be undervalued with 0% growth rate, you have more upside than downside. The higher you set the growth rate, the higher you set up the downside potential.
Look at what happened to SPWR and FSLR. Solar energy was the rage in 2008 and growth was estimated to be at 50% and above, but these lofty expectations only make the fall harder.
What I failed to do in the beginning when I started valuing stocks was to adjust the FCF numbers for cycles and one time events.
If you start a discounted cash flow calculation based on either a year with higher than normal FCF or much lower FCF, as is the case in 2008, the stock calculation will also be wrong.
Be sure to consider taking the median or average for the past few years to determine the normalized free cash flow.
The point of the stock valuation is to be realistic, not pessimistic or optimistic.
Margin of Safety
An important point is to not confuse a high discount rate for a margin of safety.
This is because since you are requiring a higher return immediately off your investment, you are trying to pay much less than a discount rate of 9%. So by placing more emphasis on a higher return, you are in fact reducing the risk of the investment which is why a 25% margin of safety may be enough.
Practice your valuation with the free dcf stock analysis spreadsheet with all the things discussed.
- A discount rate is your rate of return. Higher discount rate means you are trying to pay less for the future cash flows at the present time.
- Growth rates are the fuzziest aspect of valuing stocks and should be applied conservatively.
- Adjust numbers to remove one time events and cycles. Always consider a normal operating environment.
- Never for a big margin of safety. The best of us get it wrong as well.
http://www.oldschoolvalue.com/valuation-methods/how-value-stocks-dcf/?source=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+OldSchoolValue+%28Old+School+Value%29
How To Value A Stock With Benjamin Graham’s Formula
How To Value A Stock With Benjamin Graham’s Formula
http://www.oldschoolvalue.com/investment-tools/benjamin-graham-formula-valuation-spreadsheet/
http://www.oldschoolvalue.com/valuation-methods/value-stocks-benjamin-graham-formula/
Benjamin Graham Formula
The original formula from Security Analysis is
where V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a stock with 0% growth and g being the growth rate for the next 7-10 years.
However, this formula was later revised as Graham included a required rate of return.
http://www.oldschoolvalue.com/investment-tools/benjamin-graham-formula-valuation-spreadsheet/
http://www.oldschoolvalue.com/valuation-methods/value-stocks-benjamin-graham-formula/
Benjamin Graham Formula
The original formula from Security Analysis is
where V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a stock with 0% growth and g being the growth rate for the next 7-10 years.
However, this formula was later revised as Graham included a required rate of return.
Geithner Warns of ‘Headwinds’ on Road to Recovery
Geithner Warns of ‘Headwinds’ on Road to Recovery
Published: December 10, 2009
WASHINGTON (Reuters) — The United States economy is struggling against “headwinds” that mean the government must retain the ability to respond to unexpected crises, even as it starts to wind down emergency programs, the Treasury secretary, Timothy F. Geithner, said on Thursday.
Geithner Statement to Oversight Panel Testifying before a Congressional panel that oversees the Troubled Asset Relief Program, or TARP, Mr. Geithner took credit for having averted a complete financial disaster but warned against becoming too optimistic about a rebound.
“The financial and economic recovery still faces significant headwinds,” he said, citing high unemployment and home foreclosure rates, tight credit and impaired securitization markets, especially for mortgage-backed securities.
Mr. Geithner laid out a strategy for winding down the bank bailout program but also defended his decision on Wednesday to extend it past a scheduled year-end expiration, until next Oct. 3, as a necessary guard against a sudden economic relapse.
“History suggests that exiting too soon from policies designed to contain a financial crisis can significantly prolong an economic downturn,” he said.
The relief money was approved by Congress last year as a $700 billion program to buy impaired assets from banks but was immediately converted into a fund for the Treasury Department to make capital injections into ailing banks.
Big banks now are eager to exit the program by repaying their bailout money, partly to free themselves from pay restrictions.
Bank of America sent Treasury a $45 billion check on Wednesday to do so. Citicorp also is talking to Treasury about a repayment.
Mr. Geithner said it was “a good thing for the country that banks are eager to get out” of the program but it has to be done with care. “We are not prepared to have this money come back in a way that would leave the system or these institutions without adequate capital to face their challenges ahead.”
Citigroup got $45 billion of relief money last year.
Mr. Geithner said the investments made in banks were returning more money sooner than thought and the next few weeks will bring ”substantial income” from more sales of warrants to buy stock in banks that are repaying bailout money.
He said he was extending the program, on a modified basis, through next October because he did not want a repeat of the situation in which the government potentially faces a crisis without having adequate tools on hand to deal with it.
The Congressional Oversight Panel on Wednesday released its assessment of the program, conceding that while it had helped stabilize the financial system it had not succeeded in bolstering lending.
In addition, the panel said, it failed to resolve the issue of too-big-to-fail financial institutions and created an implicit guarantee that the government would again bail them if necessary.
Mr. Geithner said not all relief investments would be returned.
