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wbosher
27-05-2010, 08:26 AM
I am going to be out of the stock market for probably at least six months, and am thinking about learning about the basics of FA during this time. I've heard the term "intrinsic value" floating about, and would like to learn how one calculates this value.

I've done a Google search on calculating this "intrinsic value" and it threw up several thousand web pages, most of which at first glance seem to contradict each other. I was wondering if anyone on this forum could give me some tips, or point me in the direction of a web site which will have some good basic information.

I only really want to know the basics at this stage since I use TA primarily, so don't want to be reading through a 400 page book or anything like that. If anyone can help me out, that would be very much appreciated. :D

ENP
27-05-2010, 08:39 AM
Read the book "The New Buffettology"

Best book on stocks I've ever read.

A good website here: http://www.investopedia.com/articles/01/071801.asp

darksentinel
27-05-2010, 08:55 AM
I'd recommend taking a look at The Intelligent Investor, by Bejamin Graham.
http://en.wikipedia.org/wiki/The_Intelligent_Investor

Oddly enough, I did my initial reading in the FA field, and am now starting to read about TA.

wbosher
27-05-2010, 09:29 AM
Read the book "The New Buffettology"

I read somewhere that trying to use Buffets method of investing isn't necessarily going to work for everyone, simply because of the amount of money he can invest.

He has a huge advantage over someone with only a few thousand $$$, and because he can buy massive amounts of shares in a company, he gets a say in how it runs. Also, he gets better access to company information and a direct relationship with management. All this is something the average Joe Blow like us can only dream of.

ENP
27-05-2010, 09:43 AM
I read somewhere that trying to use Buffets method of investing isn't necessarily going to work for everyone, simply because of the amount of money he can invest.

He has a huge advantage over someone with only a few thousand $$$, and because he can buy massive amounts of shares in a company, he gets a say in how it runs. Also, he gets better access to company information and a direct relationship with management. All this is something the average Joe Blow like us can only dream of.

I'd rather base my investments on the best investor of all time rather than Joe Blow down the street though.

wbosher
27-05-2010, 11:12 AM
I'd rather base my investments on the best investor of all time rather than Joe Blow down the street though.

Where can I find historical data like EPS etc...?

Some companies only offer financial reports going back a couple of years on their web sites.

ENP
27-05-2010, 11:48 AM
Where can I find historical data like EPS etc...?

Some companies only offer financial reports going back a couple of years on their web sites.

Ever thought about giving the company you are looking to invest in a phone call?

wbosher
27-05-2010, 11:55 AM
Ever thought about giving the company you are looking to invest in a phone call?

Like I said, I'm out of the market for at least 6 months, probably longer. At this stage I'm just curious about FA, and how to work out if a stock is over or under valued. Not looking at investing in anyone in particular.

I am mainly a short to medium term trader, using only TA. Just want to use my time away from the market to explore new things.

ENP
27-05-2010, 12:06 PM
over or under valued

Then read all you can on "value investing"

.... simple?

What's the issue here?

darksentinel
27-05-2010, 12:14 PM
One other thing further on my suggestion of reading "The Intelligent Investor". Warren Buffet was a student of Benjamin Graham who introduced the concept of 'value investing'. Buffet expanded on the concept of value investing, and, as you pointed out, involved himself with company management for much greater added value. However Graham's original ideas are focused more on identifying the value of companies and thus is perhaps more useful than the Buffet approach for retail investors.
Another good read is Security Analysis, by Benjamin Graham and David Dodd. Both 'Security Analysis' and 'The Intelligent Investor' are quite old but have been reprinted and revised.

wbosher
27-05-2010, 12:16 PM
Then read all you can on "value investing"

.... simple?

What's the issue here?

The issue is I basically know nothing about FA, which is why I'm asking questions.

OK with you?

ENP
27-05-2010, 01:11 PM
The issue is I basically know nothing about FA, which is why I'm asking questions.

OK with you?

If you don't like Buffett and you want to learn about fundamentals..

- learn how to read a statement of financial performance (income and expenses)
- learn how to read a balance sheet (asssets and liabilities)
- learn about P/E ratio
- learn why the business is making more/less profits or has more/less equity from year to year.
- learn how the market values the business on the future earnings (PEG ratio, etc)

A few basics.

shasta
27-05-2010, 01:17 PM
I'd recommend taking a look at The Intelligent Investor, by Bejamin Graham.
http://en.wikipedia.org/wiki/The_Intelligent_Investor

Oddly enough, I did my initial reading in the FA field, and am now starting to read about TA.

wbosher

I strongly urge you to buy this book & read it over & over, it's a must have book for all investors.

Yes, we wont enjoy the same economic conditions that Warren Buffett did, but the concepts are timeless IMO.

You will hear "Intrinsic value" mentioned all the time, to try & simplify it for you, the broker reports you see use a company's fundamentals to work out a target price (well in excess of the actual share price usually), & you will hear companies mgmt use terms like that they want to "unlock value" or "enhance shareholder value".

This is the very method i try to use to invest in stocks, my recent ASX:WLF thread is another example of this.

WB's philisophy was to buy $1's worth of stocks for $0.50, so basically stocks deeply discounted.

If you want to re-read the ASX:SRL thread, i was updating the "discount to fair value" frequently for a period, eventually the market caught up & the discount reduced.

