Monday, May 24, 2010

Momentum trading

Sprint caught a couple of upgrades today and the market took the stock up pretty quickly. The last couple of weeks when the market was getting beaten down by the bears, Sprint refused to go down. These are very positive sign in terms of trading on momentum.

As noted earlier Sprint seems to be everywhere these days with advertising. They seem to have got all the products they needed to get out there with a comprehensive story and they have been blanketing the media with ads touting those products. This helps analysts and pundits build a bull case for a stock.

None of these are fundamental reasons for buying Sprint. But such market trends, where a certain stock resists being beaten down my the general market followed by some upgrades generally is an ominous sign of a break out. It generally means that somebody big believes the story. So if you are looking for speculation you might have just found it.

Friday, May 21, 2010

PM approaching "deep value"

This market down turn has brought opportunity back on the table. Granted that the market is still sliding and today's action may not be any signal that we are going to start going up again, but nonetheless it is time to see if we are approaching value in any corner of the market.

Phillip Morris International might be one such stock. Currently trading at 44.26$ this stock might be a good case study for this down turn and an experiment on the "Simplified DCF" that I had mentioned earlier. This is ofcourse looking beyond the morality of investing in a organization that sells cigarettes.

PM has a trailing EPS of 3.41$ and a forward EPS of 3.82$. The projected growth rate of the company is about 10% for the next five years and it yields a dividend of just above 5%.

If we use trailing EPS as our reference then 3.41 * 10.5 = 35.80. Plus an additional 2.32$ of dividend and that makes it 37.80$. The company is purchasing stock back at a rate of reducing the float by 12%, so if we factor a 12% increase in value that is an additional 4.53$ which brings us up to 42.336$.

If we take the forward EPS as our reference then, we first discount the projection by 10% which is 3.45$. So 3.45 * 10.5 = 36.225. Plus the dividend and the buyback adjustment and we have 43$. Now if we consider the Euro crisis as a hit of 5% to future earnings if the Euro continues to slide, then we have 40.85$.

So in summary the deep value for PM appears to be around 41-42$ and at 44.26 I am close to calling it fair and jumping in. Given the market negativity and assuming that the slide continues for some time I don't think it will be hard to pick up PM at 41$.

Friday, May 14, 2010

Buying low

This is the time when it seems like the carpet is being pulled from under you. The market seems to have taken the whole Euro bail out like a big lump that just wont go down. Tough every one out there is calming everyone else things seem to be on a slide. The market is now off more than 10% and though I have added to some position this week, I haven't really been on a buying frenzy yet.

Last time the market crashed in 2008/2009 I was reluctant to add to my positions. I was not sure where the market was going to end up. But I did buy pretty aggressively in late 2007 when the markets had started falling, resulting in added pain as the market continued to go down. So this time I am going to sit out the slide. Either the market hits doldrums before I start getting in again or I sit this one out and enjoy the upside that will follow with whatever I am already holding

The key to buying low is to actually by low and not buy on the way down - when you "think" it is low. From my experience you are better off buying 5-10% above the bottom than buying 5-10% on the way down to the bottom. Psychologically it is much better for an investor. If you end up buying a lot of stuff on the way down then you are cash strapped all the way to the bottom and are unable to participate on the way up. This does a lot of damage to the investors confidence as he nervously waits and hopes to regain lost ground.

The key is not to get a twitchy finger and pull the trigger just because you are nervous about the falling market. Find a price point you will add to the holding no matter what and wait for the slide to do the rest. If it doesn't come to it, well then you can enjoy the upside of whatever you are already holding.

Wednesday, May 12, 2010

Simplified DCF

The concept of discounted cash flow brings a certain appearance of sanity to the process of asset valuation. Every person/site that explains this concept always gives a caveat about the fact that DCF cannot be used in isolation and needs to be used in conjunction with other factors such as book value, growth rate (though this could be factored into DCF calculation), market penetration, market size and even more intangible factors such as market mood, management strength and else.

I once read that Warren Buffet could tell you in a few minutes of hearing about a company if it is deeply undervalued/discounted at current market price. This is a price at which you would be a moron to not buy it. After reading about this (and I was investigating DCF at that time) I have come up with a model of my own. Though you will find that this calculation is rather aggressive I think there is something to it if you are looking for deep value. How do I know you ask? Well I had done this calculation for a number of companies sometime in 2007 and at that time the numbers that I came up with were almost half of the current value. But following the crash of 2008 most of the companies bottomed out in and around the numbers that I had computed. So I have some renewed confidence in this calculation. Unfortunately these will be numbers that you will not see in today's market but you can always recognize value when you see it.

So in this simplified calculation, for every 5% growth rate over a period of 5 years I add 1 to 8.5 (which is the base multiple) and the resultant value is the multiple of annual EPS that should determine the current market price. These numbers come from doing multiple DCF calculations for multiple companies and observing a pattern.

So if you have a company with an annual EPS of 2$ and a 5 year growth rate of 10% then the "deep value" price is 10.5*2 = 21$. Having said this I always discount the growth rate a few point from the projections especially for high growth companies.

In 2007 this calculation yielded a 250$ value for GOOG. I believe GOOG bottomed out in the low 220s. This was the case for a few other companies that I was following.

Now I too have a way of telling if a company is deeply undervalued and if there is a buffer in the price I am paying for a stock.

Tuesday, May 11, 2010

Sprinting to success

I have been noticing that in the last few months the Sprint brand name has been popping up in several places. Wall Street Journal is one of the most obvious ones I have seen thus far. Now as most of you know, Sprint has been relegated to a very distant third in the world of mobile service providers, but there are some exciting things happening at Sprint which is worth taking notice.

Seeing the Sprint add I visited their website. I was particularly stuck by a service they offer that delivers broadband connection via a 4G network which can then translate into a hot spot in your home. I for one am sick and tired of finding bargains from Comcast and am really tired of this one provider model available to most people living in apartments. Sprint provides me an alternative to such a model. (Well, at least worth a look). They also seem to be expanding into corporate networks, providing mobile 4G service to executives on then move. All this without considering that they would be the first 4G network in the consumer space as well.

Sprint has its own problems, but at the current valuation and considering they have probably hit rock bottom in terms of subscriber loss, this might be a speculative play worth noting.

Opening shop!

This blog is an effort to log my investment thoughts as and when it hits me. I make no claim to be unbiased in my investment thoughts and they are indeed heavily influenced by my investment strategies and ideas. So please read anything on this blog with that in mind.

Many a times I have seen the market behave in a certain way and thought to myself that I had predicted that. But over the years I have been more wrong than right in my investment choices and decisions. So this blog is more to chronicle my thoughts and use it as a reference for the future to see how many time I was actually right in my predictions and thoughts in comparison to my actual investment decisions.