“There is a significant likelihood that we will not be repaid for the full value of our investments in A.I.G., G.M. and Chrysler,” he said, though some $15 billion more might come back than originally projected
http://www.nytimes.com/2009/12/11/business/economy/11tarp.html?ref=business
Published: December 10, 2009
WASHINGTON (Reuters) — The United States economy is struggling against “headwinds” that mean the government must retain the ability to respond to unexpected crises, even as it starts to wind down emergency programs, the Treasury secretary, Timothy F. Geithner, said on Thursday.
Geithner Statement to Oversight Panel Testifying before a Congressional panel that oversees the Troubled Asset Relief Program, or TARP, Mr. Geithner took credit for having averted a complete financial disaster but warned against becoming too optimistic about a rebound.
“The financial and economic recovery still faces significant headwinds,” he said, citing high unemployment and home foreclosure rates, tight credit and impaired securitization markets, especially for mortgage-backed securities.
Mr. Geithner laid out a strategy for winding down the bank bailout program but also defended his decision on Wednesday to extend it past a scheduled year-end expiration, until next Oct. 3, as a necessary guard against a sudden economic relapse.
“History suggests that exiting too soon from policies designed to contain a financial crisis can significantly prolong an economic downturn,” he said.
The relief money was approved by Congress last year as a $700 billion program to buy impaired assets from banks but was immediately converted into a fund for the Treasury Department to make capital injections into ailing banks.
Big banks now are eager to exit the program by repaying their bailout money, partly to free themselves from pay restrictions.
Bank of America sent Treasury a $45 billion check on Wednesday to do so. Citicorp also is talking to Treasury about a repayment.
Mr. Geithner said it was “a good thing for the country that banks are eager to get out” of the program but it has to be done with care. “We are not prepared to have this money come back in a way that would leave the system or these institutions without adequate capital to face their challenges ahead.”
Citigroup got $45 billion of relief money last year.
Mr. Geithner said the investments made in banks were returning more money sooner than thought and the next few weeks will bring ”substantial income” from more sales of warrants to buy stock in banks that are repaying bailout money.
He said he was extending the program, on a modified basis, through next October because he did not want a repeat of the situation in which the government potentially faces a crisis without having adequate tools on hand to deal with it.
The Congressional Oversight Panel on Wednesday released its assessment of the program, conceding that while it had helped stabilize the financial system it had not succeeded in bolstering lending.
In addition, the panel said, it failed to resolve the issue of too-big-to-fail financial institutions and created an implicit guarantee that the government would again bail them if necessary.
Mr. Geithner said not all relief investments would be returned.
“There is a significant likelihood that we will not be repaid for the full value of our investments in A.I.G., G.M. and Chrysler,” he said, though some $15 billion more might come back than originally projected
http://www.nytimes.com/2009/12/11/business/economy/11tarp.html?ref=business
October U.S. Trade Deficit Narrowed as Exports Rose
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By JAVIER C. HERNANDEZ
Published: December 10, 2009
The United States trade deficit narrowed unexpectedly in October, the government said Thursday, helped by a surge in exports like cars and computers and a drop in demand for foreign oil.
As countries struggled to sustain a recovery, the 2.6 percent rise in exports surprised some analysts. The increase helped bring the trade deficit down 7.6 percent in October, the Commerce Department said, and it is expected to help drive economic expansion in the last part of 2009.
But economists cautioned that October might be an exception caused by the extraordinary drop in oil imports. Long-term, the trade balance, which measures the difference between the value of imports and exports, will swell in the next several months as demand for oil returns to higher levels and as exports remain steady.
The country imported $17.44 billion in oil in October, a decline of $2.o7 billion from September. The decrease was the product of weaker demand — 27.4 million fewer barrels — and a 78-cent drop in the price. Excluding oil imports, which can be volatile from month to month, imports rose 2.9 percent.
“Growth both here and abroad is quite firm in the fourth quarter, and that’s an important sign of recovery,” said Dean Maki, chief United States economist at Barclays Capital. “Still, we don’t think this month’s decline reflects the underlying trend.”
The more significant number, Mr. Maki said, was the annual rate of growth for imports and exports. Both increased at a pace of about 25 percent in the last three months, leaving the trade deficit relatively unchanged.
The trade gap fell to $32.9 billion in October from $35.7 billion in September. After months of stagnation, exports climbed $3.7 billion in October, reaching the highest level in almost a year, while imports increased $0.7 billion. The gains in exports were broad-based, led by computers, automobiles and semiconductors.
The trade gap has fallen significantly in the last year, totaling $59.4 billion in October 2008. Exports were also helped by a weaker dollar, which is making American products cheaper overseas while, in the United States, driving up the price of everything from Italian cheese to Japanese cars.
“The lower dollar means there is scope for exports to rise at a faster rate,” Capital Economics, a Toronto-based research firm, said in a research note on Thursday.
Julia Coronado, senior United States economist at BNP Paribas, said strong recoveries in emerging markets could eventually help reduce the deficit. But monetary restrictions in places like China, she said, were hurting the competitiveness of American products, making the gap difficult to reduce.
