Investors should be aware that in an up cycle, analysts would do two things:
1. to upgrade the earning forecast almost on a regular basis, and,
2. to accord the stock on a higher valuation (i.e. stock is now valued at a higher PE ratio).
This, we call, earning expansion and PE ratio expansion.
Normally, the analysts would do this a couple of times during a complete up cycle.
In a down cycle, the reverse happens. That is, earning and PE ratio (valuation) contract.
For those who have been investing over the last 4 years, they would have observed these in the analysts reports during the bull and the bear phases of the market.
What lessons should we learn from this?
We should not be sucked into this as we know that a very high EPS forecast is not sustainable (as compared to its historical records), and hence disappointment or downgrade would ahve to occur and we need to get out of this before it happens.
Thus, it is very important to know the big picture to gain an inkling of which stage of the economic cycle we are in now and how it is going to move looking forward.
Hence, when we look at EPS growth, we should ask ourselves whether it is sustainable in the next few years.
Monday, 20 July 2009
PE ratio, PEG and EPS Growth rates
A high PE ratio by itself means that either
For high growth stocks, we also look at the PEG ratio (PE ratio/ EPS Growth rate). For high growth stocks, their PE ratio if viewed on absolute basis is usually very high. How do we then decide if it is still "cheap" enough for us to hold or even buy? We use the PEG ratio to see whether its growth is at a faster rate as compared to its appreciation in value (i.e. high PE ratio). If PEG is low despite a high PE ratio, this would indicate the growth in earning (higher EPS growth) is much faster than the increase in its valuation (higher PER), and hence could justify our holding or even buying the stock.
- the valuation is very expensive (where the stock price is high as compared to its EPS) or
- it has such great potential for growth that investors are willing to accord it with a high PE ratio.
In general, the lower the PE ratio, the better it is.
For high growth stocks, we also look at the PEG ratio (PE ratio/ EPS Growth rate). For high growth stocks, their PE ratio if viewed on absolute basis is usually very high. How do we then decide if it is still "cheap" enough for us to hold or even buy? We use the PEG ratio to see whether its growth is at a faster rate as compared to its appreciation in value (i.e. high PE ratio). If PEG is low despite a high PE ratio, this would indicate the growth in earning (higher EPS growth) is much faster than the increase in its valuation (higher PER), and hence could justify our holding or even buying the stock.
Public Bank records RM1.54b pre-tax profit in H1
Monday July 20 2009.
KUALA LUMPUR, July 20 — Public Bank Bhd posted a pre-tax profit of RM1.564 billion in the first half of the year year ended June 30, 2009 compared with RM1.76 billion in the same period last year.
Revenue declined to RM4.78 billion from RM5.15 billion previously.
In a statement today, the bank said net interest and financing income grew by nine per cent to RM180 million, driven by its expanding loan and deposits businesses and sustained strong assets.
It said total assets crossed the RM200 billion mark for the first time, standing at RM204.0 billion as at end-June 2009.
Total loans and advances grew by RM8.7 billion, or 7.2 per cent, in the first six months of 2009, to RM129.4 billion, significantly above the banking industry’s 1.2 per cent for the first five months of 2009, it said.
Public Bank said core customer deposits grew by 11.5 per cent in the first six months of 2009 to RM125.3 billion compared with the industry’s 2.9 per cent during the first five months of 2009.
As at the end-May 2009, Public Bank’s domestic market share of total loans and core customer deposits rose to 15.5 per cent and 15.2 per cent respectively compared with 14.8 per cent and 14.7 per cent respectively as at Dec 31, 2008, it said.
It said the group's net non-performing loan ratio was below one per cent as at end-June 2009, significantly lower than the industry’s 2.2 per cent in May 2009.
The group’s loan loss coverage of 173 per cent was about twice the banking industry’s ratio of 87 per cent, and continued to be the highest and most prudent in the Malaysian banking industry, it said.
On outlook, it said, despite the slowing economy, the banking industry in Malaysia remained resilient, supported by its strong capitalisation, stable asset quality and improved risk management practices.
Hence, it said, the group would continue to pursue its strategy of strong organic business growth, as well as maintain a high quality loan portfolio and improved productivity.
"Barring unforeseen circumstances, the group is expected to continue to record satisfactory performance for the rest of 2009," it said. — Bernama
KUALA LUMPUR, July 20 — Public Bank Bhd posted a pre-tax profit of RM1.564 billion in the first half of the year year ended June 30, 2009 compared with RM1.76 billion in the same period last year.
Revenue declined to RM4.78 billion from RM5.15 billion previously.
In a statement today, the bank said net interest and financing income grew by nine per cent to RM180 million, driven by its expanding loan and deposits businesses and sustained strong assets.
It said total assets crossed the RM200 billion mark for the first time, standing at RM204.0 billion as at end-June 2009.
Total loans and advances grew by RM8.7 billion, or 7.2 per cent, in the first six months of 2009, to RM129.4 billion, significantly above the banking industry’s 1.2 per cent for the first five months of 2009, it said.
Public Bank said core customer deposits grew by 11.5 per cent in the first six months of 2009 to RM125.3 billion compared with the industry’s 2.9 per cent during the first five months of 2009.
As at the end-May 2009, Public Bank’s domestic market share of total loans and core customer deposits rose to 15.5 per cent and 15.2 per cent respectively compared with 14.8 per cent and 14.7 per cent respectively as at Dec 31, 2008, it said.