Another book all relative new comers should have is "The Agressive Investor" by Colin Nicholson, this uses both TA & FA, & therefore is another must have book.

The ~$100 those two books will costs you, will be your best investment you ever make.

peat
27-05-2010, 01:18 PM
This is the technical answer from my Fundamentals of investment text
Intrinsic value depends on several factors :
1 Estimates of the shares future cash flows (dividends over the holding period) and the estimated price of the share at the time of sale
2 The discount rate used to translate these future cash flows into a present value
3 The amount of risk embedded in achieving the forecasted level of performance
The discounted valuation model used depends on the rate of growth
(a) where there is zero growth
Value of a share = annual div's/ required rate of return
(b) with constant growth says
Value of a share = next years dividends/(required rate of return - constant rate of growth in div's)
V = D1/(k-g)
I could go on but I've probably lost you by now

shasta
27-05-2010, 01:19 PM
Where can I find historical data like EPS etc...?

Some companies only offer financial reports going back a couple of years on their web sites.

If you want to use EPS as a guide, the only figure that matters is the future projected one!

shasta
27-05-2010, 01:22 PM
Like I said, I'm out of the market for at least 6 months, probably longer. At this stage I'm just curious about FA, and how to work out if a stock is over or under valued. Not looking at investing in anyone in particular.

I am mainly a short to medium term trader, using only TA. Just want to use my time away from the market to explore new things.


Im out of the market too, & maybe til 2011 - i dont know at this stage, so im using the time out of the market to track certain sectors & companies to try & find those that are undervalued & flying under the radar, if they run too early, i'll replace them with the next company i find, as i'm always reshuffling the 100 or so companies i track.

wbosher
27-05-2010, 01:24 PM
If you don't like Buffett and you want to learn about fundamentals..

I think you got me wrong here, I never said I don't like Buffet or his methods. I was simply pointing out that most normal people can't possibly expect to simply buy one of the millions of "Buffet" books out there and get rich using his methods alone, because of his several advantages.

I can't possibly say that I agree or disagree with any FA person or method, because I don't know anything!

Thanks ENP for your advise above, and I already started looking at some of these things. One thing (among many) I don't understand, is how you relate what you read in the balance sheet and from various ratios and percentages, to the current share price. How do you determine from all of these bits of information, if the share price is reasonable? Is there some sort of magic formula? :confused:

All this makes TA look like a walk in the park. ;)

wbosher
27-05-2010, 01:25 PM
Wow, I really need to type faster. There have been four posts while I was typing in the last one!!!

shasta
27-05-2010, 01:39 PM
I think you got me wrong here, I never said I don't like Buffet or his methods. I was simply pointing out that most normal people can't possibly expect to simply buy one of the millions of "Buffet" books out there and get rich using his methods alone, because of his several advantages.

I can't possibly say that I agree or disagree with any FA person or method, because I don't know anything!

Thanks ENP for your advise above, and I already started looking at some of these things. One thing (among many) I don't understand, is how you relate what you read in the balance sheet and from various ratios and percentages, to the current share price. How do you determine from all of these bits of information, if the share price is reasonable? Is there some sort of magic formula? :confused:

All this makes TA look like a walk in the park. ;)

Whilst Buffett might buy whole businesses & not just a few shares in them, it's the psychological thinking which is the difference.

He thinks of buying & owning a business forever (& he's a big proponent of the "allocation of capital"), which is the complete opposite of TA, which only trades based on volume & technical indicators - to a chartist what the business does is irrelevant

In more simple terms, if you find a stock you like on the NZX/ASX, & it has a pathway to production say in 3 - 5 years, has a big resource which will be in demand, you buy & hold the stock.

Warren has made some of his biggest purchases following a big correction/drop in the market, so using the fear in the market to your advantage is a Buffett style trait. (I guess it's part of averaging down, which TA frowns upon!)

shasta
27-05-2010, 01:46 PM
I'd rather base my investments on the best investor of all time rather than Joe Blow down the street though.

You can track him (WB) personally if you like, buy Berkshire Hathaway "B" Shares, for around $US70 a share

The "A" shares are available at ~$US105,000 per share!

wbosher
27-05-2010, 01:46 PM
Whilst Buffett might buy whole businesses & not just a few shares in them, it's the psychological thinking which is the difference.

He thinks of buying & owning a business forever (& he's a big proponent of the "allocation of capital"), which is the complete opposite of TA, which only trades based on volume & technical indicators - to a chartist what the business does is irrelevant

In more simple terms, if you find a stock you like on the NZX/ASX, & it has a pathway to production say in 3 - 5 years, has a big resource which will be in demand, you buy & hold the stock.

Warren has made some of his biggest purchases following a big correction/drop in the market, so using the fear in the market to your advantage is a Buffett style trait. (I guess it's part of averaging down, which TA frowns upon!)

Surely FA and TA can be compatible though, for example using FA to select a company and TA to time entry and/or exit? I was planning on using both of them this way, or if Im picking stocks using TA, and come to a bit of a stalemate between two or three stocks, FA could be used to make the difference.

Just a thought.

ENP
27-05-2010, 01:52 PM
Ahh I see, so you aren't really fussed about looking into for example, how much the business spends on it's advertising.
You just want to know if it's undervalued and by how much?

I'll run through the Buffettology one briefly, it's from the book.