“It’s a good sign that both imports and exports are picking up — that’s an indication that the economy has normalized,” Ms. Coronado said. “But as long as misaligned currencies, like China’s undervalued currency, are there, you’re not going to see a closing of the trade imbalance.”
Ms. Coronado said she expected to continue to see increases in exports of goods like computer equipment, commercial aircraft, and agricultural machinery, as businesses in emerging countries grow.
In its note, Capital Economic said that the strength of exports in October would probably help speed the rate of expansion in the fourth quarter to 3 percent.
In the third quarter, the economy expanded at a rate of 2.8 percent, but it was held back by a swelling trade deficit.
In other economic news, the number of newly laid-off workers filing for unemployment benefits rose unexpectedly by 17,000 last week.
That comes against the backdrop of signs of stability in the jobs market, with the economy shedding only 11,000 jobs last month. Still, the unemployment rate remains at 10 percent. The Labor Department attributed the unexpected rise in part to a rush of claims after the Thanksgiving holiday, when employment offices were closed.
Thursday, 10 December 2009
Glove makers’ capacity expansion on track
Glove makers’ capacity expansion on track
Tags: Adventa Bhd | Brokers Call | CIMB Research | Hartalega Holdings Bhd | Kossan Rubber Industries Bhd | Latexx Partners Bhd | MARGMA | Rubber gloves ssector | Supermax Corporation Bhd | Top Glove Corporation Bhd
Written by Financial Daily
Thursday, 10 December 2009 11:05
Rubber gloves sector
Maintain outperform: Last week, we hosted a rubber glove day which gave around 40 fund managers and buy-side analysts access to the six biggest rubber glove companies in Malaysia — TOP GLOVE CORPORATION BHD [], SUPERMAX CORPORATION BHD [], KOSSAN RUBBER INDUSTRIES BHD [], HARTALEGA HOLDINGS BHD [], LATEXX PARTNERS BHD [] and ADVENTA BHD [].
The Malaysian Rubber Glove Manufacturers’ Association (MARGMA) gave the opening remarks and touched on the ABCs of gloves, development of the industry, challenges faced as well as the prospects for the industry. This was followed by four sessions of small group meetings for each of the six firms.
Demand prospects for rubber gloves remain favourable and some of the manufacturers have even brought forward their expansion plans to cater to the high orders. Factors that could extend the sector’s re-rating include the continuing uptick in demand from the healthcare industry, ongoing capacity expansion and strong earnings growth. We maintain our overweight stance.
All the glove stocks under our coverage remain outperform, with Adventa and Supermax staying as our top picks. We raise our earnings forecasts for Adventa and Top Glove by 1% to 10%.
The event confirmed the companies’ expansion plans. Adventa and Kossan appear to be the most aggressive in their expansion. Latexx and Supermax have brought forward their expansion plans to cater to the high demand.
We were particularly surprised by Adventa’s plans to add lines with output of up to 36,000 pieces per hour, higher than even the most efficient producer currently, Hartalega, whose latest lines can produce up to 35,000 pieces per hour.
Hartalega has set its sights on the number one spot in the world for nitrile gloves, a goal which we think is not out of reach.
Among the issues raised include recent government policies to reduce the number of foreign workers which is a concern. Nevertheless, increasing automation will reduce their reliance on manpower. Glove manufacturers also raised the issue of not having enough supply of natural gas which is the most cost efficient form of energy.
To reduce their reliance on natural gas, all but Latexx and Kossan are now using biomass facilities.
The main issue for investors is the possibility of a glut given the industry’s aggressive expansion. We do not think this is a problem given the strong demand and good long-term prospects in developing countries where per capita consumption is low.
On top that, MARGMA and the rubber glove companies believe that prospects for the rubber glove industry will continue to improve given the continuous support by the government and the favourable outlook for the demand for rubber gloves. — CIMB Research, Dec 9
This article appeared in The Edge Financial Daily, December 10, 2009.
Tags: Adventa Bhd | Brokers Call | CIMB Research | Hartalega Holdings Bhd | Kossan Rubber Industries Bhd | Latexx Partners Bhd | MARGMA | Rubber gloves ssector | Supermax Corporation Bhd | Top Glove Corporation Bhd
Written by Financial Daily
Thursday, 10 December 2009 11:05
Rubber gloves sector
Maintain outperform: Last week, we hosted a rubber glove day which gave around 40 fund managers and buy-side analysts access to the six biggest rubber glove companies in Malaysia — TOP GLOVE CORPORATION BHD [], SUPERMAX CORPORATION BHD [], KOSSAN RUBBER INDUSTRIES BHD [], HARTALEGA HOLDINGS BHD [], LATEXX PARTNERS BHD [] and ADVENTA BHD [].
The Malaysian Rubber Glove Manufacturers’ Association (MARGMA) gave the opening remarks and touched on the ABCs of gloves, development of the industry, challenges faced as well as the prospects for the industry. This was followed by four sessions of small group meetings for each of the six firms.
Demand prospects for rubber gloves remain favourable and some of the manufacturers have even brought forward their expansion plans to cater to the high orders. Factors that could extend the sector’s re-rating include the continuing uptick in demand from the healthcare industry, ongoing capacity expansion and strong earnings growth. We maintain our overweight stance.