It said the group's net non-performing loan ratio was below one per cent as at end-June 2009, significantly lower than the industry’s 2.2 per cent in May 2009.
The group’s loan loss coverage of 173 per cent was about twice the banking industry’s ratio of 87 per cent, and continued to be the highest and most prudent in the Malaysian banking industry, it said.
On outlook, it said, despite the slowing economy, the banking industry in Malaysia remained resilient, supported by its strong capitalisation, stable asset quality and improved risk management practices.
Hence, it said, the group would continue to pursue its strategy of strong organic business growth, as well as maintain a high quality loan portfolio and improved productivity.
"Barring unforeseen circumstances, the group is expected to continue to record satisfactory performance for the rest of 2009," it said. — Bernama
Wake up Malaysians. “What has this country come to?”
What has this country come to?
There had been so many unexplained and unresolved incidences. Altantunya, Kugan, and now Teoh. There are also many issues, like Lingam tapes, alleged corruptions in high places, abuses of public offices and others.
When some lawyers mentioned in 1998 that if such an "event" can happen to Anwar, then the deputy PM, it may happen to anyone. They were not mincing their words.
Politics in this country is very partisan. Even the recent tragedy of Teoh, which should have provoked a bipartisan response, was debated by some "significant" politicians in a partisan manner. Surprisingly, too many remain silent on this important issue. This is truly saddening.
Where is the sense of right and wrong in these politicians and certain national papers.
Wake up Malaysians.
There had been so many unexplained and unresolved incidences. Altantunya, Kugan, and now Teoh. There are also many issues, like Lingam tapes, alleged corruptions in high places, abuses of public offices and others.
When some lawyers mentioned in 1998 that if such an "event" can happen to Anwar, then the deputy PM, it may happen to anyone. They were not mincing their words.
Politics in this country is very partisan. Even the recent tragedy of Teoh, which should have provoked a bipartisan response, was debated by some "significant" politicians in a partisan manner. Surprisingly, too many remain silent on this important issue. This is truly saddening.
Where is the sense of right and wrong in these politicians and certain national papers.
Wake up Malaysians.
Sunday, 19 July 2009
Market risk or systemic risk
This risk cannot be eliminated by diversifying one's portfolio.
Definitions of Market risk on the Web:
Market risk is the risk that the value of an investment will decrease due to moves in market factors. The four standard market risk factors are: * Equity risk, the risk that stock prices will change. * Interest rate risk, the risk that interest rates will change. ...en.wikipedia.org/wiki/Market_risk
The possibility that the value of an investment will fall because of a general decline in the financial markets.www.waddell.com/jsp/index.jsp
The chance that a security's value will decline. With fixed income securities, market risk is closely tied to interest rate risk--as interest rates rise, prices decline and vice versa.www.netxclientdemo.com/invest_glosry_MMa.htm
Exposure to changes in market prices.www.info-forex.com/glossary.htm
Also called systematic risk. The portion of a security’s risk common to all securities in the same asset class, and that cannot be eliminated through diversification.www.manealfinancial.com/Glossary-MtoZ.htm
One of six risks defined by the Federal Reserve. The risk of an increase or decrease in the market value/price of a financial instrument. Market values for debt instruments are affected by actual and anticipated changes in prevailing interest rates. ...www.americanbanker.com/glossary.html
Exposure to a change in the value of some market variable, such as interest rates or foreign exchange rates, equity, or commodity prices.www.fhlb.com/Glossary.html
Market risk refers to the risk of financial loss as a result of adverse market movements. NZDMO specifically measures market risk with regard to movements in interest rates and foreign exchange rates.www.oag.govt.nz/2007/nzdmo/glossary.htm
The value of a security may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or adverse investor ...www.dreyfus.com/content/dr/control
Uncertainty in the value of real estate due to market, economic, political or other conditions.www.new-york-new-york-real-estate.com/m2.html
The risk of loss resulting from changes in the prices of financial instruments in the markets in which Chase participates, such as changes in the value of foreign exchange or fixed-income securities.https://www.chase.com/inside/financial/annual/glossary.html
Risk that cannot be diversified away. Related: systematic riskbiz.yahoo.com/glossary/bfglosm.html
Risk relating to the market in general and cannot be diversified away by hedging or holding a variety of securities.charmforex.com/index.php
Risk of loss due to unfavourable price changes on the financial markets.www.ingwholesalebanking.com/smartsite.shtml
risk that comes from customers not wanting to buy a product, the market being smaller than originally estimated, or a competitor launching a competing product. http://www.google.com/url?&q=http://www.epilepsy.com/innovation/entrepreneurs/glossary&ei=FexiSvKmMZWBkQWf1antDw&sa=X&oi=define&ct=&cd=1&usg=AFQjCNFChX-S8PEUc0fWkKKMwHxGc_shwA
Friday, 17 July 2009
Has the share price discounted all the negatives?
In a downturn, or a crash, the price of a stock may go down by a large amount. After the price has stabilised, the question to ask oneself, would be: "Has this share price discounted all the negatives?" Re-value this stock again using its latest fundamentals. It may be a rewarding exercise.
Wake up Malaysians. “What has this country come to?”
The MACC is a highly efficient body. However, it has not been unnoticed that this body moves very fast in certain cases, and suffers severe malaise in others. A very sad situation reflecting the political culture in this country. Wake up Malaysians.
