STT - Fundamental Analysis (FA)
Sector Lead
Date: 24/03/16
Time: 19:07:55
Post #: 17358542
EV is something I see getting constantly mixed up on HC.
Enterprise Value is simply
1. Market Cap (number of shares x shareprice)
2. ADD Debt (any debt, long and short)
3. MINUS Cash and other liquid investments (like holdings in listed companies)
Why is it more important to know EV. You could get 2 companies with same market cap and earnings but one could be cash strapped, and the other could be 80% cash.
The PE ratio will be the same, however if company B (with high cash) deploys the cash in an earning positive manner, they will have an advantage on company A...
and that's where we should look at PEG ratios (worth further reading for newbies - google it), and the PEG ratio adds in the expected future 12 month growth rate into the PE.
If a company is growing earnings faster than current PE ratio, then this is considered better than a company on a PE of 10 growing earnings at 10%pa. As if another company is growing at 20% pa, the PE will become cheaper on paper if the shareprice doesn't shift.
You might also consider payable and receivables into your EV valuations, although not common, I ALWAYS looks at payables vs receivables in the reports, as this can change EV dramatically, especially for those mining/ resources companies in large capex phase, ie drilling or building plant.
I don't consider options UNLESS they are in the money and unconverted as the cash conversion add cash to the balance sheet and EV remains the same.
Escrow shares should be in the total issue, they are just not sell-able during a set period, but have no effect on EV whatsoever.
Remember, the market is always trying to price in future profits and growth, whether actually or potential, and then reacts daily to actual results, news.
TheGladiator
Date: 24/03/16
Time: 20:11:58
Post #: 17358853
OK so when I'm analysing a stock there are a number of things that I need to Consider.
1. Market cap
2. Enterprise value
3. Valuation of peers
4. Is it in the right sector
5. How many do directors hold
6. How many do top 20 hold
7. Performance of current directors
8. What are it's upcoming milestones
1. Market cap
Market capitalisation is the market value of a company's shares. This figure is calculated by taking the share price and multiplying it by the total number of shares. it can get a bit tricky deciding whether to use options. Options should be included if they are in the money or close to being in the money.
For example, company ABC has a share price of 2c and has 200,000,000 heads (shares) and 10,000,000 options with a strike price of 3c. The market cap is (200,000,000 + 10,000,000) * 0.02 = $4,200,000.
If the options had a strike price of 10c though I wouldn't have used them in the calculation.
2. Enterprise Value
I can see sectorlead has already written a great summary. See
http://hotcopper.com.au/posts/17358542/single
3. Valuation of peers
When determining whether a company is "cheap" and therefore has more room to run, it's important to see how it's valued compared to its peers who are at a similar point in its life cycle. You should also look at those who are more advanced to see possibly how much room the stock can run if it meets it's objective.
As an example let's look at SRT. Based on my research on fintech companies who are making $1m NPAT per year, they have a MC of $100m+. So SRT first performance milestone is $1m NPAT and if the vendors don't achieve this they pretty much get nothing. So SRT currently has a MC of 26 million and will have 1.55 b shares if milestone one is achieved. So 100mil MC = 6.5c. So theoretically srt will minimum 2 bag if milestone 1 is achieved.
4. Is it in the right sector
As I'm writing this I can see others have already written great summaries lol. For sector analysis see freeholds posthttp://hotcopper.com.au/posts/17358262/single
5. How many do directors hold
This is very important as when directors have skin in the game they will be more than likely look after themselves as well as shareholders. So no massive dilutions and being very prudent with company finances. They will also ensure placements go to sticky hands as they wouldn't want to see constant pump and dumps. Very good example is DUO which Peter wall had no shares in and was diluted to hell and back numerous times. Matthew walker though was very smart about it and raised at good prices most of the time to very sticky holders.