All the glove stocks under our coverage remain outperform, with Adventa and Supermax staying as our top picks. We raise our earnings forecasts for Adventa and Top Glove by 1% to 10%.
The event confirmed the companies’ expansion plans. Adventa and Kossan appear to be the most aggressive in their expansion. Latexx and Supermax have brought forward their expansion plans to cater to the high demand.
We were particularly surprised by Adventa’s plans to add lines with output of up to 36,000 pieces per hour, higher than even the most efficient producer currently, Hartalega, whose latest lines can produce up to 35,000 pieces per hour.
Hartalega has set its sights on the number one spot in the world for nitrile gloves, a goal which we think is not out of reach.
Among the issues raised include recent government policies to reduce the number of foreign workers which is a concern. Nevertheless, increasing automation will reduce their reliance on manpower. Glove manufacturers also raised the issue of not having enough supply of natural gas which is the most cost efficient form of energy.
To reduce their reliance on natural gas, all but Latexx and Kossan are now using biomass facilities.
The main issue for investors is the possibility of a glut given the industry’s aggressive expansion. We do not think this is a problem given the strong demand and good long-term prospects in developing countries where per capita consumption is low.
On top that, MARGMA and the rubber glove companies believe that prospects for the rubber glove industry will continue to improve given the continuous support by the government and the favourable outlook for the demand for rubber gloves. — CIMB Research, Dec 9
This article appeared in The Edge Financial Daily, December 10, 2009.
The 5 Keys to Value Investing
Rationale of Value Investing:
1. You will have a specific value framework to help you make investment decisions.
2. You will know how to find the balance between price and value, and how to "buy right."
3. You will know how to identify events that move stock prices.
4. You will be able to generate your own value investment targets and build your own portfolio.
Goal of the Value Investor:
Good Business + Excellent Price = Adequate Return over Time
Emotional Discipline:
With an established framework, value investors are more likely to avoid getting caught up with the moods of the market or their own emotional feelings of the day.
Charateristics of Value Investors:
1. They exude emotional discipline.
2. They possess a robust framework for making investment decisions.
3. They apply original research and independent thinking.
The Seven Fundamental Beliefs:
Belief No. 1: The world is not coming to an end, despite how the stock market is reacting.
Belief No. 2: Investors will always be driven by fear and greed, and the overall market and stocks will react accordingly. This volatility is simply the cost of doing business.
Belief No. 3: Inflation is the only true enemy. Trying to predict economic variables and the direction of the market or the economy is a waste of time - focus on businesses and their values, and remember Belief #1.
Belief No. 4: Good ideas are hard to find, but there are always good ideas out there, even in bear markets.
Belief No. 5: The primary purpose of a publicly traded company is to convert all of the company's available resources into shareholder value. As shareholders, your job is to make sure that this happens.
Belief No. 6: Ninety percent of successful investing is buying right. Selling at the optimal price is the hard part. As a result, value investors tend to buy early and sell early. [Buying early allows the investor to use dollar cost averaging. Dollar cost averaging is buying more shares of a particular company as the share price trades lower in the market place.]
Belief No. 7: Volatility is not risk; it is opportunity. Real risk is an and permanent change in the intrinsic value of the company.
Five key questions in considering investment opportunities:
1. Is this a good business run by smart people?
This may include items such as quality of earnings, product lines, market sizes, management teams, and the sustainability of competitive positioning within the industry.
2. What is this company worth?
Value investors perform fair value assessments that allow them to establish a range of prices that would determine the fair value of the company, based on measures such as normalized free cash flow, break-up , takeout, and/or asset values. Exit valuation assessment provides a rational "fair value" target price, and indicates the upside opportunity from the current stock price.
3. How attractive is the price for this company, and what should I pay for it?
Price assessment allows the individual to understand fully the price at which the stock market is currently valuing the company. In this analysis, the investor takes several factors into account by essentially answering the question. Why is the company afforded its current low valuation? For example, a company with an attractive valuation at first glance may not prove to be so appealing after a proper assessment of its accounting strategy or its competitive position relative to its peers.
4. How realistic is the most effective catalyst?
Catalyst identification and effectiveness bridges the gap between the current asking price and what value investors think the company is worth based on their exit valution assessment. The key here lies in making sure that the catalyst identified to "unlock" value in the company is very likely to occur. Potential effective catalysts may include the breakup of the company, a divestiture, new management, or an ongoing internal catalyst, such as a company's culture.
5. What is my margin of safety at my purchase price?
Buying shares with a margin of safety is essentially owning shares cheap enough that the price paid is heavily supported by the underlying economics of the business, asset values, and cash on the balance sheet. If a company's stock trades below this "margin of safety" price level for a length of time, it would be reasonable to believe that the company is more likely to be sold to a strategic or financial buyer, broken up, or liquidated to realize its true intrinsic value - thus making such shares safer to own.
