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Feb 12 2010 Sap


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Feb 12 2010 Sap

  1. 1. Stock Analyst Program 2010 Driss Kaitouni [email_address] Jamie Tucker [email_address] Honours in Investment Management, Wharton Exchange Fall 2009 February 12, 2010
  2. 2. Winter 2010 Overview <ul><li>Next meetings: March 5, 12, 19; Room 045 (2pm) </li></ul>Stock Analyst Program 2010 Date Topic Date Topic Jan 29 Overview, Valuation, Resources to Start Mar 5 More Applied Valuation Feb 5 What is Price Action? Multiples Analysis Mar 12 Applied Technical Analysis (equities, commodities, FX) Feb 12 Stock Screening & Risk Management Mar 19 TBD Feb 19 Cancelled: Reading Week Mar 26 Cancelled Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
  3. 3. Agenda <ul><li>Research Report Overview </li></ul><ul><li>Where to Trade </li></ul><ul><li>Stock Screening </li></ul><ul><li>Risk Management </li></ul><ul><li>How To Start… </li></ul><ul><li>Discussion </li></ul>Stock Analyst Program 2010
  4. 4. Research Report Overview
  5. 5. Research Report Composition <ul><li>The key to writing a coherent SAP research report is understanding and articulating an investment time horizon </li></ul><ul><ul><li>- Refer to previous reports on the MIC website: Resources > SAP References </li></ul></ul>Stock Analyst Program 2010
  6. 6. Evaluation Criteria (1) <ul><li>Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other. </li></ul><ul><li>This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company. </li></ul>Research Report Evaluation Stock Analyst Program 2010
  7. 7. Where to Trade
  8. 8. Where to Trade Online Broker Ratings – Trading (Barron’s) Source: Stock Analyst Program 2010
  9. 9. Where to Trade Online Broker Ratings – Investing (Globe & Mail) Source: <ul><li>Watch out for minimum balance, minimum activity, fund removal flexibility  due diligence! </li></ul><ul><li>List does not include brokers who don’t offer registered accounts (i.e., Interactive Brokers) </li></ul>Stock Analyst Program 2010
  10. 10. Where to Trade <ul><li>Trading costs contribute to your tax bill (unless you are trading a registered account) </li></ul><ul><li>Discount brokerage analysis: those who traded the most earned returns no higher than those who traded the least (in fact, they earn less after brokerage costs) </li></ul><ul><li>Mutual funds with the highest portfolio turnover rates have underperformed by 1.8% annually the past 10 years </li></ul><ul><li>Pension-fund study: on average, funds would raise annual returns by nearly 1% if the manager had gone on 12-month vacation! </li></ul><ul><li>Why? Investors sell winners too soon, hold losers too long (prospect theory), overconfidence, impatient </li></ul><ul><ul><li>“ The stock market serves as a relocation center at which money is moved from the active to the patient” – Warren Buffett </li></ul></ul>But, Beware... Source: Stock Analyst Program 2010
  11. 11. Stock Screening
  12. 12. Stock Screening <ul><li>Based on the stock’s intrinsic value </li></ul><ul><ul><li>- Low PE, P/BV, P/CF multiples </li></ul></ul><ul><ul><li>- Long term time horizon </li></ul></ul>Value Investing Growth Investing Contrarian Investing GARP Investing <ul><li>Risk preference, time horizon, skill set, and comfortability determine the best investment style to employ </li></ul><ul><li>Seeking future growth potential and earnings strength </li></ul><ul><li>A hybrid combination of growth and value strategies </li></ul><ul><ul><li>Peter Lynch </li></ul></ul><ul><ul><li>- Emphasis on the PEG ratio </li></ul></ul><ul><li>Goes against conventional market wisdom </li></ul><ul><ul><li>- Crowd behaviour creates mispricing </li></ul></ul>Stock Analyst Program 2010