6. How many do top 20 hold
The more the top 20 hold the tighter the register. This means there is less free float available of shares which will be sold on market. The less shares available to be sold the easier it is for the share price to run. The people in the top 20 are also important. If you have people in the top 20 who consistently back winners they will more than likely attract other good investors who follow them.
7. Performance of current directors
This is extremely important. We are trusting directors with our money so if they haven't performed in the past what makes you think they will perform in this stock. Mark creasy in the mining game and Matthew walker in the shell game are great examples. Check what companies the directors have worked in and see the share price performance to work out how successful they have been.
8. What are it's upcoming milestones
From a STT perspective we rely on announcements and big milestones to make money. If a company has no big milestones coming up then what will make the share price move up?
These milestones are also important in understanding when to time our entries. Depending on our trading strategy you can time your entry. Personally I like to get in 6 weeks earlier than when a milestone is due so there is less competition from other traders.
Remember this is the absolute minimum amount of research I will do to help me shortlist prospective stocks. Without doing the above as a minimum the risk increases substantially.
minoil
Date: 24/03/16
Time: 21:02:34
Post #: 17359095
FA..........in my case, as i like shell hunting.............and, in order, subject to change, and re-interpretation due to many variables
Market Cap.............i like to stay under 4Mill
Next step, visit a recent quarterly for............
Shares on issue.............200Mill or less is peachy........anything with 1Bill+ usually gets the heave ho...be careful of convertible notes
Cash and debt........... 500k cash seems to be a sweet spot........No debt is preferable, avoid any large payable debts.........debts to directors need to be examined closely, as they are not necessarily a hindrance
Company activity...........is it persisting with a flogged out project, or is it open to new opportunities
Management...........are they in for lifestyle?, are they open to change.......are they old and buggered, and keen to retire and have their shareholdings pushed up in time for retirement...........are they stuck in the chair, sipping coffee and dutifully accepting their fees?
Its not always the case of having a deal maker on the board, but its a plus...........remember, a lot of shells are sought out by outsiders, who are especially interested in "sleepy" management
Next, hit the T20............who is there? any well known dealmakers, shell hunters, brokers or corporate heavies etc..........is the register open/widely held? circumstances are different to each of them............one heavy with board members may be too tough to crack, maybe they want out........i tend to avoid too much Asian presence as this usually means its a closed shop. The lack of big holders may mean its easier for a corporate group like say CPS, to move in, and accumulate either on market, or via underwriting a CR.
HC threads...........you get a feel for the company.............no posts.......noice !!! its under the radar. 2 or 3 regulars, be careful as you may not get a true feel for sentiment...........3 hearts or more posting........forget it !!! its too late!! and that makes it riskier as there is not much cream left.
Gather your info, including sub notices, see if someone is moving in, is an advisor being appointed, then, you put it all on the table and try and assemble the jigsaw............with shells, there are no hard and fast rules...........much of it is by intuition and gut feel, shells dont follow the rules !
m3ntor
Date: 25/03/16
Time: 14:43:13
Post #: 17361462
Ev is just a better way to measure the size of the company , and excludes cash
good way of determining true value
Think of it like selling a toy store business, you would sell it for $X + stock
Stock isn't in the price of the business / goodwill but rather something you just add on at the end . What you're really buying for $X is the branding the goodwill the supply relationships the reputation the existing customers the lease and everything else that comes with it, the actual business
In asx world the stock would be cash and everything else is what's important
I get what you're saying that a company with a large amount of cash is valuable in itself , but this is usually reflected in the EV anyway
Usually you'll see shells for example with loads of cash will trade at higher EVs than shells with no cash . This is
because when they do an RTO vend they do not need to raise as much as they can use the shell cash too
Sector Lead
Date: 25/03/16
Time: 14:50:12
Post #: 17361485
Listed companies can also of course have negative EVs.
If they actually have a business, or a potential turnaround situation, negative EVs can return explosive growth.
You must be careful in why they have a negative EV, and sometimes the market doesn't believe the cash will generate a good return, or they are in a difficult sector/ market.