Example Valuation Approach:
1. Sum of parts valuation (using three different multiples EV/EBITDA, EV/FCF, and PE).
2. Historical valuation (using the same multiples to see how the market valued the company historically).
3. Transaction deal basis (comparison with similar deals using EV to Cash Flow and EV to Revenue).
Take an average to give an idea of Fair Value. The need is then to establish a Purchase Price at a discount to Fair Value and with a margin of safety. For example, 5.5 times Enterprise Value to pre-tax and interest cash flow could be used.
http://www.docstoc.com/docs/7984050/Investment-Strategies (Pg 54 to Pg 56)
1. You will have a specific value framework to help you make investment decisions.
2. You will know how to find the balance between price and value, and how to "buy right."
3. You will know how to identify events that move stock prices.
4. You will be able to generate your own value investment targets and build your own portfolio.
Goal of the Value Investor:
Good Business + Excellent Price = Adequate Return over Time
Emotional Discipline:
With an established framework, value investors are more likely to avoid getting caught up with the moods of the market or their own emotional feelings of the day.
Charateristics of Value Investors:
1. They exude emotional discipline.
2. They possess a robust framework for making investment decisions.
3. They apply original research and independent thinking.
The Seven Fundamental Beliefs:
Belief No. 1: The world is not coming to an end, despite how the stock market is reacting.
Belief No. 2: Investors will always be driven by fear and greed, and the overall market and stocks will react accordingly. This volatility is simply the cost of doing business.
Belief No. 3: Inflation is the only true enemy. Trying to predict economic variables and the direction of the market or the economy is a waste of time - focus on businesses and their values, and remember Belief #1.
Belief No. 4: Good ideas are hard to find, but there are always good ideas out there, even in bear markets.
Belief No. 5: The primary purpose of a publicly traded company is to convert all of the company's available resources into shareholder value. As shareholders, your job is to make sure that this happens.
Belief No. 6: Ninety percent of successful investing is buying right. Selling at the optimal price is the hard part. As a result, value investors tend to buy early and sell early. [Buying early allows the investor to use dollar cost averaging. Dollar cost averaging is buying more shares of a particular company as the share price trades lower in the market place.]
Belief No. 7: Volatility is not risk; it is opportunity. Real risk is an and permanent change in the intrinsic value of the company.
Five key questions in considering investment opportunities:
1. Is this a good business run by smart people?
This may include items such as quality of earnings, product lines, market sizes, management teams, and the sustainability of competitive positioning within the industry.
2. What is this company worth?
Value investors perform fair value assessments that allow them to establish a range of prices that would determine the fair value of the company, based on measures such as normalized free cash flow, break-up , takeout, and/or asset values. Exit valuation assessment provides a rational "fair value" target price, and indicates the upside opportunity from the current stock price.
3. How attractive is the price for this company, and what should I pay for it?
Price assessment allows the individual to understand fully the price at which the stock market is currently valuing the company. In this analysis, the investor takes several factors into account by essentially answering the question. Why is the company afforded its current low valuation? For example, a company with an attractive valuation at first glance may not prove to be so appealing after a proper assessment of its accounting strategy or its competitive position relative to its peers.
4. How realistic is the most effective catalyst?
Catalyst identification and effectiveness bridges the gap between the current asking price and what value investors think the company is worth based on their exit valution assessment. The key here lies in making sure that the catalyst identified to "unlock" value in the company is very likely to occur. Potential effective catalysts may include the breakup of the company, a divestiture, new management, or an ongoing internal catalyst, such as a company's culture.
5. What is my margin of safety at my purchase price?
Buying shares with a margin of safety is essentially owning shares cheap enough that the price paid is heavily supported by the underlying economics of the business, asset values, and cash on the balance sheet. If a company's stock trades below this "margin of safety" price level for a length of time, it would be reasonable to believe that the company is more likely to be sold to a strategic or financial buyer, broken up, or liquidated to realize its true intrinsic value - thus making such shares safer to own.
Example Valuation Approach:
1. Sum of parts valuation (using three different multiples EV/EBITDA, EV/FCF, and PE).
2. Historical valuation (using the same multiples to see how the market valued the company historically).
3. Transaction deal basis (comparison with similar deals using EV to Cash Flow and EV to Revenue).
Take an average to give an idea of Fair Value. The need is then to establish a Purchase Price at a discount to Fair Value and with a margin of safety. For example, 5.5 times Enterprise Value to pre-tax and interest cash flow could be used.
http://www.docstoc.com/docs/7984050/Investment-Strategies (Pg 54 to Pg 56)
****Buffett Fundamental Investing: How to pick stocks like Warren Buffett
Buffett Fundamental Investing
How to Pick Stock Like Warren Buffett by Timothy Vick
1. Intrinsic Value = sum total of future expected Earnings with each year's Earnings discounted by the Time Value of Money.
2. A company's Growth record is the most reliable predictor of its future course. It is best to average past Earnings to get a realistic figure. Each year's Earnings need to be discounted by the appropriate discount rate.
