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: $ _____

------



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

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.

• 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.

Professional attempts at market timing have generally failed.

'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.

Low PE stocks may have high-risk earnings or low growth.

Low PE stocks may have

• 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]  

Then check for Risk using

• Beta or
• Debt to Equity Ratio. 

 

Assess growth and eliminate

• 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

Large growth stocks have only seen 9.9% annualized rate of return as compared to 11.5% for the large value stocks.

Growth Stocks

06.12.2009 | Author: Ahmad Hassam | Posted in real estate

When you start looking for good stocks, you often come across these terms like large cap, mid cap, small cap, growth and value. Let’s discuss these terms for a moment. Capitalization or cap refers to the combined value of all the share of a company’s stocks. The division between large cap, mid cap and small cap are often blurry and not sharp.

However the following divisions are generally accepted: Large caps are companies with over $5 Billion in capitalization. Mid caps are companies with $1 to $5 Billion in capitalization and small caps are companies with $250 million to $1 Billion in capitalization. Anything below $250 million can be considered as micro cap. Now the most important term that you come across is growth stocks and value stocks. How do you determine this is a growth stock or a value stock? Perhaps the most important ratio is the Price to Earnings Ratio (P/E).

Perhaps the most important ratio is the Price to Earnings Ratio (P/E). Now the most important term that you come across is growth stocks and value stocks. How do you determine this is a growth stock or a value stock? Suppose, company ABC stock is presently selling for $50. Now suppose that last year company ABC earned $5 for every share of the stock outstanding. This means stock ABC P/E ratio is 50/5=10. So the higher the P/E ratio, the more investors are willing to pay for the stock. What is the P/E ratio? The P/E ratio divides the price of the stock by the earnings per share.

Let’s make this clear with an example. Do you know how to read the balance sheet of a company? One of the most important things in doing research on a stock is the balance sheet of the company. Suppose, company ABC stock is presently selling for $50. Now suppose that last year company ABC earned $5 for every share of the stock outstanding. This means stock ABC P/E ratio is 50/5=10. So the higher the P/E ratio, the more investors are willing to pay for the stock. So what is the P/E ratio? The P/E ratio divides the price of the stock by the earnings per share. Over the years, studies have shown that the P/E ratio is somehow related with the growth of a company. Now the higher the P/E ratio, the more growth the company is supposed to have. So it can be either the company is growing real fast of the investor have high hopes of its growth. Now these hopes can be realistic or foolish, you never know!

Growth companies are usually adolescent companies usually in sectors like computers, technology, telecom while value companies are mature companies usually in sectors like insurance, banking, manufacturing. Now, if you follow financial news than you must know that the large growth companies always grab the headlines. But do the growth stocks really make best investment? The lower the P/E ratio, the more value the company has. Low P/E ratio companies are not considered to be the movers and shakers in the market. Is there any statistical study that can guide us as to the performance of these different categories of stocks? Eugene Fama did seminal research on stocks and stock market s in’70s. Most of his results were startling and broke many myths. According to Fama and French, two famous researchers who did ground breaking research on stocks, over the last 77 years, large growth stocks have only seen 9.9% annualized rate of return as compared to 11.5% for the large value stocks.

So most of these growth stocks become highly popular in a small period of time! Everyone rushes to buy these growth stocks thinking that they are great investments. The most probable cause seems to be their immense popularity. Since most of the headlines are captures by high growth companies, investors seem to think that they are the best investments. Now intuitively you might have thought that growth stocks are better. What can be the reason for their lower performance over the years?

Let’s go back to the IPO of Google. Think about Google, how its stock price shot up within a matter of weeks after it hit the market. Weeks after that it began to cool off. In 2007, Google stock was selling something around $500. So large growth stocks tend to get overpriced before you are able to buy them!

Mr. Ahmad Hassam has done Masters from Harvard University.
http://www.colorofcredit.com/growth-stocks/

Many Mutual Funds Are Up 50% in '09 — But Beware

Many Mutual Funds Are Up 50% in '09 — But Beware
By Janet Morrissey Sunday, Dec. 06, 2009


Read more: http://www.time.com/time/business/article/0,8599,1945880,00.html#ixzz0YydcoP0W


It's been a great year for many mutual fund investors. Standard & Poor's Equity Research reports that 165 equity mutual funds are up at least 47% through October 31st, or at least double the return of the S&P 500.