Thursday, 16 July 2009
Covered Warrants
Covered Warrants on the London Stock Exchange
In October 2002, the LSE launched a market in covered warrants. Its first year was a resounding success, with 823 new issues and trading volume of GBP97 million.
A covered warrant is essentially an option. Unlike the traditional "corporate" warrant, which is issued by the underlying company, a financial institution issues the covered warrant.
Goldman, Sachs, and JP Morgan, are notable players in this market.
Covered warrants are sometimes referred to as securitised derivatives.
Whereas the typical corporate warrants gives the holder the right to buy shares directly from the company (like a call option), the covered warrant comes in may forms:
- some (put warrants) carry the right to sell rather than to buy,
- some are based on foreign exchange or commodities rather than on stock, and,
- some have complicated exercise terms.
Characteristics of warrants
A warrant is a non-dividend paying security giving its owner the right to buy a certain number of shares at a set price directly from the issuing company. These usually have an initial life of between 3 and 5 years.
Characteristics
Warrants are often issued in conjuction with a new debt issue.
Including a warrant with the bond enables the issuing firm to float the bond issue at a lower interest rate than would otherwise be required. This may be the primary motivation for their issuance.
Warrants can be detachable and nondetachable, although the former are more important for our purposes. Detachable warrants may be sold separately from their accompanying debt issue. A nondetachable warrant cannot be sold separately.
Warrants pay no dividends, and they carry no voting rights. Their principal investment attraction is the leverage they provide; the warrant price is less than that of the corresponding common stock, and consequently warrant investments magnify the effect of stock price movements.
Warrants can have unusual exercise terms and conditions. The Standard & Poor's Stock Guide listing for many warrants indicates "terms and trading basis should be checked in detail." The majority of US warrants are from small, relatively risky firms. Newly issued warrants usually originate in conjunction with an initial public offering.
Some warrants are called "B" warrants. These come about from the exercise of an "A" warrant that allows its owner to trade the warrant for shares of stock and a "B" warrant with a higher exercise price than the "A" warrant.
Looking at warrant population by stock price range, the majority are from a firm whose stock price is low. While there may be no inherent reason why a low-priced stock should be risky, it is an empirical observation that a low stock price is frequently associated with higher relative risk.
A warrant is much like a long-term call option issued by the underlying company. The warrant holder has the right but not the obligations, to buy shares at a set price during the life of the warant. Warrants provide leverage in the same fashion as an option.
Characteristics
Warrants are often issued in conjuction with a new debt issue.
Including a warrant with the bond enables the issuing firm to float the bond issue at a lower interest rate than would otherwise be required. This may be the primary motivation for their issuance.
Warrants can be detachable and nondetachable, although the former are more important for our purposes. Detachable warrants may be sold separately from their accompanying debt issue. A nondetachable warrant cannot be sold separately.
Warrants pay no dividends, and they carry no voting rights. Their principal investment attraction is the leverage they provide; the warrant price is less than that of the corresponding common stock, and consequently warrant investments magnify the effect of stock price movements.
Warrants can have unusual exercise terms and conditions. The Standard & Poor's Stock Guide listing for many warrants indicates "terms and trading basis should be checked in detail." The majority of US warrants are from small, relatively risky firms. Newly issued warrants usually originate in conjunction with an initial public offering.
Some warrants are called "B" warrants. These come about from the exercise of an "A" warrant that allows its owner to trade the warrant for shares of stock and a "B" warrant with a higher exercise price than the "A" warrant.
Looking at warrant population by stock price range, the majority are from a firm whose stock price is low. While there may be no inherent reason why a low-priced stock should be risky, it is an empirical observation that a low stock price is frequently associated with higher relative risk.
A warrant is much like a long-term call option issued by the underlying company. The warrant holder has the right but not the obligations, to buy shares at a set price during the life of the warant. Warrants provide leverage in the same fashion as an option.
Warrants and leverage
Speculators buy warrants because of the leverage they provide.
Example:
CBrand
Number of warrants to buy 1 share: 1
Exercise price: $19.23
Expiration: 3-10-09
Warrant price: $10.00
Stock price: $27.46
Suppose someone believes that CBrand is an attractive investment and wants to put about $5000 into the company. The speculator could buy either:
$5000/$10 per warrant = 500 warrants
or
$5000/$27.46 per share = 182 shares
Suppose at the end of the warrant's life in 2009, CBrand stock sells for $40.00.
With an exercise price of $19.23, the warrants would be worth $40.00 - $19.23 = $20.77.
The holding of 500 warrants would be worth $10,385.
The 182 shares of stock would be worth $7,280.
The respective holding period returns are as follows:
Warrants: ($10,385 - $5,000)/$5,000 = 107.7%
Stock: ($7,280 - $5,000) / $5,000 = 45.6%
CBrand pays a dividend, so the value of the dividend should be included in the stock holding period calculation in order for the comparison to be fair. Shareholders are entitled to declared dividends; warrant holders are not.
Example:
CBrand
Number of warrants to buy 1 share: 1
Exercise price: $19.23
Expiration: 3-10-09
Warrant price: $10.00
Stock price: $27.46
Suppose someone believes that CBrand is an attractive investment and wants to put about $5000 into the company. The speculator could buy either:
$5000/$10 per warrant = 500 warrants
or
$5000/$27.46 per share = 182 shares
Suppose at the end of the warrant's life in 2009, CBrand stock sells for $40.00.
