Value Investing 01 (May 08 - Dec 08)

[fclim]

Hi la papillion,

What is your friend's risk profile? I think hor, age should affect the appetitie for risk, but not in all cases...

e.g., if this investment for his decedents, he can buy the equities and put in some kind of trust?

oh ya, i think hor, sometime in 1997/8, the banks' price was below NAV rite? P/B < 1.0...
Would it be safer to buy then? But, dunno such times will come again... Hee...

have fun,
fc

[winston]

Value Investing 101
TSC Staff

"Value stocks, also known as undervalued stocks, trade at a lower price than the company's reputation, earnings outlook, or financial situation would seem to merit." -- TheStreet.com Glossary (Related term: Undervaluation)

From Free Cash Flow Rules:

We've all heard the saying that "cash is king," but in investing, I like to say that "free cash flow" (FCF) is king. Profits are great, but they don't count for much in the long-run if a company is not generating FCF. After all, FCF is the money left over after a business pays all its bills.

A few perfectly legitimate accounting adjustments can tweak earnings to management's delight, but at the end of the day, it's the cash that's left over that counts. Businesses that produce healthy amounts of free cash flow can be valued with a higher degree of certainty and margin of safety than simply going on profits.

With everyone sour on the market today, several wonderful businesses continue to pour out fantastic levels of free cash flow and are thus increasing intrinsic value while the equity price sits still. Sooner or later the stock price will catch up.
Fixation on cash generation keeps your analysis focused on what counts. Of course, there will be special investment situations that will be require another set of valuation parameters, but special situation investments are few and far between. Yet in markets like these, with everyone rushing to sell at the first sign of trouble, many wonderful businesses are producing gobs of cash and going unnoticed. It won't last long.

Jim Cramer gives a rundown of relatively safe positions.

Cramer: "I think that the real values that are going to be created for people who are wiling to hold something for 18 months, still aren't there... I think you have to wait. I mean they're [stock prices] not so low that you can say, 'You know what, I don't care anymore. I'm willing to buy.'

From Value Investing's Golden Rule:

All of history's great money managers adhere to the formula introduced in part one of this column.

They may not articulate the rule the same way, but each understands and employs this formula:

Absent a material change to the business, as price declines, risk declines, and your anticipated rate of return increases.

Let's look at this all-important precept more closely.

Risk declines in concert with price.

Let's assume you own shares of General Electric (GE Quote - Cramer on GE - Stock Picks) in your IRA account. The stock has declined from $38 to $27 a share over the last few months. If GE's long-term business value has not been impaired, the price decline in GE stock coincides with a decline in your ownership risk.

The decrease in risk is seen in the increase in the spread between price and value. If GE's business is worth $40 a share (my calculation; the mechanics of how I arrived at this number are unimportant for the purpose of this column), the spread between price and value has widened from $2 a share (when it traded at $38) to $13 a share ($40 value minus $27 price quote).

Lower prices increase your anticipated rate of return.

In the face of falling stock prices, investors get stressed. There is a magic elixir that will eliminate the stress: Sell! Sell GE at $27 to eliminate your risk. Sell GE because the recent price decline might continue. Sell GE so you can invest in risk-free Treasury bills.

It might alleviate your stress, but selling GE at $27 is a dumb move. If GE is worth $40 a share, your ownership risk is low and your anticipated rate of return is 50%. If you sell GE after the price has dropped to $27 and invest in Treasury bills, you'll generate a 2% yield. If you hold GE and wait until you can get a price that approximates the $40 value, you'll generate a 50% return (not including GE's 4.6% dividend).

If you hold GE, how long will you have to wait for a $40 stock quote? The short answer: I don't know. The wait could be a couple of months or it could be a couple of years. Pessimism permeates the market, making it difficult to secure bids that approximate value. Even if you have to wait two years, though, you'll get some nice benefits. Not only will you collect $2.48 a share in dividends (assuming there is no change in the dividend payout), but your asset will likely be more valuable in a couple of years. It's reasonable to expect that GE's business value may reach $47 or $48 a share by 2010.