While investors in those funds should feel euphoric, S&P is quick to issue a warning to investors who might fall victim to those seductive returns. The S&P report, issued Friday, indicates that many of the best-performing funds relied on short-term strategies and paid little attention to the underlying fundamentals of the stocks in their portfolios, which could lead to a performance problem in 2010. "Using only a backward-looking approach to selecting funds [i.e., past performance] has significant flaws because it ignores the fundamentals of the stocks owned by the fund along with relevant risk and cost factors of the fund," the report said.

Of the 165 domestic equity funds that at least doubled the market's return, only 12% are ranked as S&P five-star funds. In fact, 19% are now ranked with a one- or two-star rating, effectively placing them in the bottom half of funds on overall attractiveness. "These funds have relatively weak fundamentals that contribute negatively to the ranking," S&P's analyst note in their report. The reasons cited for such low star rankings: Many own overvalued or risky stocks, have managers with short tenures, have high costs or offer poor long-term performance.

The S&P research team cited Hotchkis & Wiley Mid-Cap Value Fund, Legg Mason Capital Management Opportunities Trust and Fidelity Select Automotive Portfolio as examples of funds that had eye-popping 2009 returns, but are currently ranked as two-star funds by the S&P.

The Hotchkis & Wiley Mid-Cap Value Fund is up 52% so far this year, making it the fifth-best performing mid-cap value fund this year, according to Morningstar. However, S&P believes the fund's "volatile longer-term performance should give investors cause for concern." It noted that the fund significantly lagged its peer average in 2007 and 2008, pushing it into the bottom quartile on a three- and five-year total return basis. Also, S&P analysts contend the fund's securities are currently overvalued and pose risk based on their growth and consistency when it comes to historical earnings and dividends. It also cited the fund's cost factors as contributing to the fund's weaker ranking.

However, Stan Majcher, principal and portfolio manager of the Hotchkis & Wiley Mid-Cap Value Fund, disagrees. Majcher noted that his fund has a strong long-term performance record, as Morningstar currently ranks it the third best performing mid-cap fund when it comes to annualized returns over the past 10 years, with an annualized return of 10.85%. He acknowledges the fund underperformed in 2007 and 2008, but doesn't think these periods should be considered in isolation.

Majcher says his fund's strategy is to seek out stocks that are wrongly considered risky or overvalued. "We screen for and invest in securities that are misunderstood," he says. "We'll tend to have stocks that look like they have poor characteristics, but when you dig a lot deeper, they don't." He said many of these companies have "temporary issues" that will go away and lead to higher stock performance. His portfolio trades at less than 10 times earnings, which is not overvalued, Majcher contends. "The portolio trades at less than 10 times earnings and the market trades significantly higher than that - usually 14 or 15 times."

He also noted that he's been managing the portfolio since 1999, which should wipe out concerns about "short tenures."

"We've been around for 10 years and this isn't the first time we've screened poorly," Majcher says, "but we have actually have good performance over the period."

On the postive side, S&P named the Pin Oak Aggressive Stock fund as an example of a fund that performed strongly in 2009 and remains a good bet for 2010. The fund is up 71% so far in 2009 and "scored positively on S&P Fair Value and for its low-cost factors-components in the S&P fund ranking." The fund's portfolio manager, Mark Oelschlager, says his fund always seeks out stocks based on valuation and long-term investment. His fund started moving into cyclical stocks and increasing risk late last year at a time when "fear was rampant" in the market because "it was mispriced," he says. "We pay a lot of attention to valuation," adds Oeslschlager. "This paid off this year and we think it will pay off next year as well."

Oelschlager also noted that his firm keeps a low expense ratio, keeps trading costs down and manages its portfolio in a tax-efficient manner.