With an exercise price of $19.23, the warrants would be worth $40.00 - $19.23 = $20.77.
The holding of 500 warrants would be worth $10,385.
The 182 shares of stock would be worth $7,280.
The respective holding period returns are as follows:
Warrants: ($10,385 - $5,000)/$5,000 = 107.7%
Stock: ($7,280 - $5,000) / $5,000 = 45.6%
CBrand pays a dividend, so the value of the dividend should be included in the stock holding period calculation in order for the comparison to be fair. Shareholders are entitled to declared dividends; warrant holders are not.
Extending the life of out-of-the-money warrant
Companies sometimes extend the life of an out-of-the-money (stock price is less than exercise price) warrant as it nears expiration. The exercise of warrants is a relatively inexpensive source of new capital for the firm. Management may not want to let the opportunity pass.
Extending the life of a warrant will immediately add value to it. A nearly worthless expiring warrant is likely to jump several dollars in value if the firm extends its life a few years.
The actual price change would depend on:
Extending the life of a warrant will immediately add value to it. A nearly worthless expiring warrant is likely to jump several dollars in value if the firm extends its life a few years.
The actual price change would depend on:
- the stock/exercise price relationship,
- the added term of the warrant, and
- the anticipated volatility of the stock over the extension period.
Pricing of Warrants (illustrations)
Illustrations
AR warrant.
Exercise price $7.32
Current stock price $11.95
This warrant is in-the-money.
It must sell for at least its intrinsic value of $11.95-$7.32 = $4.63, which it does.
Market price of warrant $5.00, represents a $0.37 premium over the warrant's intrinsic value.
GC warrant
4 warrants to buy 1 share at $6.60
Current stock price $19.72
What is the minimum value for which this warrant should sell?
http://www.klse.com.my/website/bm/market_information/market_statistics/equities/downloads/warrants_info.pdf
AR warrant.
Exercise price $7.32
Current stock price $11.95
This warrant is in-the-money.
It must sell for at least its intrinsic value of $11.95-$7.32 = $4.63, which it does.
Market price of warrant $5.00, represents a $0.37 premium over the warrant's intrinsic value.
GC warrant
4 warrants to buy 1 share at $6.60
Current stock price $19.72
What is the minimum value for which this warrant should sell?
Current stock price > exercise price by $19.72-$6.60 - $13.12.
This amount would be the intrinsic value of the warrant if each warrant permitted the purchase of one share.
Because 4 warrants are required, the intrinsic value declines proportionately: $13.12/4 = $3.28.
This amount is the minimum value at which the warrant should sell.
http://www.klse.com.my/website/bm/market_information/market_statistics/equities/downloads/warrants_info.pdf
Pricing of Warrants
The most important factor influencing the market price of a warrant is the relationship between the price of the underlying common stock and the price at which the investor may buy shares - the exercise price.
The warrant is in-the-money: stock price > exercise price
The warrant is out-of-the money: stock price < exercise price.
When the warrant is in-the-money, it has intrinsic value.
Minimum, maximum and actual market values of a warrant.
If it takes one warrant to buy one shae of stock, then the effective exercise price is the same as the stated exercise price.
If however, a single warrant with an exercise price of $10 allows you to buy 2 shares of a stock, the effective exercise price is $5.
Effective exercise price = Exercise price/conversion ratio
As Standard & Poor's warns, "trading terms and basis should be checked in detail." An investor should always check the effective exercise price, which is the stated exercise price divided by the conversion ratio. It is the amount of money needed to buy one share of the stock.
Assuming a conversion ratio of 1:1, it would not make sense for the warrant to ever sell for more than the value of the underlying asset. The theoretical maximum price of a warrant is therefore equal to the stock price. (For instance, if one share of the stock sells for $25, no rational person would be willing to pay more than $25 for the right to buy a share, even if the warrant exercise price were zero.)
The theoretical minimum value is the warrant's intrinsic value. This is the greater of zero and the amount by which the stock price exceeds the exercise price. (Given a stock price of $25 and an exercise price of $20, this warrant should always sell for at least $5. If not, arbitrage would be present.)
Actual warrant prices fall between the two extremes. The gap between the market price of the warrant and its minimum value is largest when the stock price equals the exercise price. As the stock price rises or falls from this point, the gap narrows.
The warrant is in-the-money: stock price > exercise price
The warrant is out-of-the money: stock price < exercise price.
When the warrant is in-the-money, it has intrinsic value.
Minimum, maximum and actual market values of a warrant.
If it takes one warrant to buy one shae of stock, then the effective exercise price is the same as the stated exercise price.
If however, a single warrant with an exercise price of $10 allows you to buy 2 shares of a stock, the effective exercise price is $5.
Effective exercise price = Exercise price/conversion ratio
As Standard & Poor's warns, "trading terms and basis should be checked in detail." An investor should always check the effective exercise price, which is the stated exercise price divided by the conversion ratio. It is the amount of money needed to buy one share of the stock.
Assuming a conversion ratio of 1:1, it would not make sense for the warrant to ever sell for more than the value of the underlying asset. The theoretical maximum price of a warrant is therefore equal to the stock price. (For instance, if one share of the stock sells for $25, no rational person would be willing to pay more than $25 for the right to buy a share, even if the warrant exercise price were zero.)
The theoretical minimum value is the warrant's intrinsic value. This is the greater of zero and the amount by which the stock price exceeds the exercise price. (Given a stock price of $25 and an exercise price of $20, this warrant should always sell for at least $5. If not, arbitrage would be present.)
