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Sri Lanka Equity Forum » Stock Market Talk » Some thoughts on CSE market situation at present

Some thoughts on CSE market situation at present

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Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
I do not know about your optimism right now but let me again point out some of the share at CSE are at sheer bargains . Some trading below IPO, NAV and PE of 5-7. Some have very strong cash per share. Others have the clear potential to improve the cash situations with their management doing their job right.
f you don;t believe me look at some Fin sector shares, certain manufacturing shares, and a certain plantation share( a sector which every one is skeptical about now.) Even the Motor sector is neglected largely and is undervalued . People sold their shares over too much panic. Do you think these companies are
going to go bankrupt or earn 10% of what they earned last year?

The foriegners are still going for larger cap companies which have not appreciated that much. ( COMB, DIST JKH etc)But just think what will happen if they start collecting in big quantities some other quality shares. I see early indications of such in the likes of Diversified conglomerate which is trading in the penny stock category thanks to a bad move to make it over liquid. Some companies have easily the potential to pay 10% dividend of current share price in the future. Some already have.
Share like CTC and NEST have over appreciated as they we high dividend yielding shares and illiquid. But now there are other share which can give higher dividend return.


Some penny stocks if properly managed within the next 5 years have the potential multiply value by 5 folds. We have discussed them before but again ;ook at below IPO, below NAV shares.

Even more importantly some share will appreciate from time to time for no apparent reason to the novice. Some share will give trading opportunities just by following the market trend. Some good share may pull back in red days . Will we see it as negative factor or positive chance for the future? It depends on you. But note many shares have corrected in value or over corrected right now from the top. Even shares like BUKI which was at Rs 1600 one time is at Rs 750 today. ( still have room to correct). Look what happened to LOLC. There are many more examples.



Share market is also a mental game. Now in this great bear trend share don't appreciate blindly like in those days where every tom, dick and harry of a share appreciated due to over optimism, manipulation and greed.

This market is now for the smart. This is the time to pick shares after smart thinking . Time have gone for blindly picking shares. Certain share will have the tendency to go up in price when the bull starts? which are those shares. ( That being said time again will come that a blind share will go up in price thanks to market cycles and human mentality)



Still investor confidence if less due to volatility in interest rates , micro and macro factors . Bargain hunter now are going to win in the future . I have a feeling world economies are going to bounce back slowly within this year( that is if you believe that world has a tendency to balance out the kinks over time if one see it as a optimistic place).

Is Sri Lankan companies that bad as CSE is reflecting? Time to analyze , think and invest smartly. Not in huge chunks as sudden price drops can still happen thanks to weak mentalities.


We can make ASI to go back to 4500 or to even less if we want to. But we are giving a selected few ( people) even more potential to grow richer if we all contribute to drop the index down further.


Some people are going to laugh with 50-200 capital gains with time! Is this the time to go all out and buy. No. Like I said buy in small chunks . Investment strategies have been discussed in this forum several times.

Make your own strategy , identify your plays, invest smart, have patience and sometimes we need to go against the crowd to win in the future.

Good luck.

K.Haputantri

K.Haputantri
Co-Admin
I totally agree with you slstock. Its time to collect if one has own money. Don't buy on credit.

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Bottom fishing not too late.
Why in our forum the experts couldn't identify some counters and discuss like before?
Not to say BUY/HOLD/SELL, just to discuss pros and cons of the counter.

K.Haputantri

K.Haputantri
Co-Admin
@Redbulls wrote:Bottom fishing not too late.
Why in our forum the experts couldn't identify some counters and discuss like before?
Not to say BUY/HOLD/SELL, just to discuss pros and cons of the counter.

Its better if some one can rate all the shares according to their current PER & NAV so that individuals can decide.

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
@K.Haputantri wrote:
@Redbulls wrote:Bottom fishing not too late.
Why in our forum the experts couldn't identify some counters and discuss like before?
Not to say BUY/HOLD/SELL, just to discuss pros and cons of the counter.

Its better if some one can rate all the shares according to their current PER & NAV so that individuals can decide.

I think SRIAS all ready uploaded Capital Trust reports on NAV & PER in talk section.

UKboy

UKboy
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Good article from slstock

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
DFCC and CFIN seems to have gained foreigner interest again. What more to come?