- get the last 10 years of annual reports. (I choose 5 for NZ and AUS stocks)
- get the earnings per share (EPS) for all those years too.
- figure out on average in the 5 or 10 years the earnings have been growing each year. e.g. if it was 100 cents last year and 110 cents this year, it's an increase of 10% earnings
- if it's 10% then next year it should theoretically be 121 cents. (110 plus 10%)
- compare that 121 cents to the current share price to get a P\E ratio. For example, if the share is currently $20, then the theoretical P/E ratio for the upcoming year will be 16.53 ($20 divided by $1.21)
- the 16.53 P/E ratio gives a yield of 6.05% (100 divided by 16.53 to get a yield)
- Buffett then compares this to the AAA rated USA government bond yield. Say the government bonds can be bought today for 6% then it's undervalued
- in NZ, I compare it to the NZ government bond. These are both roughly 5.8% so the stock is undervalued because it's 6.05%
- therefore, the theoreticaly price I'd consider than stock would be worth would be $20.86 ($1.21 earnings divided by 5.8%)

Please someone correct me if I'm wrong, I read the book about 3 months ago.

peat
27-05-2010, 02:00 PM
A- Buffett then compares this to the AAA rated USA government bond yield. Say the government bonds can be bought today for 6% then it's undervalued
- in NZ, I compare it to the NZ government bond.
its called the risk free rate of return
(on the assumption that there is no risk lending to the govt)
[which with sovereign debt risk raising its ugly head must now be at least a little questionable] ;+)

and it is used to calculate your required rated of return by adding on a margin for the risk you're accepting by buying an equity cf a govt bond.

shasta
27-05-2010, 02:15 PM
Surely FA and TA can be compatible though, for example using FA to select a company and TA to time entry and/or exit? I was planning on using both of them this way, or if Im picking stocks using TA, and come to a bit of a stalemate between two or three stocks, FA could be used to make the difference.

Just a thought.

Absolutely, your best returns will come from using TA & FA, it's not what Warren Buffett uses, that all.

I suggested "The agressive investor" book because it has blow by blow examples of how the author uses both, thers a CD on there which shows his FA & TA filters used & everything

wbosher
27-05-2010, 02:21 PM
Absolutely, your best returns will come from using TA & FA, it's not what Warren Buffett uses, that all.

I suggested "The agressive investor" book because it has blow by blow examples of how the author uses both, thers a CD on there which shows his FA & TA filters used & everything

That sounds like it's exactly what I'm looking for. :) Is this primarily for investing or trading? Or both?

wbosher
27-05-2010, 02:39 PM
Bugger, the book appears to be out of print.

4be
27-05-2010, 02:47 PM
FYI ... ' The Agressive investor' has been replaced by 'Building Wealth in the Stockmarket' . It was released this month. Basically refines his methods etc and has more finacial ratios.

4be

wbosher
27-05-2010, 03:18 PM
FYI ... ' The Agressive investor' has been replaced by 'Building Wealth in the Stockmarket' . It was released this month. Basically refines his methods etc and has more finacial ratios.

4be

I had a look on his website http://www.bwts.com.au/ where he is explaining the book, one line in particular caught my eye - If you are a private investor with a significant sum of money to invest safely in the stock market, here is a complete plan, proven through bull and bear markets.

Oh well, I better start saving...;)

shasta
27-05-2010, 10:02 PM
I had a look on his website http://www.bwts.com.au/ where he is explaining the book, one line in particular caught my eye - If you are a private investor with a significant sum of money to invest safely in the stock market, here is a complete plan, proven through bull and bear markets.

Oh well, I better start saving...;)

Thanks for the update 4be

wbosher, dont worry about the amounts involved it's the principles he uses that you can use yourself.

Down the track you will find your own style, but that book is good for mid term trading/investing, he isnt a day trader.

percy
01-06-2010, 05:22 PM
wbosher,
try your local library,business section.peter lynch and jim slater have also written good books on the market.I found The Zulu Principal by jim slater excellent.If they do not have it they may get it from another library for you.All the Buffet books are good.

wbosher
02-06-2010, 11:43 AM
wbosher,
try your local library,business section.peter lynch and jim slater have also written good books on the market.I found The Zulu Principal by jim slater excellent.If they do not have it they may get it from another library for you.All the Buffet books are good.

Hey, thanks for everyones help here.

I have been looking over some annual reports for several companies, not for any particular reason just curiosity. I have come across several numbers which don't stack up and would like to know if this is normal.

Just as an example I have looked at the balance sheet going back four or five years for a couple of NZX listed companies. Below is some examples.

I will use Total Assets as an example. In the 2010 report it states that this is 46,006,000 and in the column for 2009 it has 10,397,000. However, in the 2009 report, the Total Assets says 42,560,000 and the 2008 column says 32,898,000. In the 2008 report, the figures are different again for 2008 than what is on the 2008 column in the 2009 report.

I would think that if the 2009 annual report says one thing, then in the 2009 column in the 2010 report should say the same thing! :confused:

Any advice on this? Why would this change?

Cheers. :)

Aaron
02-06-2010, 12:39 PM
I would guess that there was a change in accounting policies. There will be a note on changes in accounting policies in the financial statements and this should show any changes and their affect to last years comparative figures.

wbosher
02-06-2010, 12:41 PM
I would guess that there was a change in accounting policies. There will be a note on changes in accounting policies in the financial statements and this should show any changes and their affect to last years comparative figures.