Note that your cost basis in GE stock is irrelevant in applying the rule above. Whether you paid $4 or $40 for your stock doesn't matter. In deciding whether to sell the GE stock in your IRA, the only numbers that matter are the current price and the current value.

Read the full version of Value Investing's Golden Rule: Whirlpool, GE.

From Value Stock Investing: CarMax, Overstock.com:

The value-centric investor "insures" against risk by buying shares at a discount -- by paying a price for stock that is materially lower than value. My risk is low if I buy shares of a company at 50 cents per dollar of value. My potential reward is a 100% gain.

How do you find stocks that are selling at 50 cents or even 33 cents per dollar of value? The answer is easy to state, but difficult to put into practice: You have to be able to see things that other investors do not see.

Do you think you've identified the next big winner? Then tell me something I don't know. Tell me what you see that others don't see. Identify a specific variable in the valuation equation that the crowd of investors has overlooked or misinterpreted.

Read the full version of Value Stock Investing: CarMax, Overstock.com.


http://www.thestreet.com/story/10439912 ... c=_htmlwal

[fclim]

Hi la papillion,

Interesting how we get different sets of figures...
I got my NAV figures from the SGX latest qtr (2Q-08) filing by the banks...

DBS
Price = 16.44
NAV = 12.78
P/Nav = 1.29

OCBC
Price = 6.95
NAV = 6.41
P/Nav = 1.09

UOB
Price = 16.50
NAV = 12.63
P/Nav = 1.31

have fun,
fc

Information Sources:
1. DBS latest qtr rpt (See Net Book Value, pg 2)
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_DA89FF2DD5ADA67B4825749E001901DC/$file/2Q08performancesummary.pdf?openelement
2. OCBC latest qtr rpt (See Net Asset Value after re-valuation surplus, pg 13)
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_241756BEDA24AA714825749E00161CF8/$file/2Q08FinancialResults.pdf?openelement
3. UOB latest qtr rpt (See Revalued NAV, pg 5)
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_47AF264630312FC24825749C00158637/$file/1H08UOBGroupResults.pdf?openelement

[la papillion]

fclim,

I took it from share investment book, 340. I didn't bother to calculate it as I just need a quick reference. I think yours should be more accurate. Afterall, the table that I did for P/B is taken from their respective annual reports too. Perhaps share investment used a different sort of definition.

Thks for your effort in putting up the figures. You must have spent a while collecting the data!

[fclim]

Hi la papillion,

No problem at all...
I collected the data prior to your posting...
Was using it as a rough gauge for the market...

have fun,
fc

[caseyc]

I took it from share investment book, 340.

Just a small note... The data from shares investment book's website seems inaccurate as well. I was researching on a company recently and found the error after I cross-checked with the annual report.

[la papillion]

Thks caseyc, I thought so too. I never used their data for serious work...only for play play..thanks, maybe we should all complain to ask them what the hell they've been doing.

[Cheng]

Value investors must be very busy now, bargain hunting.

A margin of safety of 60% should be appropriate.

[fclim]

dear all,

i started to nibble a bit on OCBC when the price / book was about 1, its like buying a free bank, i could not resist.. hee...

unfortunately, after my initial nibble, the price continues downwards... i'm mentally prepared though still sad... i'm prepared for it to go as low as 0.8 price to book...

so, if you are still holding cash... well, maybe you can still get a better deal than me? althou i think my deal not bad liaoz...

good luck to all...

most importantly, have fun,
fc

[Cheng]

In this pure bear, there will be prolong periods of prices being stagnant, that is where you find the bottom.

Why? Investors hurt in this economic crisis will be too fearful to buy. Once mass selling stops and not many are buying, prices remain stagnant for a very long time, that is where I will start buying.

Be greedy when others are fearful and be fearful when others are greedy. But when people are rushing out, don't rush in too quickly. Unless you want to join the victims of the stampede.

Is this called timing the market? But I don't know how low the market will fall. Will it rise very suddenly and caught me by surprise? I don't think so.