WildBear


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Slstock is correct. Now market has plenty of stocks with huge growth potential trading at P/E ratio of less than 7, and well below their NAV.

K.Haputantri

K.Haputantri
Co-Admin
SAMP & COMB have come down due to listing of employee shares issued at a discount. Time to collect.

hariesha


Vice President - Equity Analytics
Vice President - Equity Analytics
This should be the line of thinking for the investors. People who were in this line managed to earn positive results during last six months. Latest being the month of June. Those who made fresh investments at the beginning of the month earned considerable gains within two weeks.

Have a balanced portfolio. Select shares for the future, for the med/short term and for trading. All important. There is enough material for average investors in this forum and in the research section. The problem is most of the guys here are not following the available reports. They are more interested in gossips and easily become prey to promoters. See how cowed is attracted to gossip topics.

People should realize that they are investors not gossip hunters.

market bull

market bull
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
V good article,Thanks Very Happy

@slstock wrote:

This market is now for the smart. This is the time to pick shares after smart thinking . Time have gone for blindly picking shares.

Make your own strategy , identify your plays, invest smart, have patience and sometimes we need to go against the crowd to win in the future.

seyon


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Thanks slstock.

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@slstock wrote:
If you don't believe me, look at some Fin sector shares, certain manufacturing shares, and a certain plantation share (a sector which every one is skeptical about now). Even the Motor sector is neglected largely and is undervalued. People sold their shares over too much panic. Do you think these companies are going to go bankrupt or earn 10% of what they earned last year?
...
This market is now for the smart. This is the time to pick shares after smart thinking. Time has gone for blindly picking shares. Certain share will have the tendency to go up in price when the bull starts. Which are those shares?
Great thoughts, slstock!
With so many 'tips' available, how does one identify the good ones from the bad ones?

Stock selection and investing should never be restricted to quantitative methods. However, I have found it useful to use a formula to assess whether a share is worth investing in or not; it is a method of elimination, not a method of selection.

My simple formula assigns weights to financial performance parameters that matter to me:
(5 x EPS) + (0.6 x BVPS) + (10 x DPS)

Let's take some assumed figures for a hypothetical company...
EPS = Earnings per Share = Rs 7.40
BVPS = Book Value per share = Rs 55.55
DPS = Dividend per Share = Rs 2.50
Then, according to my formula, the maximum that I would pay for that share is:
(5 x 7.40) + (0.6 x 55.55) + (10 x 2.50) = Rs 95.33.

Try it out, change the weights if you wish, and see whether it works for your favorite share!

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
@Antonym wrote:
Stock selection and investing should never be restricted to quantitative methods. However, I have found it useful to use a formula to assess whether a share is worth investing in or not; it is a method of elimination, not a method of selection.

My simple formula assigns weights to financial performance parameters that matter to me:
(5 x EPS) + (0.6 x BVPS) + (10 x DPS)

Let's take some assumed figures for a hypothetical company...
EPS = Earnings per Share = Rs 7.40
BVPS = Book Value per share = Rs 55.55
DPS = Dividend per Share = Rs 2.50
Then, according to my formula, the maximum that I would pay for that share is:
(5 x 7.40) + (0.6 x 55.55) + (10 x 2.50) = Rs 95.33.

Try it out, change the weights if you wish, and see whether it works for your favorite share!

Good one.

Whitebull


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@Antonym wrote:
@slstock wrote:
If you don't believe me, look at some Fin sector shares, certain manufacturing shares, and a certain plantation share (a sector which every one is skeptical about now). Even the Motor sector is neglected largely and is undervalued. People sold their shares over too much panic. Do you think these companies are going to go bankrupt or earn 10% of what they earned last year?
...
This market is now for the smart. This is the time to pick shares after smart thinking. Time has gone for blindly picking shares. Certain share will have the tendency to go up in price when the bull starts. Which are those shares?
Great thoughts, slstock!
With so many 'tips' available, how does one identify the good ones from the bad ones?

Stock selection and investing should never be restricted to quantitative methods. However, I have found it useful to use a formula to assess whether a share is worth investing in or not; it is a method of elimination, not a method of selection.