I could understand if it was just one year, in one company, but it's not. I've gone back 4 years and the same thing occurs every year to varying degrees, and it's not just one company either.

Aaron
02-06-2010, 12:49 PM
Give me an example. State the company and the financial year the financial statements are for and if I can get a copy of the financial statements I could have a crack at explaining the difference.
I'm no expert but I understand that NZ companies adopted the International Financial Reporting Standards(IFRS) which lead to some major changes in how some assets are valued.
The companies would then have to change the last year comparative figures so that the comparative figures are calculated using the same accounting policies as the current year.

I also could do with a challenge and I need to understand financial statements better but tend to be lazy.

wbosher
02-06-2010, 12:52 PM
Take a look at PHB - Pharmacybrands Limited as an example. It could be the way I'm reading this, but I'm pretty sure I'm reading it correctly.

Got to http://www.lifepharmacy.co.nz/default.cfm?layout=investorRelations and you can download the reports dating back to 2006. I've only been looking at the balance sheet.

Aaron
03-06-2010, 08:07 AM
The 2006 comparatives in the 31/3/2007 financial statements are different. The differences are described in Note3 "Significant Accounting Policies" on page 20. I won't pretend to understand the changes but with time you could probably work it out if you thought it was relevant.
I can't say I understand FA or TA analysis but would note that the 2009 cashflow statement for Life Pharmacies show operating losses for both 2008 and 2009. The first thing I would want a company I invest in is for it to actually make money. I don't know much about Life Pharmacies but maybe there is a growth story or an expansion that about to make heaps or perhaps 2008 and 2009 are affected by the recession. Share issues have kept the company going but who are the shares being issued to. I would guess you would then go to the balance sheet and work out what the net assets you are buying into really are. Would goodwill for a corner pharmacy be worth much. I suppose getting a lease in a good location would be worth something.
I guess you also look at sales growth etc etc. But like you I would like to know what are some key factors to look for so you can screen companies without wasting time looking at dogs.

wbosher
03-06-2010, 08:52 AM
I would like to know what are some key factors to look for so you can screen companies without wasting time looking at dogs.

From the little reading I've done so far (and I do mean little) it seems that dividing the net worth by the number of shares, and comparing this to the current share price seems to be a good start. Obvoiusly the company needs to be consistantly making a good profit as well. No doubt this is only a fraction of what is required, but I'm sure someone will help us out, there good like that here. :D

I wasn't actually looking at this company as an investment, I was just going through a few company reports to see if I can learn a thing or two. Just picked this one at random.

Is there some sort of scanner that can be used to filter out some possibles from hundreds of stocks, and then looking at the remainders for a good deal, or is it just a case of going through tons of stocks manually?

shasta
03-06-2010, 04:43 PM
From the little reading I've done so far (and I do mean little) it seems that dividing the net worth by the number of shares, and comparing this to the current share price seems to be a good start. Obvoiusly the company needs to be consistantly making a good profit as well. No doubt this is only a fraction of what is required, but I'm sure someone will help us out, there good like that here. :D

I wasn't actually looking at this company as an investment, I was just going through a few company reports to see if I can learn a thing or two. Just picked this one at random.

Is there some sort of scanner that can be used to filter out some possibles from hundreds of stocks, and then looking at the remainders for a good deal, or is it just a case of going through tons of stocks manually?

The ASX website has all the companies that make up the various sectors, so if you use the AFR Smart Investor site, you can extract a P/E ratio comparison, that could be a start for you.

I like using the "Return on Capital/Equity" ratio = NPAT/Average shareholder funds - anything over 10% shows the current management have created shareholder value above bank interest rates, over 20% per annum & you have very compentent management onboard!

I also use the Trading Room website to get data on opitons, dividends etc

Here's the links as mentioned:

http://www.asx.com.au/research/industry/index.htm

http://www.afrsmartinvestor.com.au/tables.aspx

http://www.tradingroom.com.au/apps/qt/index.ac

wbosher
03-06-2010, 06:06 PM
Thanks Shasta, I'll take a look. Do you think it might be a good idea to start with NZ companies, or doesn't it really matter? I only ask this because it may be easier to keep up to date with local business news, and there are a smaller amount of companies to trawl through.

winner69
03-06-2010, 07:15 PM
I like using the "Return on Capital/Equity" ratio = NPAT/Average shareholder funds - anything over 10% shows the current management have created shareholder value above bank interest rates, over 20% per annum & you have very compentent management onboard!



Surprised with you of all people Shasta coming out with such a genaralised statement .... as you know 10% ROE isn't always a good result and doess't always lead to shareholder value

Isn't the real sign of having 'very competent management on board' is whether they have create real economic value when taking into debt levels .... ie a return on invested capital in excess of the company cost of capital .... not just the shareholder part

And i would hate to think that wbosher takes your advice and backs one of the highest ROE companies on the NZX10 because that consistently high ROE means they have 'very competent management on board' .... wbosher might be disappointed with his investment in TEL eh

shasta
03-06-2010, 07:18 PM
Surprised with you of all people Shasta coming out with such a genaralised statement .... as you know 10% ROE isn't always a good result and doess't always lead to shareholder value

Isn't the real sign of having 'very competent management on board' is whether they have create real economic value when taking into debt levels .... ie a return on invested capital in excess of the company cost of capital .... not just the shareholder part

And i would hate to think that wbosher takes your advice and backs one of the highest ROE companies on the NZX10 because that consistently high ROE means they have 'very competent management on board' .... wbosher might be disappointed with his investment in TEL eh

I possibly should have added that is a small part of my criteria among a host of other important things i look for.

