Value & Growth Investing Criteria

[kermit345]

Possibly skc, although Rome wasn't built in a day

Today's HSN announcement looks like earnings growth continues to occur and very likely that EPS will be around the 8cps mark as indicated in my EPS chart above. As we move into the new Financial Year and reporting season, that forecast may become reality with a new current IV of around $1.16 meaning my 25% MOS is there based on current share price. Anyway, probably shouldn't hijack the thread about HSN, but happy to discuss further in PM or on stock chat forum.

 

[Noddy]

Possibly skc, although Rome wasn't built in a day

Today's HSN announcement looks like earnings growth continues to occur and very likely that EPS will be around the 8cps mark as indicated in my EPS chart above. As we move into the new Financial Year and reporting season, that forecast may become reality with a new current IV of around $1.16 meaning my 25% MOS is there based on current share price. Anyway, probably shouldn't hijack the thread about HSN, but happy to discuss further in PM or on stock chat forum.

After today's announcement have re-valued HSN to $1.13 using 9c EPS for 2010/11, and a growth rate of 8% going forward. On that basis (using DCF) have bought some more around 90c.
Probably also hijacking the thread to HSN, but we are discussing methods of valuation using HSN as a comparitive example

 

[notabclearning]

Kermit please release your excellent program to the public. It would help everybody tremendously!!!

 

[kermit345]

I dont mind helping people out with excel equations, graphing, valuation questions, my approach or anything like that, but don't plan on handing out the spreadsheet i've put together which contains all my personal equations and hard work inside it.

Investing isn't easy and I think you'll find if you put in the effort to create your own spreadsheet or program that it is both rewarding and gives you greater insight into how YOU would like to value companies.

 

[Noddy]

I dont mind helping people out with excel equations, graphing, valuation questions, my approach or anything like that, but don't plan on handing out the spreadsheet i've put together which contains all my personal equations and hard work inside it.

Investing isn't easy and I think you'll find if you put in the effort to create your own spreadsheet or program that it is both rewarding and gives you greater insight into how YOU would like to value companies.

Kermit,
Agree with you 100%. We all need to do our own work and develop our own methods of investing. Nice to share ideas with others from time to time, but ultimately we all need to learn and develop our own trading plan.

 

[kermit345]

Well investing is like shoes, theres not one size that fits everyone. If you start trading someone elses plan or using their spreadsheet/strategy what happens if something goes wrong and you've played no part in developing it yourself.

Investing the time to learn and progress your own methods will have great rewards both in terms of your eventual returns but also your knowledge. Forums are a great starting place but sooner or later steps have to be taken alone.

Noddy, interesting your valuation on HSN comes to $1.13 now with estimated 9cps earnings. My valuation comes to $1.16 with estimated 8cps earnings. I think your equation is slightly more conservative or mine is slightly more optomistic, depending on which way you look at it. Although we seem to both be in the same ballpark which suggests were on the same line of thought.

 

[Noddy]

Agree.

DCF valuation places the main emphasis on forward earnings.

So downrates valuations on stocks such as DWS or MOC that are showing little or no growth, but gives higher valuations on stocks such as TGA or HSN that are continually growing.

But growth stocks are the best to be in. If only interested in high dividends, best to leave your money in TLS etc. or on fixed deposit at the CBA maybe, and just collect the interest.

Problem with DCF calculations, however, is the difficulty in estimating forward earnings. Many things can go wrong as you know.

So I tend to use the current years increase( TGA 13% for example) and extrapolate that percentage or usually a percentage shaved down a bit lower to allow a margin. Can always upgrade if they do better.

Then look for a margin of safety, usually min. of 15% - 20%, but higher if possible.
Very difficult to find now with the XAO around 4800 or so.

Really impressed with your system though, but wouldn't have the computer skills (or the patience either) to develop something as good as that.

Good luck with your trading in the future.

 

[Macros]

For what its worth, my (forward) target price for HSN is $0.91.

Therefore I don't view this as an undervalued company. In fact, over time the market seems fairly consistent at pricing HSN to perfection. Given the historical swings in price, it would indicate that there have been some great buying opportunities when it has taken a swing.

Whilst the company doesn't not present great value currently, it has proven to be able to consistently grow its value over time and should it continue to do so in to the future, it should prove to be a solid company.

 

[Macros]

I've had a look recently and have found some value in the market but one has to be selective. This is probably a good sign that we aren't in an extreme environment (global monetary/fiscal issues aside).

Many companies that I've looked at over the past couple of weeks are, on average, roughly where I think they should be.

My view is that we could continue be in a relatively flat market, with some swings, for quite some time. The thing that will change this outcome is a matter of inflation and interest rates. I think timing is important and unfortunately it means that if you are investing industrial stocks, it is probably worthwhile managing capital on an ongoing basis with additions in the dips and by taking some off the table with the up swings - it helps to know when to do this when having a solid understanding of value and does not require technical analysis (although I've learned that it can help time buys and sells once value has been identified).

For example, in March I sold FGE due to it being reasonably close to my target price, I had better value opportunities for my capital and I'm concerned that it could be impacted by margin compression and increased competition over the next couple of years.

I also sold down some of my MCE in March (still hold some but a smaller part of my portfolio) also due to concern with regards to margins and exchange rates and also again finding better elsewhere. I still see value in MCE.

Whilst I've found some discounts (e.g. you mentioned TGA and I have a forward MOS of around 39%) I can't look past the precious metals or the oil and gas space as there are some companies that scream value to me. They also fit in with my view of what is happening from a macro point of view with regards to a sustained period of easy money globally and sovereign debt crises.