My simple formula assigns weights to financial performance parameters that matter to me:
(5 x EPS) + (0.6 x BVPS) + (10 x DPS)

Let's take some assumed figures for a hypothetical company...
EPS = Earnings per Share = Rs 7.40
BVPS = Book Value per share = Rs 55.55
DPS = Dividend per Share = Rs 2.50
Then, according to my formula, the maximum that I would pay for that share is:
(5 x 7.40) + (0.6 x 55.55) + (10 x 2.50) = Rs 95.33.

Try it out, change the weights if you wish, and see whether it works for your favorite share!

A nice formula.

Is this calculated with last financial year reports ? OR

Do you use Interrim Finacial Statements ?

I can remember earlier you use a formula which have investers expected earning from that share.(NAVPS + 8 * annual EPS in which 8 came by investers expected rate of return per annum[100/12.5 = 8])

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@Whitebull: I use trailing twelve months financial data, even if they are unaudited. (If, in your opinion, unaudited financials are not reliable, then the management is not reliable - and you don't want to invest in such a company.)
You could even use estimates of future earnings, if the prospects of the company are on an uptrend.

I am happy that you remember my 'old formula'. This cruel downtrend has made me older and (hopefully!) wiser. Hence the need for introducing this 'new formula'...

You will observe that the weights for EPS and BVPS have been reduced, and DPS has been introduced.
Weight for EPS is reduced because investors' expected returns have increased due to higher interest rates.
BVPS is sometimes over-emphasized unless the company has plans of liquidating its assets and distributing the proceeds to shareholders. What's more important is how a company can use its assets to generate revenues.
High dividend yield shares are good because they survive a downturn better. Dividends are the only real return that an investor gets until he finally divests the share. Dividends indicate that a company has more money that it needs for its operations - which is a good sign.

So, it is (5 x EPS) + (0.6 x BVPS) + (10 x DPS) for me!

Whitebull


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Thanks for the information Antonym.

Please excuse me if I sounds silly but DPS is always a fraction of EPS isn't it ? So it seems same number or fraction of same number has been taken twice if company gives a dividend.

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@Whitebull wrote:Thanks for the information Antonym.

Please excuse me if I sounds silly but DPS is always a fraction of EPS isn't it ? So it seems same number or fraction of same number has been taken twice if company gives a dividend.
@Whitebull: That is a very smart question!
On average, companies on the CSE pay out about 33.75% of their earnings as dividends... I needed a method of assigning a higher price to companies that pay a higher dividend. Therefore, I had to reduce some weight from EPS - and assign a separate weight to DPS. (It is not taken twice.)

Whitebull


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@Antonym wrote:
@Whitebull wrote:Thanks for the information Antonym.

Please excuse me if I sounds silly but DPS is always a fraction of EPS isn't it ? So it seems same number or fraction of same number has been taken twice if company gives a dividend.
@Whitebull: That is a very smart question!
On average, companies on the CSE pay out about 33.75% of their earnings as dividends... I needed a method of assigning a higher price to companies that pay a higher dividend. Therefore, I had to reduce some weight from EPS - and assign a separate weight to DPS. (It is not taken twice.)

Yes you got a point.

Anyway for a new/growing company it is better to re - invest the earning rather than giving a dividend...If management does well that share will be more appreciated.Please do not think I critisize ur formula.I know it is very difficult to include all the factors in to a general formula.

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Many thanks for the formula. I remember using one of your old formulae but at that time I could only find a very limited number of shares that fit to it. Now I can say there will be many shares that fit to this good formula.

Okay some random examples at reduced statistics.Am taking approx Eps based on past performance and future possibility


1) DIMO adjust its coming year EPS to Rs 150 ( half last year) , with NAV of 800 and dividend of Rs 30
as example the formula value will yield.

DIMO= (5 x 150) + (0.6 x 841) + (10 x 30)= rs 1550

2) GLAS = (5x 0.75) + (0.6x3.3) + (10X0.3) = Rs 8,5

3) RHL = ( 5X7) + (0.6X41.71) + (10X1.5) = Rs75

4) KCAB = (5X12) + ( 0,6X87.02) + ( 10X2) = Rs 130

5) DIST = 5x20 + 0,6x121 + 10x3 = Rs 202

6) PCH = 5x0,57 + 0,6 x 6.2 + 10*.25 = Rs 8.5



Seems to be a very good formula to get indication of present purchase value.