  13. 13. Stock Screening <ul><li>1) Adequate size : $100MM sales in 1970 </li></ul><ul><li>2) Sufficiently strong financial condition : current ratio ≥ 2 </li></ul><ul><li>3) Earnings stability : no losses past 10 years </li></ul><ul><li>4) Dividend record : 20 years of dividend payments </li></ul><ul><li>5) Earnings growth : net income increased by 1/3+ on per-share basis for past 10 years, using 3 year moving averages at beginning and end </li></ul><ul><li>6) Moderate P/E ratio : < 15x earnings for past 3 years </li></ul><ul><li>7) Moderating price-to-assets ratio : current price ≤ 1.5x book value </li></ul><ul><li>Further information: The Intelligent Investor, Security Analysis (books) </li></ul>Ben Graham (Value Investor) Stock Analyst Program 2010
  14. 14. Stock Screening Warren Buffett - First Stage Analysis <ul><li>Take a look at the nature of the company’s business </li></ul><ul><ul><li>A viable company will have the size, depth, and breadth of brand recognition </li></ul></ul><ul><li>Inflation sustainability and ability to pass on costs </li></ul><ul><ul><li>Look for ability to increase cost of main product relative to inflation </li></ul></ul><ul><li>Products are understandable and business lines are comprehendible </li></ul><ul><li>Company is able to have predictability in terms of earnings </li></ul><ul><ul><li>Earnings growth or expansion is also a requirement </li></ul></ul><ul><ul><li>A short dip in earnings growth is acceptable given certain circumstances </li></ul></ul><ul><li>Consideration given to companies with conservative finances </li></ul><ul><ul><li>This includes low levels of debt relative to net income </li></ul></ul><ul><li>Close scrutiny towards managements use of retained earnings towards shareholder wealth </li></ul><ul><ul><li>ROE over the past 10 years should be greater than 15% on average </li></ul></ul><ul><li>High free cash flow and low capital expenditure should not be excessive </li></ul>Source: John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2010
  15. 15. Warren Buffet - Second Stage Analysis (Properly Priced?) <ul><ul><li>Step 1 . Calculate IRR </li></ul></ul><ul><ul><li>- Determine through EPS/Market Price </li></ul></ul><ul><ul><li>Step 2. Compare calculation made in step 1 to the long term bond yield </li></ul></ul><ul><ul><li>- Exceptions can be made if company’s expected yield growth is high </li></ul></ul><ul><ul><li>Step 3 . Calculate Future EPS: First calculate 10 year average ROE from balance sheet figures, then calculate average dividend payout ratio in order to find the average retained earnings </li></ul></ul><ul><ul><li>- Since % ROE retained = (Avg ROE/ 100) ×(1- (Avg payout/100), </li></ul></ul><ul><ul><li>- Multiply ROE retained by 100 and use as interest rate to solve for FV (equity per share) given PV as current equity per share </li></ul></ul><ul><ul><li>- Take FV (equity per share) multiply by 10 year average ROE to get future EPS </li></ul></ul><ul><ul><li>Step 4 . Use the above future EPS and multiply by average PE (last 10 years) to get projected future stock price </li></ul></ul><ul><ul><li>- Include dividend pool to stock price by taking company’s estimated EPS for current year adjusted for growth rate in dividends to give you a projected EPS </li></ul></ul>Stock Screening Source: John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2010
  16. 16. Warren Buffett - Second Stage Analysis Cont. Stock Screening <ul><ul><li>Step 4 cont’d . </li></ul></ul><ul><ul><li>- Use the projected EPS in each year, multiply by (average dividend payout/100) . </li></ul></ul><ul><ul><li>- Use the sum of the above value and add back to the stock price calculated above </li></ul></ul><ul><ul><li>Step 5. Use the above calculations to determine expected return using the ROE method </li></ul></ul><ul><ul><li>PV- Current Stock </li></ul></ul><ul><ul><li>FV- Future stock price adjusted for dividends from step 4. </li></ul></ul><ul><ul><li>N- number