Actual warrant prices fall between the two extremes. The gap between the market price of the warrant and its minimum value is largest when the stock price equals the exercise price. As the stock price rises or falls from this point, the gap narrows.
The Problem with Big Losses
Risky situation must involve a chance of loss.
Suppose the possible returns on an investment fall into a normal distribution curve. This distribution shows this investment has an expected return of 9.5%. Standard statistical thinking tells use if we invest in this stocka nd hold it, some years we will have high rturns and some years low returns, but that, on average, the return will be 9.5%. This assumption is true, but it is also a potentially misleading result.
To see why, suppose an investor buys this stock and holds it 10 years. In each of 9 of those years, the stock advances 20%; in the other year it falls 90%. The 10-year arithmetic average return is 9%, slightly below the return predicted by the distribution. A $1,000 invesment, howver, would be worth only $1,000(1.20)^9*(0.10) = $516, less than the starting value! The compound annual rate of return is a negative 6.40%.
The lesson is that a large one period loss can overwhelm a series of gains. If an initial investment falls by 50%, for instance, it must gain 100% to return to its original value. Big losses complicate actual returns, and investors learn to avoid situations where they may lurk.
Suppose the possible returns on an investment fall into a normal distribution curve. This distribution shows this investment has an expected return of 9.5%. Standard statistical thinking tells use if we invest in this stocka nd hold it, some years we will have high rturns and some years low returns, but that, on average, the return will be 9.5%. This assumption is true, but it is also a potentially misleading result.
To see why, suppose an investor buys this stock and holds it 10 years. In each of 9 of those years, the stock advances 20%; in the other year it falls 90%. The 10-year arithmetic average return is 9%, slightly below the return predicted by the distribution. A $1,000 invesment, howver, would be worth only $1,000(1.20)^9*(0.10) = $516, less than the starting value! The compound annual rate of return is a negative 6.40%.
The lesson is that a large one period loss can overwhelm a series of gains. If an initial investment falls by 50%, for instance, it must gain 100% to return to its original value. Big losses complicate actual returns, and investors learn to avoid situations where they may lurk.
Understanding Warrant
For example:
WARRANTS xx07/xx16
- new ordinary share at an exercise price of RM0.40 per ordinary share.
- The exercise period is 9 years from the date of issuance which will expire on xx, May xx16.
-----
Illustration:-
Today's Share Price: 14.40
Warrant's Price: 10.80
Exercise Price: 5.30
Quantity: 60,000,000 free detachable warrants
In-the-money:
Market price of mother share > exercise price
Intrinsic value of warrant
= Market share price - Exercise price of warrant
= 14.40 - 5.30 = 9.10.
Therefore, you can exercise your right to buy the mother share at the exercise (lower) price to sell at the market (higher) price.
Premium:
Premium paid for the warrant
= Warrant market price - Intrinsic value of warrant
= 10.80 - 9.10
= 1.70
The premium paid is 1.70 (1.70/9.10 = 18.7%) over the warrant's intrinsic value.
Premiums (over the warrant's intrinsic value) are commonly used as a quick measure of the warrant's expensiveness. Because warrants are issued at a premium, investors must consider if it can appreciate to a level that allows recovery of the paid premium within the warrant's lifespan.
While warrants can offer a smart addition to a portfolio, keep in mind the following - your view of the underlying share is important; understand the unique nature of warrants and stay attentive to small movements in the market.
Cash extraction:
Assuming mother share increased to $2.00 and warrants also increased, to $1.58.
One can sell the mother share and invest some of these money into its warrants. Effectively, you would have decreased your invested capital (extracted cash of 0.42 per share) while maintaining exposure to further upside.
WARRANTS xx07/xx16
- new ordinary share at an exercise price of RM0.40 per ordinary share.
- The exercise period is 9 years from the date of issuance which will expire on xx, May xx16.
-----
Illustration:-
Today's Share Price: 14.40
Warrant's Price: 10.80
Exercise Price: 5.30
Quantity: 60,000,000 free detachable warrants
In-the-money:
Market price of mother share > exercise price
Intrinsic value of warrant
= Market share price - Exercise price of warrant
= 14.40 - 5.30 = 9.10.
Therefore, you can exercise your right to buy the mother share at the exercise (lower) price to sell at the market (higher) price.
Premium:
Premium paid for the warrant
= Warrant market price - Intrinsic value of warrant
= 10.80 - 9.10
= 1.70
The premium paid is 1.70 (1.70/9.10 = 18.7%) over the warrant's intrinsic value.
Premiums (over the warrant's intrinsic value) are commonly used as a quick measure of the warrant's expensiveness. Because warrants are issued at a premium, investors must consider if it can appreciate to a level that allows recovery of the paid premium within the warrant's lifespan.
While warrants can offer a smart addition to a portfolio, keep in mind the following - your view of the underlying share is important; understand the unique nature of warrants and stay attentive to small movements in the market.
Cash extraction:
Assuming mother share increased to $2.00 and warrants also increased, to $1.58.
One can sell the mother share and invest some of these money into its warrants. Effectively, you would have decreased your invested capital (extracted cash of 0.42 per share) while maintaining exposure to further upside.
Including Warrant in your Portfolio
A warrant is a specialized investment tool with its own language; call warrants, in-the-money warrants (a warrant with an exercise price which is below the market price of its underlying security), gearing and premiums are among the terms used. It's important to understand the main aspects of this vehicle before including it in your portfolio.