But what will happen to BUKI , CARS ,CARG etc .

Note the forumla will give better results for shares trading under or around their NAV and with higher EPS. If one can find shares that trade around NAV , high eps and good dividend this formula will show the value such.

Like Antonym mentioned, the parameters can be tweaked to ones preference. Again thanks for sharing Antonym.




@Antonym wrote:
@slstock wrote:
If you don't believe me, look at some Fin sector shares, certain manufacturing shares, and a certain plantation share (a sector which every one is skeptical about now). Even the Motor sector is neglected largely and is undervalued. People sold their shares over too much panic. Do you think these companies are going to go bankrupt or earn 10% of what they earned last year?
...
This market is now for the smart. This is the time to pick shares after smart thinking. Time has gone for blindly picking shares. Certain share will have the tendency to go up in price when the bull starts. Which are those shares?
Great thoughts, slstock!
With so many 'tips' available, how does one identify the good ones from the bad ones?

Stock selection and investing should never be restricted to quantitative methods. However, I have found it useful to use a formula to assess whether a share is worth investing in or not; it is a method of elimination, not a method of selection.

My simple formula assigns weights to financial performance parameters that matter to me:
(5 x EPS) + (0.6 x BVPS) + (10 x DPS)

Let's take some assumed figures for a hypothetical company...
EPS = Earnings per Share = Rs 7.40
BVPS = Book Value per share = Rs 55.55
DPS = Dividend per Share = Rs 2.50
Then, according to my formula, the maximum that I would pay for that share is:
(5 x 7.40) + (0.6 x 55.55) + (10 x 2.50) = Rs 95.33.

Try it out, change the weights if you wish, and see whether it works for your favorite share!

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@Whitebull wrote:
Yes you got a point.

Anyway for a new/growing company it is better to re - invest the earning rather than giving a dividend...If management does well that share will be more appreciated.Please do not think I critisize ur formula.I know it is very difficult to include all the factors in to a general formula.
@Whitebull: For me, dividends are important - which is why I have given it some weight. You are free to intelligently change the assigned weights, according to what matters to you... Therefore, this formula is flexible.

By the way, constructive criticism is welcome; it helps me to improve! Very Happy

wiki


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Good work..very valuable.. Thanks... Slstock and Antonym

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@slstock wrote:I remember using one of your old formulae but at that time I could only find a very limited number of shares that fit to it. Now I can say there will be many shares that fit to this good formula.
...
But what will happen to BUKI, CARS, CARG, etc.?
Very few shares fit the old formula because they were probably over-valued...

This is the elimination round
; so, if too many shares fit this formula, that's not good... We need to identify the best of the lot. So, you can tighten it, something like this:
(3 x EPS) + (0.5 x BVPS) + (10 x DPS)
That's how flexible it is!

BUKI, CARS, CARG, etc. don't qualify? Then, don't buy them - unless you have some information that is not evident in the financials...

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
Let me add my 50cents to this valuable discussion;

It could be a good idea to have a key stock in the portfolio, that can create magic for you.
Suppose if you find a key performing stock in your portfolio that grows tremendously, adding a bit more in that share could bring you a fortune. But the difficult part is identifying this key stock.
i.e. Ppl who followed BFL in 2010 would still remember how it has turned out to be a 10 bagger in couple of months. Wink

One has no need of paying attention to the short-term fluctuations in share price but the value of the underlying businesses is vital for investments.
We dont want to invest in a company that has nothing to offer in few years time.
However, if you have time watch out for these fluctuations cuz these can make your investments grow too.

One can pay attention to NAV to make sure the investment is made on undervalued companies (which are traded at the market less than NAV).
In my line of thinking this it really important as its wise to pay a fraction to invest in a growing company rather than paying a premium to buy a company which recorded a growth.

IMO the fractions given to NAV - 0.6 and to dividend section - 10 are good values.. It pave the way to identify the companies which are undervalued and pay good dividends..