3. Is the stock more attractive than a bond? Divide the 12 months EPS by the current rate of long-term Government Bonds e.g. EPS of $2.50 / 6% or 0.06 = $40. If the stock trades for less than $40, it is better value than a bond. If the share's earnings are expected to grow annually, it will beat a bond.
4. Identify the expected Price Range, Projected future EPS 10 years out, based on average of past EPS Growth. Multiply by the High and Low PE Ratios to find the expected Price Range. Add in the expected Dividends for the period. Compute an annualised Rate of Return based on the increase in the Share Price. Buffett's hurdle is 15%.
5. Book Value. Ultimately, Price shoud approximate growth in Book Value and in Intrinsic Value. Watch out the increases in Book Value which are generated artificially
6. Return on Equity. ROE = Net Income (end-of-year Shareholders' Equity + start-of-year Shareholder's Equity/2). Good returns on ROE should benefit the Share Price. High ROE - EPS Growth - Increase in Shareholder's Equity - Intrinsic Value - Share Price. A high ROE is difficult to maintain, as the company gets bigger. Look for high ROE with little or no debt. Drug and Consumer product companies can carry over 50% Debt and still have high ROEs. Share buy-backs can be used to manipulate higher ROEs. ROE should be 15%+.
7. Rate of Returns. 15% Rule. Collect and calculate figures on the following:
Tabulation in Table Format
Price:
EPS:
PE:
Growth Rate:
Average PE:
Dividend Payout:
Year ---- EPS
20-
20-
20-
20-
20-
20-
20-
20-
20-
20-
----------------
Total
Price needed in 10 years to get 15%: $____
Expected 10-year Price (20--EPS* Av. PE): $____
Plus expected Dividends: $____
Total Return: $____
Expected 10-year Rate of Return: ____%
-----
Highest Price you can pay to get 15% return: $ _____
------
Stock Evaluation. Can a company earn its present Market Cap. in terms of future Profits? Does the company have a consistent record of accomplishment?
Shares are Bonds with less predictable Coupons. Shares must beat inflation, Government Bond Yields and be able to rise over time. Shares should be bought in preference to Bonds when the current Earnings Yield (Current Earnings/Price) is at or above the level of long-term Bonds.
When To Sell:
Takeover Arbitrage
General Criteria:
Buffett-Style Value Criteria and Filter.
1. Earnings yield should be at least twice the AAA bond yield (which is about 5.9%)
2. PE should be less than 40% of the share's highest PER over the previous five years.
3. Dividend yield should be at least two thirds of the AAA bond yield.
4. Stock price should be no more than two thirds of company's tangible book value per share.
5. Company should be selling in the market for no more than two thirds of its net current assets.
To this, add Margin of Safety criteria:
1. Company should owe no more than it is worth: total debt should not exceed book value.
2. Current assets should be at least twice current liabilities - in other words, the current ratio should exceed 2.
3. Total debt should be less than twice net current assets.
4. Earnings growth should be at least 7% a year compound over the past decade.
5. As an indication of stability of earnings, there should have been no more than two annual earnings declines of 5% or more during the past decade.
Demanding a share price no more than two-thirds tangible assets is asking too much of today's market. The basic search, therefore, used the following sieves:
1. PE less than 8.5. This is the implied multiple from the demand that the earnings yield should be more than twice 5.9%. The inverse of an 11.8% earnings yield is a price-earnings multiple of 8.5.
2. A dividend yield of at least 4% - two thirds of the 5.9% AAA bond yield.
3. A Price to Tangible Assets Ratio of less than 0.8 - price less than four-fifths tangible assets.
4. Gross Gearing of less than 100% - the company does not owe more than it is worth.
5. Current Ratio of at least two - in other words current assets are at least twice current liabilities.
http://www.docstoc.com/docs/7984050/Investment-Strategies (Page 91)
How to Pick Stock Like Warren Buffett by Timothy Vick
1. Intrinsic Value = sum total of future expected Earnings with each year's Earnings discounted by the Time Value of Money.
2. A company's Growth record is the most reliable predictor of its future course. It is best to average past Earnings to get a realistic figure. Each year's Earnings need to be discounted by the appropriate discount rate.
3. Is the stock more attractive than a bond? Divide the 12 months EPS by the current rate of long-term Government Bonds e.g. EPS of $2.50 / 6% or 0.06 = $40. If the stock trades for less than $40, it is better value than a bond. If the share's earnings are expected to grow annually, it will beat a bond.
4. Identify the expected Price Range, Projected future EPS 10 years out, based on average of past EPS Growth. Multiply by the High and Low PE Ratios to find the expected Price Range. Add in the expected Dividends for the period. Compute an annualised Rate of Return based on the increase in the Share Price. Buffett's hurdle is 15%.
5. Book Value. Ultimately, Price shoud approximate growth in Book Value and in Intrinsic Value. Watch out the increases in Book Value which are generated artificially
- a) issuing more shares
- b) acquisitions
- c) leaving cash in the bank to earn interest, in which case ROE will slowly fall.