of periods (in this case 10) </li></ul></ul><ul><ul><li>i- Solve </li></ul></ul><ul><ul><li>Refer to ratio criteria to determine expected return threshold </li></ul></ul><ul><ul><li>Step 6. Determine the expected return using the EPS growth (average) </li></ul></ul><ul><ul><li>- First take the average EPS growth for last 10 years </li></ul></ul><ul><ul><li>- Project the 10 year EPS figure by using this growth rate and current EPS </li></ul></ul><ul><ul><li>- Determine Future stock price by multiplying by 10 year PE (average) </li></ul></ul><ul><ul><li>Step 7. Calculate expected return as per step 5, using the EPS growth method </li></ul></ul><ul><ul><li>Step 8. Compare the results using the average of the expected returns from both the ROE and EPS method </li></ul></ul>Source: John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2010
  17. 17. Stock Screening <ul><li>1) 5-year average annual EPS growth rate ≥ 20% but ≤ 30% </li></ul><ul><li>2) D/E ratio of 0.33 – 1.00 (the lower the better) </li></ul><ul><li>3) PEG ratio < 1 (trailing P/E ratio divided by current EPS) </li></ul><ul><li>4) Pretax profit margin consistency </li></ul><ul><li>5) Little institutional ownership (<50% preferred) </li></ul><ul><li>6) Flat or increasing inventory turnover </li></ul><ul><li>Further information: One Up on Wall Street, Beating the Street (books) </li></ul>Peter Lynch (GARP Investor) Stock Analyst Program 2010
  18. 18. Stock Screening William O’Neal (Growth Investing) Source: John Reese, Todd Glassman; “Market Gurus.” <ul><li>Cut losses at 7-8% loss (high risk strategy) </li></ul>Stock Analyst Program 2010
  19. 19. Stock Screening <ul><li>Thesis: investors overvalue popular stocks and undervalue unpopular stocks </li></ul><ul><li>1) Find ‘shunned’ stocks: low P/E, low P/B, low price/dividend, low P/CF </li></ul><ul><li>2) Separate investor overreaction from truly bad investments </li></ul><ul><ul><li>Look for: high current ratio, high ROE, high pre-tax profit margins, low D/E </li></ul></ul><ul><li>Further information: Contrarian Investment Strategy (book) </li></ul>David Dreman (Contrarian Investor) Stock Analyst Program 2010
  20. 20. Stock Screening Value vs. Growth (P/B Deciles vs. 5-Year Annualized Return) Source: “Value vs. Glamour: A Global Phenomenon” – Brandes Institute (2008) Stock Analyst Program 2010
  21. 21. Stock Screening <ul><li> </li></ul><ul><ul><li>Descriptive, fundamental, technical screens </li></ul></ul><ul><li> </li></ul><ul><ul><li>Many different exchanges, lots of fundamental screens </li></ul></ul><ul><li> </li></ul><ul><ul><li>Graphical distributions </li></ul></ul><ul><li>Bloomberg Terminal </li></ul><ul><ul><li>Comprehensive screener </li></ul></ul>Useful Stock Screeners Stock Analyst Program 2010
  22. 22. Risk Management
  23. 23. Risk Management <ul><li>&quot; I haven't met a rich technician&quot; - Jim Rogers </li></ul><ul><ul><li>&quot; I always laugh at people who say &quot;I've never met a rich technician&quot; I love that! Its such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician.&quot; -Marty Schwartz </li></ul></ul><ul><li>&quot;Diversify your investments“ - John Templeton </li></ul><ul><ul><li>&quot;Diversification is a hedge for ignorance&quot; - William O'Neil </li></ul></ul><ul><li>&quot;Don't bottom fish&quot; - Peter Lynch </li></ul><ul><li>&quot;Don't try to buy at the bottom or sell at the top“ - Bernard Baruch </li></ul><ul><li>&quot;Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich” - Jim Rogers </li></ul><ul><li>&quot;I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.&quot; - Paul Tudor Jones </li></ul><ul><li>&quot;I'm more concerned about controlling the downside. Learn to take the losses. The most important thing about making money is not to let your losses get out of hand.&quot; - Marty Schwartz </li></ul><ul><li>&quot;Rule number one of investing is never lose money. Rule number two is never forget rule number 1&quot; -Warren Buffett </li></ul>Quotes Stock Analyst Program 2010