A warrant is a derivative, meaning it 'derives' its value from its underlying share. This is why the performance of a warrant will always depend on the performance of its underlying share.
A small movement in the price of the mother share can result in a surge or fall in the value of your warrant. Thus, expect this to happen and choose strategies that leverage and profit from this behavior.
Unlike a share, warrants carry an expiry date. The warrant tends to lose its value when it's close to expiring. Once it expires, it has no value and you lose the capital invested to buy the warrant. Buying and holding, as you would a share, is why 90% of warrant traders lose their capital.
If the underlying share price is above the warrant strike price (the predetermined price that the warrant holder is entitled to purchase or sell in the case of put warrant the underlying security), your call warrant is said to be in-the-money and you can exercise your right to buy the mother share at the strike (lower) price to sell at the market (higher) price.
There are costs involved when buying warrants - transaction costs and the time lag before you receive the underlying share after exercising the warrant. There're also occasions when a warrant trades at a discount. This incurs when the strike price and the cost to obtain the warrant are less than the price of the underlying share. Even tough this may look like an opportunity to make arbitrage profit, however, the risk of the underlying share price falling during the period between receiving the shares from exercising the warrant and their sale.
The whole process can take up to a month, during which the mother share can move in any direction. Warrants can also trade at a discount if the underlying share has just enjoyed spectacular run in price. Investors should avoid buying these discount warrants if they feel the high price of the mother share is unsustainable.
Warrants are the domain of short run traders. Some analysts recommend a particular trading strategy known as cash extraction. This strategy can be executed if you're holding a particular share that has appreciated in value. By selling the share and investing some of the proceeds into its warrants, you decrease your invested capital while maintaining exposure to further upside.
Many investors also trade in warrants because they sell at a fraction of the price of the underlying share and their leverage effect (a characteristic of warrants that enables the holder to enjoy larger percentage returns than the underlying security, at a lower price) allows the investors making bigger percentage gains when compared with conventional share investments.
For instance, share ABC may gain 30cent to close at $1.80, representing an increase of 20%, but a similar gain of 30cent for warrant ABC (from 50cent) to 80cent is an equivalent gain of 60%.
When the price paid for the warrant as well as its strike price is higher than the price of the underlying share, the warrant is trading at a premium. Meaning, the warrant's premium can crudely measure how much more expensive it is to acquire a share via a warrant compared with buying the share directly. Premiums are commonly used as a quick measure of the warrant's expensiveness. Because warrants are issued at a premium, investors must consider if it can appreciate to a level that allows recovery of the paid premium within the warrant's lifespan.
Another important factor to consider when selecting a warrant is volatility. A high volatility warrant, even though more expensive, can very well generate more money than a low volatility warrant. High volatility means that the underlying share is more likely making big swings.
While warrants can offer a smart addition to a portfolio, keep in mind the following - your view of the underlying share is important; understand the unique nature of warrants and stay attentive to small movements in the market.
http://ezinearticles.com/?Investing:-Warrant&id=291064
A warrant is a derivative, meaning it 'derives' its value from its underlying share. This is why the performance of a warrant will always depend on the performance of its underlying share.
A small movement in the price of the mother share can result in a surge or fall in the value of your warrant. Thus, expect this to happen and choose strategies that leverage and profit from this behavior.
Unlike a share, warrants carry an expiry date. The warrant tends to lose its value when it's close to expiring. Once it expires, it has no value and you lose the capital invested to buy the warrant. Buying and holding, as you would a share, is why 90% of warrant traders lose their capital.
If the underlying share price is above the warrant strike price (the predetermined price that the warrant holder is entitled to purchase or sell in the case of put warrant the underlying security), your call warrant is said to be in-the-money and you can exercise your right to buy the mother share at the strike (lower) price to sell at the market (higher) price.
There are costs involved when buying warrants - transaction costs and the time lag before you receive the underlying share after exercising the warrant. There're also occasions when a warrant trades at a discount. This incurs when the strike price and the cost to obtain the warrant are less than the price of the underlying share. Even tough this may look like an opportunity to make arbitrage profit, however, the risk of the underlying share price falling during the period between receiving the shares from exercising the warrant and their sale.
The whole process can take up to a month, during which the mother share can move in any direction. Warrants can also trade at a discount if the underlying share has just enjoyed spectacular run in price. Investors should avoid buying these discount warrants if they feel the high price of the mother share is unsustainable.
Warrants are the domain of short run traders. Some analysts recommend a particular trading strategy known as cash extraction. This strategy can be executed if you're holding a particular share that has appreciated in value. By selling the share and investing some of the proceeds into its warrants, you decrease your invested capital while maintaining exposure to further upside.
Many investors also trade in warrants because they sell at a fraction of the price of the underlying share and their leverage effect (a characteristic of warrants that enables the holder to enjoy larger percentage returns than the underlying security, at a lower price) allows the investors making bigger percentage gains when compared with conventional share investments.
For instance, share ABC may gain 30cent to close at $1.80, representing an increase of 20%, but a similar gain of 30cent for warrant ABC (from 50cent) to 80cent is an equivalent gain of 60%.