Anyone buying TEL without looking at the chart would have to be a devout contrarian!

shasta
03-06-2010, 07:19 PM
Thanks Shasta, I'll take a look. Do you think it might be a good idea to start with NZ companies, or doesn't it really matter? I only ask this because it may be easier to keep up to date with local business news, and there are a smaller amount of companies to trawl through.

I started off on the NZX, but little liquidity saw me move to the ASX in 2007 (the NZD/AUD was 90-92c back then), mainly as i branched out into O&G companies & miners

wbosher
04-06-2010, 08:09 AM
I used to trade the ASX exclusively, for the reasons you've pointed out, but also becase using TA it was easy to use a scanner to cut down the choice from thousands down to maybe 20 or so in a few minutes.

As I'm not yet familiar with FA, I thought that having less to choose from like on the NZX, might make life a little easier for a newbie (to FA) like myself.

winner69
04-06-2010, 10:31 AM
wbosher .... soemtimes all the theory and all that can really confuse the issue about whether any company is a good investment from a FA point of view

Why don't you imagine that you have enough dosh to buy the whole company .... FA is then looking at what you would get out of that company over time (cash and added capital value) .... look at from an owners perspective ... and if you come up with a number that you reckon is a fair retuen for the risk you would have taken then (fundamentally) buying a few shares in it is probably a good idea. If you wouldn't buy the whole company then why buy a few shares in it

If all this is too hard then go back to trading prices that the market thinks any company is worth at any particular point in time. Buying a few shares in a company isn't investing in that company (they don't get your cash) .... you are only buying something that has some value attributed to it.

winner69
04-06-2010, 10:44 AM
wb ... sort of what i was raving on about is covered in my easons below why i wouldn't buy WHS at the moment .... even though fundamnetally it is a great company, strategically well placed, essentailly well mnanaged, has a good business model etc and will remain part of NZ landscape for some time. So on fundamentals no reason not to buy .... but at the mo on a fundamental valuation basis overpriced .... I couldn't justify paying the market price for it today if I could afford to buy the whole company

From my psot on the WHS thread -

Currently WHS EBIT about $128M (assuming this year to be about the same as last year) which after tax gives Operating Earnings of about $90M .... driven from shareholder equity of $$320m and debt of $100m .... so a 20% return on capital .... fantastic performance

At current shareprice market cap is $1.1 billion. So if you managed to buy the company it would cost you this $1.1 billion and you pick up the $100m debt so total cost (capital required) is $1.2 billion. All of sudden that $90m operating earnings is not that attractive .... it only gives you a 8% return on the capital invested (6% if you had to pay a 20% premium)

So honestly .... would any of you if you had $1,4 billion buy something for a 6% after tax return .... esp when they have essentially saturated the market and future growth potential is rather limited without further capital.

I doubt it ... therefore isn't WHS overvalued at the moment? .... and that there is some strategic value of the sites / footprint for a potential buyer included in the price.

Same sort of thinking Buffet applies ... as Snoopy would probably say Warren wouldn't be buying WHS at these prices .... but at what price? .... at least a 12% return i would say to cover cost of capital ... ie about $2.10 a share.

Is that what Warren pay Snoopy ... haven't checked your latest workings on sharechat


This is not saying that buying WHS shares is stupid or anything .... it is saying that a purchaser would not get much of a return from buying the company at the current price ..... but the WHS shareprice will probably go up and down over the next few years even thought the underlying 'fundamnetals' wont change .... thats what i mean about trading the price of WHS shares .... nothing more and nothing less

shasta
04-06-2010, 01:16 PM
wb ... sort of what i was raving on about is covered in my easons below why i wouldn't buy WHS at the moment .... even though fundamnetally it is a great company, strategically well placed, essentailly well mnanaged, has a good business model etc and will remain part of NZ landscape for some time. So on fundamentals no reason not to buy .... but at the mo on a fundamental valuation basis overpriced .... I couldn't justify paying the market price for it today if I could afford to buy the whole company

From my psot on the WHS thread -

Currently WHS EBIT about $128M (assuming this year to be about the same as last year) which after tax gives Operating Earnings of about $90M .... driven from shareholder equity of $$320m and debt of $100m .... so a 20% return on capital .... fantastic performance

At current shareprice market cap is $1.1 billion. So if you managed to buy the company it would cost you this $1.1 billion and you pick up the $100m debt so total cost (capital required) is $1.2 billion. All of sudden that $90m operating earnings is not that attractive .... it only gives you a 8% return on the capital invested (6% if you had to pay a 20% premium)

So honestly .... would any of you if you had $1,4 billion buy something for a 6% after tax return .... esp when they have essentially saturated the market and future growth potential is rather limited without further capital.

I doubt it ... therefore isn't WHS overvalued at the moment? .... and that there is some strategic value of the sites / footprint for a potential buyer included in the price.

Same sort of thinking Buffet applies ... as Snoopy would probably say Warren wouldn't be buying WHS at these prices .... but at what price? .... at least a 12% return i would say to cover cost of capital ... ie about $2.10 a share.