6. Return on Equity. ROE = Net Income (end-of-year Shareholders' Equity + start-of-year Shareholder's Equity/2). Good returns on ROE should benefit the Share Price. High ROE - EPS Growth - Increase in Shareholder's Equity - Intrinsic Value - Share Price. A high ROE is difficult to maintain, as the company gets bigger. Look for high ROE with little or no debt. Drug and Consumer product companies can carry over 50% Debt and still have high ROEs. Share buy-backs can be used to manipulate higher ROEs. ROE should be 15%+.
7. Rate of Returns. 15% Rule. Collect and calculate figures on the following:
- current EPS
- estimate future Growth Rate of use Consensus Forecasts
- calculate historic average PE Ratio
- calculate Dividend Payout Ratio
Tabulation in Table Format
Price:
EPS:
PE:
Growth Rate:
Average PE:
Dividend Payout:
Year ---- EPS
20-
20-
20-
20-
20-
20-
20-
20-
20-
20-
----------------
Total
Price needed in 10 years to get 15%: $____
Expected 10-year Price (20--EPS* Av. PE): $____
Plus expected Dividends: $____
Total Return: $____
Expected 10-year Rate of Return: ____%
-----
Highest Price you can pay to get 15% return: $ _____
------
Stock Evaluation. Can a company earn its present Market Cap. in terms of future Profits? Does the company have a consistent record of accomplishment?
Shares are Bonds with less predictable Coupons. Shares must beat inflation, Government Bond Yields and be able to rise over time. Shares should be bought in preference to Bonds when the current Earnings Yield (Current Earnings/Price) is at or above the level of long-term Bonds.
When To Sell:
- Bond Yields are rising and about to overtake Share Earnings Yields.
- Share Prices are rising at a greater rate than the economy is expanding.
- Excessive PE multiples, even allowing for productivity and low interest rates.
- Economy cannot get any stronger.
Takeover Arbitrage
- Buy at a Price below the target takeover Price.
- Only invest in deals already announced.
- Calculate Profits in Advance. Annualised return of 20-30% needed.
- Ensure the deal is almost certain. A widening spread may mean the worst.
General Criteria:
- Consistent Earnings Growth
- High Cash Flow and Low level of Spending
- Little need of long-term Debt
- High ROE 15%+
- High ROA (Return on Total Inventory plus Plant)
- Low Price relative to Valuation.
Buffett-Style Value Criteria and Filter.
1. Earnings yield should be at least twice the AAA bond yield (which is about 5.9%)
2. PE should be less than 40% of the share's highest PER over the previous five years.
3. Dividend yield should be at least two thirds of the AAA bond yield.
4. Stock price should be no more than two thirds of company's tangible book value per share.
5. Company should be selling in the market for no more than two thirds of its net current assets.
To this, add Margin of Safety criteria:
1. Company should owe no more than it is worth: total debt should not exceed book value.
2. Current assets should be at least twice current liabilities - in other words, the current ratio should exceed 2.
3. Total debt should be less than twice net current assets.
4. Earnings growth should be at least 7% a year compound over the past decade.
5. As an indication of stability of earnings, there should have been no more than two annual earnings declines of 5% or more during the past decade.
Demanding a share price no more than two-thirds tangible assets is asking too much of today's market. The basic search, therefore, used the following sieves:
1. PE less than 8.5. This is the implied multiple from the demand that the earnings yield should be more than twice 5.9%. The inverse of an 11.8% earnings yield is a price-earnings multiple of 8.5.
2. A dividend yield of at least 4% - two thirds of the 5.9% AAA bond yield.
3. A Price to Tangible Assets Ratio of less than 0.8 - price less than four-fifths tangible assets.
4. Gross Gearing of less than 100% - the company does not owe more than it is worth.
5. Current Ratio of at least two - in other words current assets are at least twice current liabilities.
http://www.docstoc.com/docs/7984050/Investment-Strategies (Page 91)
Wednesday, 9 December 2009
Investing Strategy - Growth Investing
Growth Investing
Look for three characteristics of Growth - superior brand, good management and superior technology.
Buying:
Entry
Exit:
http://www.docstoc.com/docs/7984050/Investment-Strategies (Page 96)
Look for three characteristics of Growth - superior brand, good management and superior technology.
Buying:
- A PEG less than 0.75
- Market Capitalization greater than GBP 20m
- PE less than 20
- High projected Earnings Growth 1 - 5 years.
- Highest 1, 3, and 5 year historical Earnings Growth
- High continuous EPS Growth, historical and current.
- Positive Earning Surprises.
- High Revenue Growth.
- Positive Cash Flow. Cash Flow per share should be greater than Capital Expenditure per share. Cash Flow per share should exceed EPS. Low P/CF ratio.
- Positive Relative Strength over the last 1, 3, 6, and 12 months.
- Net Gearing less than 50%. Interest Cover, Quick Ratio, and Current Ratio need to be healthy.
- Look for high Margins relative to the sector and a high ROCE.
- Pay attention to Directors' Dealings
- Check recent Brokers' Estimates
Entry
- TA signals
Exit:
- If the PEG has doubled.