When the price paid for the warrant as well as its strike price is higher than the price of the underlying share, the warrant is trading at a premium. Meaning, the warrant's premium can crudely measure how much more expensive it is to acquire a share via a warrant compared with buying the share directly. Premiums are commonly used as a quick measure of the warrant's expensiveness. Because warrants are issued at a premium, investors must consider if it can appreciate to a level that allows recovery of the paid premium within the warrant's lifespan.
Another important factor to consider when selecting a warrant is volatility. A high volatility warrant, even though more expensive, can very well generate more money than a low volatility warrant. High volatility means that the underlying share is more likely making big swings.
While warrants can offer a smart addition to a portfolio, keep in mind the following - your view of the underlying share is important; understand the unique nature of warrants and stay attentive to small movements in the market.
http://ezinearticles.com/?Investing:-Warrant&id=291064
KLSE Market PE is 19.70
09.07.09
PE Ratio
19.70
Div Yield
3.47
Price/Bk Value
1.90
KLSE CI
1065.68
02.07.09
PE Ratio
17.63
Div Yield
3.54
Price/Bk Value
1.61
KLSE CI
1078.71
03.07.08
PE Ratio
10.24
Div Yield
3.74
Price/Bk Value
1.82
KLSE CI
1153.70
http://spreadsheets.google.com/ccc?key=tfdJmkOsX8p5jmD7g1FgrIw
Even in this bullish environment, one can still look for bargains. Time for another rebalancing of my portfolio.
PE Ratio
19.70
Div Yield
3.47
Price/Bk Value
1.90
KLSE CI
1065.68
02.07.09
PE Ratio
17.63
Div Yield
3.54
Price/Bk Value
1.61
KLSE CI
1078.71
03.07.08
PE Ratio
10.24
Div Yield
3.74
Price/Bk Value
1.82
KLSE CI
1153.70
http://spreadsheets.google.com/ccc?key=tfdJmkOsX8p5jmD7g1FgrIw
Even in this bullish environment, one can still look for bargains. Time for another rebalancing of my portfolio.
Wednesday, 15 July 2009
Market PE
The largest companies on Bursa Malaysia ranked by market capitalization.
Market Capitalization 580,236.6
Net Profit 41,161.1
Market PE 14.1
http://www.horizon.my/investor/list.php
1 SIME 6,009.5 7.350 44,169.8 34,044.7 3,512.1
2 MAYBANK 7,077.7 5.900 41,758.4 16,153.9 2,928.2
3 PBBANK 3,531.9 9.950 35,142.4 10,500.3 2,622.7
4 COMMERZ 3,578.1 9.700 34,707.6 - 1,952.0
5 TENAGA 4,334.6 7.900 34,243.3 25,750.6 2,594.0
6 MISC 3,719.8 8.550 31,804.3 12,957.4 2,430.3
7 IOICORP 6,150.6 4.660 28,661.8 14,665.4 2,231.6
8 AXIATA 8,445.1 2.700 22,801.8 11,347.7 498.0
9 GENTING 3,703.8 5.650 20,926.5 9,082.5 569.3
10 PETGAS 1,978.7 9.800 19,391.3 3,125.7 1,092.9
11 DIGI 777.5 22.000 17,105.0 4,814.5 1,140.7
12 PLUS 5,000.0 3.180 15,900.0 2,968.0 1,079.3
13 PPB 1,185.5 12.000 14,226.0 3,462.0 1,286.5
14 BAT 285.5 44.750 12,776.1 4,135.2 811.7
15 KLK 1,067.5 11.900 12,703.3 7,855.4 1,040.7
16 YTLPOWR 5,464.2 2.170 11,857.3 4,242.5 1,038.8
17 YTL 1,658.8 6.850 11,362.8 6,549.9 769.8
18 TM 3,577.4 2.950 10,553.3 8,674.9 791.9
19 AMMB 2,723.0 3.680 10,020.6 5,860.7 860.8
20 RHBCAP 2,153.5 4.420 9,518.5 - 1,048.7
21 HLBANK 1,580.1 5.850 9,243.6 - 741.8
22 PETDAG 993.5 8.300 8,246.1 22,301.6 661.7
23 NESTLE 234.5 32.000 7,504.0 3,877.1 340.9
24 MMCCORP 3,045.0 2.300 7,003.5 8,545.0 527.3
25 ASTRO 1,934.0 3.480 6,730.3 2,601.7 -6.2
26 UMW 1,080.7 6.050 6,538.2 12,769.6 565.8
27 TANJONG 403.3 14.400 5,807.5 3,693.9 463.8
28 GAMUDA 2,003.2 2.870 5,749.2 2,403.7 325.1
29 BJTOTO 1,351.0 4.240 5,728.2 3,277.8 348.7