Cash burn if high must always be considered.
Then some are just way oversold.
Sector Lead
Date: 26/03/16
Time: 11:26:07
Post #: 17363623
PEG ratios
Price Earnings/ Growth ratio.
This is a useful extension of the basic PE ratio. I find this is important as all of the instos are always looking for growth stocks with lower than average PEs. Many ASX stars come from this area. Dominos, Blackmores etc. Until the balance is tipped the other way, and the PE figure is many times the earnings growth figure.
Simple example:
Company A: Market Cap $100m/ NPAT $10m = PE 10x
If company A is growing earnings @ 20% then forecast NPAT would be $12m, and the forward PE is 8.33
To get the PEG. Take the current PE (10) and divide by growth rate (20%).
The PEG = .5
A PEG under 1 is considered better value and more likely the stock will appreciate.
If the above example was actually listed AND in a good sector, then it's unlikely you'll find a stock as good as that.
A cheap multiple AND growing faster than PE figure.
Company B: Market Cap $100m/ NPAT $10m = PE 10x
If company B is struggling to grow earnings/ tough sector and just 2% is expected
PE (10) divided by (2% growth) = PEG of 5
Little reason for much change in the company market cap.
http://www.investopedia.com/terms/p/pegratio.asp
A study from the Fool
Some things to ponder
Here are a few more interesting tidbits from my study:
- 92% of companies with PEG ratios of less than 1 beat the market over three years.
- 68% of companies with PEG ratios of between 1 and 2 beat the market.
- 47% of companies with PEG ratios greater than 2 beat the market.
http://www.fool.com/investing/value/2006/04/06/how-useful-is-the-peg-ratio.aspx
I like using PEG, and a EV/NPAT ratio.
forrestfield
Date: 26/03/16
Time: 14:47:51
Post #: 17364154
Okay different strategies for different things... First of all, everyone investing in market needs to find their own strategy... be it based on TA or FA based on time frame etc... once established, lets take the second step...
Spot the trend, gains made here are larger and easier... Try to spot it earlier and then enjoy the rewards... even if you arrive late, don't worry try to find the cheapies... Like in Lithium I joined the party late but yet found 3 winners... I am not saying there wont be any winners out of the sector but easier gains can be made within the sector...
How to spot a sector? You can either be the late comer or you can be the early spotter... There are always signals... Follow the giants, billionaires, trend setters etc they always know more... For example, our iron ore giants were investing in dairy, agriculture and beef well before the Chinese changed their 1 child policy... we have seen the result, stocks made 3-10 bags in no time... Also check whats happening in Fintech now... you will see what I mean...
How to find these signals? Simply research and reasrach and more research... you don't have to spot every trend, one trend is enough to set you up well... and if invested the right amount of money at right time, you are done for life.
Other than sporting the trend and your own strategy... find your strengths and weaknesses... What impacts your judgement the most? For example, I try to invest in stocks where I personally se multi bagger potential... But I realised that waiting for those multi bag gins I quite often lose short term gains in the similar stock... and while I try to gather these short term opportunities, I over do it and let go my actual goal... So after heaps of experiments and analysis of my own trading patterns I now trade based on % and parcels... For example, if I buy something and it shoots within days I lock in gains rather than waiting for multi bags... however, if something runs smoothly< I just hang in... let the runners run I guess... Secondly, I now hold real short term, short term and medium term parcels for the stocks I think can do multi bags...
On top of this, I have established criteria's for minows, small caps, medium caps and I rarely invest in Large caps not even in my super...
Simply, the larger the market cap is the harder it becomes to analyse the stock and its possible potential.... So I stick to basic with minows and small caps... though I prefer the liquid ones for my large holdings... Liquid only for entry not for exit... exit is normally based on news flow and then there is heaps of volume at times 50m plus for days which is more than sufficient to exit...