  24. 24. Risk Management Never Lose … .but pick your tolerance level for losing, @ which point you need to stop and reevaluate yourself, your rules, and your strategy Stock Analyst Program 2010
  25. 25. Risk Management Considerations <ul><li>How much capital is placed vs. how much capital is risked per trade </li></ul><ul><ul><li>What is the effect on the portfolio, opportunity cost of getting into other trades etc. </li></ul></ul><ul><li>When NOT to trade? </li></ul><ul><li>Look at your equity curve – do you trade the same on losing and winning streaks? </li></ul><ul><li>When do you have a take a loss in order to avoid a larger loss? </li></ul><ul><li>Do you change your plan AFTER you get into a trade? </li></ul><ul><li>How does your position sizing change with accumulated new profits/losses </li></ul><ul><li>Factors </li></ul><ul><ul><li>Leverage used </li></ul></ul><ul><ul><li>Volatility of asset traded </li></ul></ul>Max Risk Potential Profit Stock Analyst Program 2010
  26. 26. Risk Management Example 32 pips 73 pips BUY if channel is respected TAKE PROFIT below session high STOP LOSS below previous low ACTIVATE TRAILING STOP Max Risk Potential Profit 0.43 73 pips 32 pips 2.28 now Stock Analyst Program 2010
  27. 27. Risk Management More Considerations <ul><li>Look at portfolio globally and correlations amongst different holdings </li></ul><ul><li>Positions with high correlations are the same as leverage </li></ul><ul><ul><li>Positions with negative correlations can lower risk & return </li></ul></ul><ul><li>Difference between winning and losing: </li></ul><ul><ul><li>More due to limiting mistakes than to going into good trades </li></ul></ul><ul><li>Remember that cash is also a position </li></ul><ul><li>Plan your trades. Trade your plan </li></ul><ul><ul><li>Often said, not always done… </li></ul></ul><ul><li>Consistency is never over done </li></ul>Stock Analyst Program 2010
  28. 28. Risk Management Equity Curve Stock Analyst Program 2010
  29. 29. Risk Management Equity Curve Stock Analyst Program 2010
  30. 30. Risk Management Equity Curve Stock Analyst Program 2010
  31. 31. Risk Management Equity Curve Stock Analyst Program 2010
  32. 32. How to Start…
  33. 33. How to Start… <ul><li>Macroeconomy </li></ul><ul><ul><li>David Rosenberg, Chief Economist & Strategist, Gluskin Sheff </li></ul></ul><ul><ul><ul><li>Go to to sign up for morning newsletters (often bearish) </li></ul></ul></ul><ul><ul><li> > The Macro View (can e-mail subscribe) </li></ul></ul><ul><ul><li> > Business and Finance </li></ul></ul><ul><li>Industry Analysis [VPN required] </li></ul><ul><ul><li> > NetAdvantage > Industry Reports </li></ul></ul><ul><ul><ul><li>Or, > Mergent Online > Industry Reports </li></ul></ul></ul><ul><ul><li>Bloomberg terminal: RSE <go> > Search by Industry </li></ul></ul><ul><ul><li> > Stocks & Sectors </li></ul></ul><ul><li>Company Analysis </li></ul><ul><ul><li> > Screener </li></ul></ul><ul><ul><li> > Screener </li></ul></ul><ul><ul><li> > ValueLine [old school, but great info in one page] </li></ul></ul><ul><ul><li>Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR </li></ul></ul>Important Resources Stock Analyst Program 2010
  34. 34. Research Report Composition <ul><li>Next meetings: Room 045; March 5, 12, 19 (2pm) </li></ul>Date Topic Date Topic Jan 29 Overview, Valuation, Resources to Start Mar 5 More Applied Valuation Feb 5 What is Price Action? Multiples Analysis Mar 12 Applied Technical Analysis (equities, commodities, FX) Feb 12 Stock Screening & Risk Management Mar 19 TBD Feb 19 Cancelled: Reading Week Mar 26 Cancelled Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations Stock Analyst Program 2010