- Trailing Stop/Loss of 10%
http://www.docstoc.com/docs/7984050/Investment-Strategies (Page 96)
Value Buying and Selling
Value Buying and Selling
Invest in good companies on the dip.
1. Do not down average.
2. Buy when market is pessimistic.
3. Sell when:
Source:
The Motley Fool www.fool.co.uk/
Page 11: http://www.docstoc.com/docs/7984050/Investment-Strategies
Invest in good companies on the dip.
1. Do not down average.
2. Buy when market is pessimistic.
3. Sell when:
- Fundamentals change for the worse
- Grossly over-valued
- Better investment opportunities exists
- Stock falls 10% below purchase price or when 50 day Moving Average falls below the Price line
- PBV is usually the first to break. That is, it will go over 1. It breaks first in most cases because the discount to 1 is usually fairly modest to start with. Shares bought on a PBV of 0.9 need only rise by 11% for the discount to be erased. But if the PE on purchase was 8 and the Yield 5%, when PBV hits 1, the shares would only be at a still attractive 8.9 and 4.5% respectively. Do not sell just because PBV < 1 ceases to exist.
- Sell on a strong rising PE and falling Yield, unless there is an indication that these would come back down to value levels by the release of very good figures. Thus if historical PE had risen to 16 and Yield to 2.5% and an announcement showed doubled EPS and Dividend, that immediately puts the shares back on to a PE of 8 and yield of 5% on a historical basis.
- If you wait for the announcement, review the net Cash, PBV and especially, EPS forecasts. If these still make sense stay in because the share had reinstated deep value status. This situation is quite rare.
- In most cases, announcements merely confirm that the share has performed in line with expectations, rather than greatly exceeded them, and has lost super value status. Therefore, after a good rise, where most of the deep value has gone, sell shortly before announcements, rather than after, because shares frequently fall back following the figures, unless those figures are much better than anticipated. That does not happen often.
Source:
The Motley Fool www.fool.co.uk/
Page 11: http://www.docstoc.com/docs/7984050/Investment-Strategies
Market Timing: You need to be right 70%+ of the time to break even.
Market Timing:
You need to be right 70%+ of the time to break even. Market timing skills are vastly overstated. Various indicators may tell you that the market is over-valued but it does not tell you when the correction will occur.
You can always find under-valued stocks in an over-priced market. PEs tend to revert to 16 but lower interest rates allow for much higher PEs. There is a positive relationship between GDP growth and stock returns in any single year but it does not predict returns for the following year.
Increases in Interest rates leads to higher Cost of Equity and lower PEs. Greater willingness to take risk leads to a higher Risk Premium for equity and higher PEs. An increase in expected Earnings Growth leads to a higher Market PE.
You need to be right 70%+ of the time to break even. Market timing skills are vastly overstated. Various indicators may tell you that the market is over-valued but it does not tell you when the correction will occur.
You can always find under-valued stocks in an over-priced market. PEs tend to revert to 16 but lower interest rates allow for much higher PEs. There is a positive relationship between GDP growth and stock returns in any single year but it does not predict returns for the following year.
Increases in Interest rates leads to higher Cost of Equity and lower PEs. Greater willingness to take risk leads to a higher Risk Premium for equity and higher PEs. An increase in expected Earnings Growth leads to a higher Market PE.
- If markets are over-valued, you could switch from Growth to Value.
- If a market increase based on real economic growth is expected, then you may switch into cyclicals.
- If interest rates go up causing the market to drop, switch out of financials into consumer products.
- N.B. The market will bottom out and peak before the economy e.g. invest in cyclicals when the economy enters a recession then shift into industrials and energy as the economy improves.
- Contrarians may invest in sectors that delivered the worst performance in previous periods.
'Buy on the rumour. Sell on the News."
'Buy on the rumour. Sell on the News."
This means that most of the benefit comes in the run-up with only a small advance after the announcement.
Markets are more efficeint about assessing good news; an investor needs to move quickly if he is to benefit.
Best if you can forecast the likely firms based on historical earnings and trading volume.
This means that most of the benefit comes in the run-up with only a small advance after the announcement.
Markets are more efficeint about assessing good news; an investor needs to move quickly if he is to benefit.
Best if you can forecast the likely firms based on historical earnings and trading volume.
Low PE stocks may have high-risk earnings or low growth.
Low PE stocks may have
Assess growth and eliminate
- high-risk earnings or
- low growth.
You could modify earnings e.g.
- P/Normalised Earnings
- P/Adjusted Earnings, or
- P/Cash Earnings [=P/Cash Earnings + Depreciation + Amortisation]
- Beta or
- Debt to Equity Ratio.
- declining Earnings or
- Earnings Growth lower than the sector.
****Investment Philosophy and Strategies Notes
Investment Philosophy and Strategies
http://www.docstoc.com/docs/7984050/Investment-Strategies
Portfolio Management Theory And Technical Analysis
Lecture Notes
http://samvak.tripod.com/portfolio.html
http://www.docstoc.com/docs/7984050/Investment-Strategies
Portfolio Management Theory And Technical Analysis
Lecture Notes
http://samvak.tripod.com/portfolio.html
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