From here onwards I check the following:
1. Number of shares on issue... Love it when they have less than 300m with liquidity...
2. Market cap and that is fully diluted... means options, debts, con notes cash all included... the smaller the market cap the better it is...
3. Cash burn rate on admin... this helps me to spot the life style companies... If the cash burn rate is low, it means less dilution over time...
4. Cash position... If the sector is not hot the stock must have heaps of cash... if the sector is hot, they will able to raise cash with minimum dilution... even if there is dilution share price will have less impact... most of the times cap raise in the right sector pumps the stock higher within days to weeks so all good...
5. Directors / management (does not apply to shells... In shells this is the first thing I check)... Have they done good previously... previously means recently like 6 months to 2 years... anything before, it does not bother me much...
6. Managements own position... how much shares they hold... and that is based on their capital not free shares etc... I realised over the years if the management has their own skin in the game they try harder... Not always, but most of the times...
7. Top 20... good to know but I normally think the only safe shares are the ones held by sub holders as they cant sell them without disclosing.... the rest of the t20, they can buy or sell any time like all of us...
there are other things, but if the above do exist I take a position...
Position size.... can be 1 to 5k... these are when I am not 100% sure... and I want to see the trend on daily basis... So I take a small position for two reasons:
1. If the stock make gains my research I not completely wasted and I still got something out of it.
2. I watch it on daily basis... it helps keeping an eye on announcements, volume and trading pattern.
When it comes to large holding, I normally hold 2-5 stocks at a time... Now many would say, you should not buy more than 5% of your portfolio in one stock... I would say that's their strategy... I personally take a large position and need one of them to be a goer... Also realised if I follow the above criteria and avoid stocks with heaps of shares and debt / con notes, my bad trades make 20-30% capital loss while my winners do somewhere between 30-500% gains... So at the end of the day, I do fine IMO...
Shells: totally different strategy...
I take large punts at times... mostly with MW shells though and now Otsana is becoming a personal favourite... the way they have done their listings for OOK and CR8... I am impressed...
as said countless times, I buy shells for people behind them... I mean if you take the people out, shell has nothing really...
secondly, I have my own brand value for groups... for now, MW has 5-10m value close to deal IMO and Otsana has 3-5m close to deal...
I can add heaps re shells but I remember we discussed heaps on shells in the past so perhaps STT library can be handy in this regard...
All the best guys and remember I am a simple punter who still has to learn heaps... So take this post as my simple rules and nothing more...
FullMoonFever
Date: 26/03/16
Time: 16:21:08
Post #: 17364386
Well as usual, the weekend lounge is a hotbed of useful information and insights of various methods, ideas & reference material for new or experienced traders alike to pick at to enhance their own strategies....enough can't be said about the quality freely shared by knowledgeable illustrious posters. A thanks as well from me.
So...just to add some other bits from my own thoughts for those interested.
A couple of sites I like that can be either subscribed to or have free components as well.
ASXiq is one and the other Investogain. Not being able to monitor all stocks across all industries obviously, I find these provide a couple of diff triggers for me to then look further into a stock TA & FA as a potential...not perfect or foolproof but just another handy tool.
ASXiq provides various inbuilt scans for TA as well as useful FA info such as PE, PEG, EV etc (subs req'd) , the merits of which have been discussed already but one free section I like is the filter by sector or industry ranking that I can use to see % gain over 1 day or week or mth & vol for example that prompts me to then look at the chart and then also the poss FA behind the movement. Can have it's own little glitches occasionally - like Co. name not updated eg. RSL to SRT.
Investogain has various Co. info in one spot when looking but also the quick filter listing of the last 20 buys / sells list for Directors for "all" or "over 100k", I find again, is a handy trigger to then look at why they may be doing so.
Try post one of my own thoughts on FA as well later with a kinda ongoing live(ish) example I'm researching atm.
Site links:
http://asxiq.com/end-of-day-screener/end-of-day/1/
http://www.investogain.com.au/directors-transactions