30 HLFG 1,052.8 4.960 5,221.9 - 528.7
31 PARKSON 1,036.4 4.940 5,119.8 2,354.0 448.0
32 LMCEMNT 849.7 6.000 5,098.2 2,530.8 367.7
33 IJM 859.4 5.800 4,984.5 4,637.2 -420.5
34 MAS 1,671.0 2.970 4,962.9 15,035.3 244.3
35 BJLAND 1,144.9 3.800 4,350.6 1,516.1 1,110.8
36 SPSETIA 1,008.9 3.900 3,934.7 1,328.3 213.5
37 AIRPORT 1,100.0 3.520 3,872.0 1,384.7 288.9
38 BURSA 523.7 7.250 3,796.8 290.3 104.4
39 BKAWAN 436.0 8.600 3,749.6 284.1 505.5
40 AFG 1,548.1 2.270 3,514.2 - 380.0
41 F&N 356.5 9.100 3,244.2 2,865.1 152.9
42 EONCAP 693.2 4.600 3,188.7 - 133.8
43 SHELL 300.0 10.400 3,120.0 13,086.1 -330.0
44 MAYBULK 1,000.0 3.080 3,080.0 721.2 460.9
45 KLCCP 934.1 3.220 3,007.8 843.0 441.6
46 SARAWAK 1,519.0 1.930 2,931.7 1,339.3 275.6
47 AIRASIA 2,372.4 1.200 2,846.9 1,603.3 498.0
48 BJCORP 3,047.4 0.910 2,773.1 3,465.8 616.5
49 BSTEAD 651.0 4.060 2,643.1 7,029.8 578.8
50 AFFIN 1,494.4 1.750 2,615.2 2,115.4 292.8
Market Capitalization 580,236.6
Net Profit 41,161.1
Market PE 14.1
http://www.horizon.my/investor/list.php
1 SIME 6,009.5 7.350 44,169.8 34,044.7 3,512.1
2 MAYBANK 7,077.7 5.900 41,758.4 16,153.9 2,928.2
3 PBBANK 3,531.9 9.950 35,142.4 10,500.3 2,622.7
4 COMMERZ 3,578.1 9.700 34,707.6 - 1,952.0
5 TENAGA 4,334.6 7.900 34,243.3 25,750.6 2,594.0
6 MISC 3,719.8 8.550 31,804.3 12,957.4 2,430.3
7 IOICORP 6,150.6 4.660 28,661.8 14,665.4 2,231.6
8 AXIATA 8,445.1 2.700 22,801.8 11,347.7 498.0
9 GENTING 3,703.8 5.650 20,926.5 9,082.5 569.3
10 PETGAS 1,978.7 9.800 19,391.3 3,125.7 1,092.9
11 DIGI 777.5 22.000 17,105.0 4,814.5 1,140.7
12 PLUS 5,000.0 3.180 15,900.0 2,968.0 1,079.3
13 PPB 1,185.5 12.000 14,226.0 3,462.0 1,286.5
14 BAT 285.5 44.750 12,776.1 4,135.2 811.7
15 KLK 1,067.5 11.900 12,703.3 7,855.4 1,040.7
16 YTLPOWR 5,464.2 2.170 11,857.3 4,242.5 1,038.8
17 YTL 1,658.8 6.850 11,362.8 6,549.9 769.8
18 TM 3,577.4 2.950 10,553.3 8,674.9 791.9
19 AMMB 2,723.0 3.680 10,020.6 5,860.7 860.8
20 RHBCAP 2,153.5 4.420 9,518.5 - 1,048.7
21 HLBANK 1,580.1 5.850 9,243.6 - 741.8
22 PETDAG 993.5 8.300 8,246.1 22,301.6 661.7
23 NESTLE 234.5 32.000 7,504.0 3,877.1 340.9
24 MMCCORP 3,045.0 2.300 7,003.5 8,545.0 527.3
25 ASTRO 1,934.0 3.480 6,730.3 2,601.7 -6.2
26 UMW 1,080.7 6.050 6,538.2 12,769.6 565.8
27 TANJONG 403.3 14.400 5,807.5 3,693.9 463.8
28 GAMUDA 2,003.2 2.870 5,749.2 2,403.7 325.1
29 BJTOTO 1,351.0 4.240 5,728.2 3,277.8 348.7
30 HLFG 1,052.8 4.960 5,221.9 - 528.7
31 PARKSON 1,036.4 4.940 5,119.8 2,354.0 448.0
32 LMCEMNT 849.7 6.000 5,098.2 2,530.8 367.7
33 IJM 859.4 5.800 4,984.5 4,637.2 -420.5
34 MAS 1,671.0 2.970 4,962.9 15,035.3 244.3
35 BJLAND 1,144.9 3.800 4,350.6 1,516.1 1,110.8
36 SPSETIA 1,008.9 3.900 3,934.7 1,328.3 213.5
37 AIRPORT 1,100.0 3.520 3,872.0 1,384.7 288.9
38 BURSA 523.7 7.250 3,796.8 290.3 104.4
39 BKAWAN 436.0 8.600 3,749.6 284.1 505.5
40 AFG 1,548.1 2.270 3,514.2 - 380.0
41 F&N 356.5 9.100 3,244.2 2,865.1 152.9
42 EONCAP 693.2 4.600 3,188.7 - 133.8
43 SHELL 300.0 10.400 3,120.0 13,086.1 -330.0
44 MAYBULK 1,000.0 3.080 3,080.0 721.2 460.9
45 KLCCP 934.1 3.220 3,007.8 843.0 441.6
46 SARAWAK 1,519.0 1.930 2,931.7 1,339.3 275.6
47 AIRASIA 2,372.4 1.200 2,846.9 1,603.3 498.0
48 BJCORP 3,047.4 0.910 2,773.1 3,465.8 616.5
49 BSTEAD 651.0 4.060 2,643.1 7,029.8 578.8
50 AFFIN 1,494.4 1.750 2,615.2 2,115.4 292.8
Beautiful Nestle (M) 19 year chart
Chart 1: Nestle M's daily chart for the past 19 years (Source: Tradesignum)
http://nexttrade.blogspot.com/2009/07/nestle-m-time-to-take-profit.html
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