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.

• 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.

 

Because many investors are now expecting that the prices will go up they start buying stocks.

• 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.

 

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/

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/

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

• 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.

If you are one of the intelligent investors, consider these valuation models in your next purchase.

 

 

Discounted Cash Flow (DCF)

 

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.  

 

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)

 

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. 

 

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/

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

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.

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.

Summary

• 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.

Go ahead, be creative.

Decorate your room.  Make living pleasant.

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

October U.S. Trade Deficit Narrowed as Exports Rose

http://www.nytimes.com/2009/12/11/business/economy/11econ.html?ref=business



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.

Recession Elsewhere, but It’s Booming in China

http://www.nytimes.com/2009/12/10/business/economy/10consume.html?pagewanted=1

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.

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)

****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

• a) issuing more shares
• b) acquisitions
• c) leaving cash in the bank to earn interest, in which case ROE will slowly fall. 

Buffett is against the use of accounting charges and write-offs to artificially improve the look of future profits.

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: $ _____

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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)

Investing Strategy - Growth Investing

Growth Investing


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:

• 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

4.  The Motley Fool Sell Advice:

• 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