Is that what Warren pay Snoopy ... haven't checked your latest workings on sharechat


This is not saying that buying WHS shares is stupid or anything .... it is saying that a purchaser would not get much of a return from buying the company at the current price ..... but the WHS shareprice will probably go up and down over the next few years even thought the underlying 'fundamnetals' wont change .... thats what i mean about trading the price of WHS shares .... nothing more and nothing less

Trying to remember the saying, "better to pay a good price for a great company, than a great price for a good company" (something like that)

wbosher
05-06-2010, 10:06 AM
wb ... sort of what i was raving on about is covered in my easons below why i wouldn't buy WHS at the moment .... even though fundamnetally it is a great company, strategically well placed, essentailly well mnanaged, has a good business model etc and will remain part of NZ landscape for some time. So on fundamentals no reason not to buy .... but at the mo on a fundamental valuation basis overpriced .... I couldn't justify paying the market price for it today if I could afford to buy the whole company

From my psot on the WHS thread -

Currently WHS EBIT about $128M (assuming this year to be about the same as last year) which after tax gives Operating Earnings of about $90M .... driven from shareholder equity of $$320m and debt of $100m .... so a 20% return on capital .... fantastic performance

At current shareprice market cap is $1.1 billion. So if you managed to buy the company it would cost you this $1.1 billion and you pick up the $100m debt so total cost (capital required) is $1.2 billion. All of sudden that $90m operating earnings is not that attractive .... it only gives you a 8% return on the capital invested (6% if you had to pay a 20% premium)

So honestly .... would any of you if you had $1,4 billion buy something for a 6% after tax return .... esp when they have essentially saturated the market and future growth potential is rather limited without further capital.

I doubt it ... therefore isn't WHS overvalued at the moment? .... and that there is some strategic value of the sites / footprint for a potential buyer included in the price.

Same sort of thinking Buffet applies ... as Snoopy would probably say Warren wouldn't be buying WHS at these prices .... but at what price? .... at least a 12% return i would say to cover cost of capital ... ie about $2.10 a share.

Is that what Warren pay Snoopy ... haven't checked your latest workings on sharechat


This is not saying that buying WHS shares is stupid or anything .... it is saying that a purchaser would not get much of a return from buying the company at the current price ..... but the WHS shareprice will probably go up and down over the next few years even thought the underlying 'fundamnetals' wont change .... thats what i mean about trading the price of WHS shares .... nothing more and nothing less

Thanks for that winner69, that sounds a lot easier than trying to figure out sh!tload of ratios!! So correct me if I'm wrong, I could basically used the PE ratio of several stocks to narrow down the search, and dig a little bit deeper with what's left over to work out if it is under/overvalued from there, and then pick the best one of the bunch?

All sounds too simple. ;)

winner69
05-06-2010, 10:38 AM
Thanks for that winner69, that sounds a lot easier than trying to figure out sh!tload of ratios!! So correct me if I'm wrong, I could basically used the PE ratio of several stocks to narrow down the search, and dig a little bit deeper with what's left over to work out if it is under/overvalued from there, and then pick the best one of the bunch?

All sounds too simple. ;)

In theory yes mate but life isn't always that simple is it .... irrespective of what ratios say remember that shareprices invariably reflect the prevailing sentiment of investors at any point in time.

One thing I am not clear about is what type of investor you want to be and what are your long term objectives. You seem to have moved away from being a trader which seems to suggest you want to be reasonably active with your investing to trying to invest on fundamentals which suggests you are happy with consistent gains over time with the odd windfall along the way .... or are just exploring what is best for you?

Looking at fundamentals is more than just ratios (they are jsut valuation tools). It is more important to understand how a company makes money and what the key drivers are that lead to sustainable earnings growth .... and then you work out what you might want to pay for it ,,, as shasta said try to find a great company at a good price

wbosher
05-06-2010, 12:10 PM
In theory yes mate but life isn't always that simple is it .... irrespective of what ratios say remember that shareprices invariably reflect the prevailing sentiment of investors at any point in time.

One thing I am not clear about is what type of investor you want to be and what are your long term objectives. You seem to have moved away from being a trader which seems to suggest you want to be reasonably active with your investing to trying to invest on fundamentals which suggests you are happy with consistent gains over time with the odd windfall along the way .... or are just exploring what is best for you?

Looking at fundamentals is more than just ratios (they are jsut valuation tools). It is more important to understand how a company makes money and what the key drivers are that lead to sustainable earnings growth .... and then you work out what you might want to pay for it ,,, as shasta said try to find a great company at a good price

I'm taking a break from trading due to my wife having a baby in about 4 weeks, and I'll need all the money I can muster while she's off work. I'm thinking about doing both short/medium term trading as well as some long term investing, once we're back on our feet financially. This why I thought I'd use this time to learn something about FA so that I'll be prepared when the time comes to get back into it. It'll probably be close to a year before I can afford to do anything though.