Such factors are the ones to consider, says S&P analyst Todd Rosenbluth, along with fundamentals, risk, performance track record and cost factors. "Before making a selection, make sure to look at not just the gains the fund may have achieved this year, but also aim to understand the fundamentals of its performance, risk and cost factors," he said, in a statement. "This year's top fund could repeat their success in 2010 or be next year's bottom funds."



Read more: http://www.time.com/time/business/article/0,8599,1945880,00.html#ixzz0YydSEPCl

AIG Reduces Fed Borrowings by $25 Billion

AIG Reduces Fed Borrowings by $25 Billion
By AP / STEPHEN BERNARD Tuesday, Dec. 01, 2009


(NEW YORK) — American International Group Inc. on Tuesday slashed the amount of money it owes the government by $25 billion as it moved two subsidiaries into special holding units ahead of their planned spinoff or sale.

AIG moved American International Assurance Co. and American Life Insurance Co. into special purpose vehicles, which are used ahead of a move to separate a unit from a parent company. The government is receiving preferred equity stakes in the two life insurance companies worth $25 billion in exchange for a reduction in the amount of money AIG owes the government.

AIG will continue to hold the common stakes in AIA and Alico until it determines whether to complete initial public offerings for the companies or sell them privately. No timetable yet has been announced for when an IPO or sale will be completed.

Shares of the conglomerate based in New York rose $1.49, or 5.2 percent, to $29.89 in premarket trading.

AIG was bailed out by the government last fall at the peak of the credit crisis. As losses continued to pile up, the government eventually extended AIG an aid package worth more than $180 billion. The government also received a nearly 80 percent stake in AIG in return for the support.

The insurance giant has been selling assets and spinning off divisions in an effort to help repay the government debt.

As of Sept. 30, AIG had tapped $122.31 billion of the aid package and owed the government $85.66 billion in loans. Tuesday's separation of AIA and Alico would reduce the outstanding aid package to $97.31 billion and the amount owed in loans to $60.66 billion. "AIG continues to make good on its commitment to pay the American people back," AIG CEO Robert Benmosche said in a statement.

The government received a preferred stake in AIA, an Asian life insurer with more than 20 million customers, worth $16 billion. The preferred stake in Alico, an international life insurance firm that operates in more than 50 countries around the world offering life and health insurance, is worth $9 billion.

AIG said it would take a $5.7 billion charge during the fourth quarter tied to accelerating the moves of AIA and Alico into separate, stand-alone units.

Benmosche reiterated AIG continues to expect volatility in quarterly results as the insurer continues to restructure its operations to repay the government.

The plan to separate AIA and Alico and give the government $25 billion in preferred shares of the two companies was first announced in late June. AIG had been discussing sales of the units as early as March.



Read more: http://www.time.com/time/business/article/0,8599,1943739,00.html#ixzz0Yy1gaCuf

Listing abroad not easy for local firms, insiders say (Vietnam)

Listing abroad not easy for local firms, insiders say

Last updated: Saturday, October 10, 2009 |
VnnNews - Listing procedures have proved difficult for Vietnamese firms aiming to sell shares on foreign stock markets.

The Hanoi-based infrastructure developer Cavico Corp. completed a “hard journey” in meeting all the requirements to become the first Vietnamese firm listed on the US national securities exchange NASDAQ last month, Chief Executive Officer Bui Quang Ha said.

“The listing procedure was a rigorous process, specifically the due diligence conducted by NASDAQ,” Ha said in a statement following the listing on September 18.

He said the company had consulted with the New York-based full-service investment bank Rodman & Renshaw LLC during the application while leading US law firm Sichenzia Ross Friedman Ference LLP represented Cavico during the process.

Cavico shares had been traded on the US OTC Bulletin Board under the ticker symbol CVIC before it was listed on NASDAQ, the largest US equities exchange.

“Following a comprehensive evaluation of all US exchanges, we determined that the NASDAQ Capital Market was the best fit for Cavico Corp.,” Ha said in the statement.

Trading of Cavico’s common stock commenced September 18 under the ticker symbol CAVO.

Founded in 2000, Hanoi-based Cavico Corp. focuses on large infrastructure projects, including hydropower facilities, bridges, tunnels, roads, and mines.