 

[Noddy]

For what its worth, my (forward) target price for HSN is $0.91.

Therefore I don't view this as an undervalued company. In fact, over time the market seems fairly consistent at pricing HSN to perfection. Given the historical swings in price, it would indicate that there have been some great buying opportunities when it has taken a swing.

Interesting post Macros.

On the basis that anything is only worth what someone is prepared to pay for it, and someone else is prepared to sell it for, all stock prices are exactly priced to perfection at any one moment.

Interested in what method you are using to value companies, in particular HSN which is being used in this thread as an example of stock valuation.

 

[Macros]

Noddy,

I go with the method supported by Roger Montgomery and with my own personal touches.

 

[Noddy]

Noddy,

I go with the method supported by Roger Montgomery and with my own personal touches.

Macros,

I have RM's book and have read it a couple of times and regularly read his blog.
Makes a lot of sense, but think the valuation method he uses based on ROE produces very conservative results, often well below what stocks are selling for eg, COH,WPL etc.

 

[Macros]

Noddy,

I find that in the end, it depends on the use of the model and expectations of future earnings. I don't believe that the most important factor is current value, I believe that the most important factor is future EPS and future value.

I have personally not come across a single stock that I have not been able to apply the model and my preference is to invest in precious metals, oil and gas.

I think the model works very well for WPL. The price for WPL is significantly over the IV consistently over recent years and therefore leads me to believe that the market has not priced in sufficient risk. WPL is a relatively risky business. My target price for WPL is $33 compared to current price of $47. Also, although it is in a good sector, if it cannot be exceptionally profitable now or in the next couple of years, I'm not sure when it will be. I think the market has been pricing in a risk rate of around 10%. If you think WPL is a lower risk business then the current price makes sense. I certainly don't see value in the current price, but then again I also don't think its a terrible business for the coming decade. I just choose to allocate my money to other companies in the same area but with substantial value to be realised.

Also, my modelling shows that 2004 would have been a good time to invest in WPL but there has not been any other good time. If you invested in 2005/06 at $30-40 then there has been no value gained and this is also predicted by the model.

With regards to COH, the market seems to be pricing in a risk rate of around 8%, which is exceptionally low, but is has proven to be a fantastic business. Given the significant increase in value that COH has generated, it would be easy to justify an investment without a margin of safety. It has increased its value every single year. The current target price based on the market's perception of risk is around $71 which is not far off the current price. However, this would also mean that you aren't protected if there were any black swan events that impact on the business.

In the end, price will move towards IV. This model works well. However the successful use of the model depends on the user's expectations of future growth and earnings. These issues require a lot more than just plugging in a number.

 

[Ves]

I am too trying to develop an intrinsic valuation method close to what Roger Montgomery endorses (ROE method).

As I am a beginner at this kind of thing I was wondering if I could get people's thoughts on the criteria that they use to decide what Internal Rate of Return to use for valuing companies?

I am thinking that companies with less risk would be 10%, and this would increase with any perceived risk. I wouldn't want to invest a company that I would apply an IRR of higher than maybe 16%.

Am I correct in saying that the higher the IRR used, the higher the Intrinsic Value will be, therefore making it less likely to be trading under IV on the market as there is more risk factored into the equation?

Do people also increase the IRR used in harsher economic conditions?

Am I on the right track?

 

[skip9]

Slowly developing my own view and criteria in what to assess companies on and compare to each other. I have a few ratio's and statistics that i think are the more important and are listed below;

Total Debt:
Debt-To-Equity (%):
Operating Cash Flow ($M):
Discount Cash Flow ($M):
EBIT ($M):
EBIT Margin (%):
Gross Margin (%):
Earnings Growth (%):
EPS Growth (%):
Return on Equity (%):
Liquidity:
Current Assets ($m):
Current Liabilities ($m):
Dividend Yield (%):

Whats the thoughts on this analysis criteria? and out of those what are the more important. I will be looking at these figures and comparing them between companies along with the Macro view of economics and intrinsic value measures.

Any feedback is appreciated.

 

[Julia]

Skip9, that's a long list. It's notable for its total omission of what the share price is doing.

 

[InvisbleInvestor]

Skip9, that's a long list. It's notable for its total omission of what the share price is doing.

Well, that's what value investing is all about. Turning the stock market off, valuing the business and then seeing if it trading at, or at a discount to its 'intrinsic' value. You can't have the share price as an input to find the 'value' of a business, as it is extremely volatile and (often does) move without any change in the fundamentals of the business itself.

The share price is only 'important' after a valuation has been made, and if it is a reasonable discount to the valuation. Have you read Roger Montgomery's book out of curiosity?

 

[Julia]

. Have you read Roger Montgomery's book out of curiosity?

No. I'm not a fundamental investor.

 

[Frankie]

I always check that the company I am about to do fundamental research on has low debt before proceeding. This is of high importance to me.

If a company has high debt I will probably avoid putting it through my fundamental analysis filters.

 

[skip9]

Skip9, that's a long list. It's notable for its total omission of what the share price is doing.

Julia, As InvisibleInvestor said, Share Price to me is irreverent until i find a company that i feel confident in investing in - then i'll look at the price to see if its at a price where i would be happy to be investing into the business. These are metrics of analysing businesses rather than share prices.

Frankie - Thanks, that is also key importance to me - low or no debt, a debt-to-equity ratio of below .75 is a maximum figure, but is also good at comparing these figures between two companies.