I was using trading for quick gains, which for the most part I acheived. The sharp rise in the market over the last year (with the exception of the last couple of months) certainly helped. :)

My reason for the long term investments will be to hopefully have enough money in about 15 years to put my kids through university, if they choose to do that, or help them get into their first home. I think getting into a home in 20 years time will be almost impossible with out parental assistance. That's what we're here for after all.

winner69
06-06-2010, 06:08 AM
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10649952

Lizard
08-06-2010, 08:00 AM
Hi wbosher,

Here's one of the many older threads on ST re Fundamental Analysis:
http://www.sharetrader.co.nz/showthread.php?3410-What-Makes-for-Good-FA

It makes for an interesting read - the market has changed dramatically since then, so it might be interesting to see if posters then are still using the same method (Westie might have had a bit more luck finding net-nets!)

percy
09-06-2010, 07:34 AM
Hi wbosher,

Here's one of the many older threads on ST re Fundamental Analysis:
http://www.sharetrader.co.nz/showthread.php?3410-What-Makes-for-Good-FA

It makes for an interesting read - the market has changed dramatically since then, so it might be interesting to see if posters then are still using the same method (Westie might have had a bit more luck finding net-nets!)
I found it very interesting,and good advice.I do not see that the principles of sound investing has changed.We just get into trouble when we deviate from them!!

Snoopy
18-06-2010, 09:20 AM
I read somewhere that trying to use Buffets method of investing isn't necessarily going to work for everyone, simply because of the amount of money he can invest.

He has a huge advantage over someone with only a few thousand $$$, and because he can buy massive amounts of shares in a company, he gets a say in how it runs. Also, he gets better access to company information and a direct relationship with management. All this is something the average Joe Blow like us can only dream of.

Sound like you have been reading Macdunk. Macdunk has never read any Buffett books so has no idea what is in them. While Warren has more money than us, the use of his methods does not require a big budget as Macdunk seems to think. Indeed in many ways the less cash you have to more investment opportunities you can take up that make a difference to your portfolio.

SNOOPY

peat
09-09-2010, 11:31 AM
...am thinking about learning about the basics of FA during this time.
I only really want to know the basics at this stage since I use TA primarily, so don't want to be reading through a 400 page book or anything like that. If anyone can help me out, that would be very much appreciated. :D

http://financialedge.investopedia.com/financial-edge/0910/6-Basic-Financial-Ratios-And-What-They-Tell-You.aspx

wbosher
13-12-2010, 07:43 AM
Hi guys, long time no chat. Life is starting to return to normal after having our second child about 5 months ago, so I'm looking at getting back into the game soon, with a longer term outlook rather than short/medium term trading.

I've bought Colin Nicholson's "Building wealth in the stockmarket", and I'm about half way through. So far it's a bloody good read, and very well written IMO.

He uses a combination of TA and (basic) FA to make investment decisions, and it looks to me like a fairly sound way to go about it. Part of his criteria for picking stocks is that the P/E ratio and the Div Yield must meet certain conditions, he runs scans to achieve this on the ASX.

I'm interested in just investing in the NZX at this early stage, but am unable to find a way to run this sort of scan on the NZX. The scan for the TA requirements is easy, but I just can't seem to find a way to scan for P/E and Div Yield.

Can anyone help?

shasta
13-12-2010, 03:06 PM
Hi guys, long time no chat. Life is starting to return to normal after having our second child about 5 months ago, so I'm looking at getting back into the game soon, with a longer term outlook rather than short/medium term trading.

I've bought Colin Nicholson's "Building wealth in the stockmarket", and I'm about half way through. So far it's a bloody good read, and very well written IMO.

He uses a combination of TA and (basic) FA to make investment decisions, and it looks to me like a fairly sound way to go about it. Part of his criteria for picking stocks is that the P/E ratio and the Div Yield must meet certain conditions, he runs scans to achieve this on the ASX.

I'm interested in just investing in the NZX at this early stage, but am unable to find a way to run this sort of scan on the NZX. The scan for the TA requirements is easy, but I just can't seem to find a way to scan for P/E and Div Yield.

Can anyone help?

For ASX stocks
http://www.afrsmartinvestor.com/tables.aspx

For NZX stocks, the nzx.com site does have historical P/E ratios on individual companies. but these are based on the last published figures

Im not aware of any site that covers NZX stocks like AFR Smart Investor does for ASX stocks, so it might be a manual task, but theres not that many companies that pay dividends (the Herald* in the weekend has a brief run down on top yields/highest & lowest P/E, not sure thats all you want)

* Could be a Sunday paper, im not 100% sure

I would recommend you also read Chris Nicholson's "The Agressive Investor" a great read, also combining TA & FA

wbosher
13-12-2010, 03:16 PM
I would recommend you also read Chris Nicholson's "The Agressive Investor" a great read, also combining TA & FA

Thanks for tha shasta, looks like it will be a manual task. Good thing the NZX isn't all that big!

"The Agressive Investor" is no longer in print, and has been replaced by this book (both books written by the same author ;)). Apparently it's very similar, just more up to date examples etc...

This book is also combining TA & FA and would use pretty much the same criteria as Colin would have been used in "The Agressive Investor".

Lizard
13-12-2010, 08:22 PM
Hi Wbosher,

You can subscribe to the Market Analysis database (http://www.stockmarket.co.nz/oss_start.htm) and get a few different criteria to sort by. I've used it quite a bit over the years, although at $144 for 6 months (minimum), it is starting to look a little expensive next to other info sources. Of course, it only takes one good pick to more than pay for that...

My last sub from 2 years ago will expire this month, so not sure if I will be using it again. However, being able to sort by both typical fundamental criteria like P/E, ROE and Pr/NTA alongside Relative Strength rating and insider buying is a handy combo.