The PetroVietnam Finance Corp. (PVFC), a unit of Vietnam Oil & Gas Group, is now finalizing the documents needed to list on the Singapore Stock Exchange (SGX).

The company hopes to list during the second quarter of next year as Vietnam’s first credit organization listed abroad, Tong Quoc Truong, general director of PVFC, told Thanh Nien.

PetroVietnam, as the parent company is known, owns 78 percent of PetroVietnam Finance, which is the second-largest listed company on the Ho Chi Minh Stock Exchange.

Truong said the listing aimed to make the company brand known internationally, to mobilize funds from foreign investors and to expand its business across Asia, starting with Singapore.

Though advised by Morgan Stanley, a market leader in securities, Truong said it had been hard for the firm to fulfill all the listing procedures.

“There’re so many procedures that we’re still not sure how much farther we have to go from now until the listing.”

According to a stock expert who asked to remain anonymous, listing procedures are not the biggest problem as there are different options in every country.

Foreign exchange management regulations allow foreign investors to open an account in Vietnam and buy shares here, but not vice versa.

He said the system should be more equal for domestic and foreign investors.

The State Securities Commission in August began collecting its members’ opinions for a draft decree that would instruct domestic firms on how to list abroad.

Since 2007 many locally-listed firms have set overseas listing as a major goal, including Vietnam largest dairy firm Vinamilk (VNM) and PetroVietnam Drilling and Well Services Joint Stock Co. (PVD).

VietNamNet/TN

http://www.vnnnews.net/listing-abroad-not-easy-for-local-firms-insiders-say

With high grade apartments unsalable investors’ money remains buried (Vietnam)

With high grade apartments unsalable investors’ money remains buried

Last updated: Tuesday, October 6, 2009 |
VnnNews – Though prices of luxury apartments have been decreasing sharply, the demand for expensive products remains low.

Speculators complain capital has been ‘buried’ in apartments as they still have not been able to sell them for the last several months.

Phan Ha, an investor in district 1 of HCM City, said that he has two unsold high grade apartments worth nearly 6 billion dong ($20,761) at Blooming Park building. When it was launched, Ha had purchased the two apartments at 30 million dong per square metre as an investment.

However, to date, Ha still cannot sell the apartments, and the apartments’ prices have not seen any increases.

However, the address and location would appear to still be fashionable. Blooming Park is located next to Thu Thiem new urban area and the Metro Supermarket. Besides, the land area is not far from the East-West Boulevard, Thu Thiem tunnel, the belt road of Phu My Bridge and Tan Cang Industrial Zone.

Ha still cannot find buyers even when he is offering to sell the apartments at the original prices. However the prices at 2.8 billion dong ($164,700) and 3.1 billion dong ($182,352), still remain unattractive to buyers.

Other projects have also left products unsalable. Director of Tran Nao Branch of Vinaland Nguyen Xuan Loc said that high grade apartments are not proving popular these days. Few appear interested in the apartments at The Vista, Riverside or Sunrise projects.

Explaining the lack of lack of attraction, Ngo Duong Hoang Thao, Chairman of Dai Dong Duong Consultancy Company, said the supply of high grade apartments has exceeded demand.

Nguyen Thi Thanh Huong, Director of Tin Nghia real estate trading floor, said there has been little interest in high grade apartments on her trading floor, however, land plots are selling very well.

According to Thao, the main buyers of high grade apartments are secondary investors, who hope that they can sell the apartments later for profit.

However, secondary investors are quiet after suffering losses on other deals and the economic downturn has made people poorer, thus unable to afford expensive houses.

Meanwhile, low cost apartments are selling well. Le Thanh Company has sold its 134 apartments in Binh Tan district easily. The company’s Director Le Huu Nghia said that the apartments have been selling well due to their reasonable price of 6.5 million dong ($382) per square metre which is much lower than $1,300-2,000 per square metre of high grade apartments.

Phuoc Ha

http://www.vnnnews.net/with-high-grade-apartments-unsalable-investors-money-remains-buried