(PS: The database doesn't work well on all browsers, as I can't get it to operate from Safari, but okay with Firefox or Chrome)

wbosher
14-12-2010, 06:56 AM
I'm starting back with a very small amount of money, so will be trying to do as much on the cheap (or free) as possible. I went through the entire NZX last night manually looking at P/E and Div Yield specifically, and it only took about an hour, so I will probably continue to do it this way untill I have more $$$.

If in future I start investing on the ASX again, I will definately not be doing that manually!. :scared:

Until I get some experience, I will be using the techniques in the book almost to the letter and it is suprisingly simple.

OldRider
14-12-2010, 11:24 AM
wbosher: I have used for some years a formula, originated with Buffet or Munger I believe, which I think might provide
what you require. It is my first filter, and not too difficult or time consuming to use in a spreadsheet, if you have a data source,
has found me some good investments. Wouldn't be surprised though if it has few passes for NZX.

Google "CGVI" there was some discussion a few years back on an Australian forum "SHARESGURU", I think at least some
of the posts are still there together with a bit of information, google this as well.

whirly
14-12-2010, 12:56 PM
A couple of small offerings that may be of interest -

http://www.topyields.nl/Top-dividend-yields-of-NZX50.php

http://www.valuecruncher.com/ I'd be particularly interested in fundies views on the worth and validity of this site.

Cheers Whirly

percy
14-12-2010, 03:04 PM
A couple of small offerings that may be of interest -

http://www.topyields.nl/Top-dividend-yields-of-NZX50.php

http://www.valuecruncher.com/ I'd be particularly interested in fundies views on the worth and validity of this site.

Cheers Whirly
Whirly,I agee with them AIA is a buy.RYMAN is not a sell.I disagree with them with the following shares I hold; CEN,EBO.FBU,NPX<POT, SKT,SKC$16.59 ? NZS.
I would not use the site again.Your picks in competition look better thought out.
Have just visited topyields,Found it interesting.

Lizard
14-12-2010, 08:18 PM
Okay, found what you want wbosher (I think). The IRG database is a great source of NZ stock data, both free and subscriber:
http://www.irg.co.nz/irgpages/pricerat.php

I found I could copy and paste the table into Excel Spreadsheet and sort from there. Hope that helps! :)

(Have a look around the site - there is quite a bit of info there.)

percy
14-12-2010, 08:56 PM
Okay, found what you want wbosher (I think). The IRG database is a great source of NZ stock data, both free and subscriber:
http://www.irg.co.nz/irgpages/pricerat.php

I found I could copy and paste the table into Excel Spreadsheet and sort from there. Hope that helps! :)

(Have a look around the site - there is quite a bit of info there.)

Lizard,you have done it again!!!!! great site.

wbosher
15-12-2010, 06:45 AM
Okay, found what you want wbosher (I think). The IRG database is a great source of NZ stock data, both free and subscriber:
http://www.irg.co.nz/irgpages/pricerat.php

I found I could copy and paste the table into Excel Spreadsheet and sort from there. Hope that helps! :)

(Have a look around the site - there is quite a bit of info there.)

Wow, that's excellent!! I'll have a look around. Thanks Lizard. :D

I have found some differences between what this site says, and what is on the DB site in regard to Div Yield. Is GR Div Yield different to Div Yield?

Lizard
15-12-2010, 07:47 AM
I have found some differences between what this site says, and what is on the DB site in regard to Div Yield. Is GR Div Yield different to Div Yield?

It looks as though IRG is including imputation credits and DB are not.

Aaron
24-07-2011, 07:03 PM
This is the technical answer from my Fundamentals of investment text
Intrinsic value depends on several factors :
1 Estimates of the shares future cash flows (dividends over the holding period) and the estimated price of the share at the time of sale
2 The discount rate used to translate these future cash flows into a present value
3 The amount of risk embedded in achieving the forecasted level of performance
The discounted valuation model used depends on the rate of growth
(a) where there is zero growth
Value of a share = annual div's/ required rate of return
(b) with constant growth says
Value of a share = next years dividends/(required rate of return - constant rate of growth in div's)
V = D1/(k-g)
I could go on but I've probably lost you by now

Do many people use this dividend discount model?

For example NZ Listed property Trusts and Companies.
What range might you use as "k" in this low interest rate environment?
What about "g"? Hard to see any growth in the short term (1 or even 2 years) for property companies.

For eample GMT forecasts 6.25cents per unit distribution(after tax) for 2012. Bank term deposits (3yrs) are roughly 5.3%(before tax). Assuming 2% growth your capitalization rate would have to be about 8% to justify GMT's current 99cent price. With no growth "k" must be about 6%.

How do people establish their own capitalisation rates and growth rates?

I know the daily prices but how do most people establish value?

I appreciate the figures are arbitrary and noone can see the future but does this formula provide a starting value for anyone.

peat
24-07-2011, 07:19 PM
I havent seen it used much in published research that I've accessed...

PlatnuM195
25-10-2011, 01:30 PM
Just read 'The Intelligent Investor' and it was a great read :D

HIDDENGEM
30-10-2011, 03:00 PM
I am new to this web site. I read this thread and leant lot. Well informative excellent discussion andvery useful for new comers to the markets in both New Zealand and Australia. . Ihave one question to raise here.

How do we find out ROE ratio for companies listed inNew Zealand and Australia? If anyone can help me out, that would be very much appreciated