K&M


Senior Equity Analytic
Senior Equity Analytic
Certainly some valuable and intellectual comments has flown in this thread, im sure the article by slstock and the nice formula will clearly help the value investors to make better decisions. but my question is, does all these articles pin pointing that the market is undervalued will matter for this Market? because as far as i saw during last year was clear manipulation and misinterpretation f innocent investors.our market pattern is basically simple for 3 to 4 weeks their will be investors selling to foreigners and suddenly when it reach the bottom you will see a quick rally for about 3 to 4 days and again we turn into the same pattern where people who bought during the rally start selling due to low buying rates and see a rally all of a sudden and the the final result is prices of stocks are going down gradually.

i don't see any stability in our market for fundamentals to work, our market is an emotionally driven market thats why at the heat of war also it gave us good return to investors where in other markets it should be the opposite of what happened here during a war time. now this emotional factor is been demolished in the recent times and investors confidence is dampen due to hihg level of misconduct in the market , so firstly we must build that all over again and then do all these calculations and make good investments.

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@smallville wrote:
It could be a good idea to have a key stock in the portfolio, that can create magic for you.
Suppose if you find a key performing stock in your portfolio that grows tremendously, adding a bit more in that share could bring you a fortune. But the difficult part is identifying this key stock.
...
One has no need of paying attention to the short-term fluctuations in share price but the value of the underlying businesses is vital for investments.
@smallville: Couple of excellent thoughts there...
1. The 'key stock' suggestion is especially useful for those who are willing to take extra risk for extra return; it's like putting half of your eggs in one basket. Therefore, the selection of the basket (or key stock) is very important.
2. If you know what the company is worth, you will not lose sleep over fluctuations in share price. Price is temporary, determined by demand and supply... whereas value is what the business is worth - as determined by quantitative factors (like a formula!) and qualitative factors.

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@ Antonym & slstock, very interesting discussion of ideas & knowledge. thanks. sometimes when we restrict ourselves to formulas and go strictly by reported info on EPS, NAV etc, we maybe missing the bigger picture as i'll explain shortly. sometimes we must also think "outside the box" using qualatative factors especially in a sri-lankan context specifically our short term macro situ as trailings earnings may look very different to future earnings. furthermore, stocks that look attractive based on a formula may underperform due to macro / micro economic factors affecting that particular company / industry in the future. nevertheless, its a interesting concept and factors to keep in mind are as folls :

1. Dividends :
a. some companies never pay dividends and stockpile cash. Apple never paid a dividend between 1991-2011 and stockpiled usd 100 Billion cash. now analysts are saying stock will go from usd 600-usd 1000 by 2014.
b. some companies barely pay a dividend but re-invest all their retained earnings in aggresive expansion to create shareholder value. Buki for eg barely paid a dividend in the past 8-9 years but the stock is a 240 bagger between 2003/2004 and 2011/2012. 24,000 % return in 8-9 years ! on a dividend screen for payout / yield, most would have missed it, because those numbers were paltry.
c, some companies payout 90-95 % of their earnings as dividends.NEST, CTC, LLUB etc come to mind. In Nest case EPS was approx Rs 50 and they paid a Rs 47.50 dividend which amount to a 95 % payout. but the stated Book value is only Rs 70 (maybe more if you consider other factors), so investors are willing to pay now 16 times book value to get a 4 % dividend yield ?

2. Earnings (EPS) : Quality of Earnings is the key to consider. do the reported numbers include extra-ordinary, non-recurring items ? Hayleys, Fort Land Group, entire LOLC / Brown umbrella of companies include this, so quality of earnings may be poor. sometimes companies, for eg, Buki, report a significant amount of earnings off income statement with a note to the accounts, which we have to consider too. for eg, Buki reported Rs 42 EPS in income statement and additional Rs 38 per share in note to account as a fair value gain in changes to biological assets according to IAS, but not recognised according to SLAS in 2011/2012.

3. NAV : due to historical cost accounting convention, this is the least reliable figure in the accounting statements. Assets, land, buildings, Plantations & Biological Assets, equity etc are not marked to market and do not reflect fair value. so if you are using this figure in any formula, you may be way off target. The Volcker Rule in the U.S.A. specifically seeks to rectify this by making it mandatory for banks in the U.S. to mark to market their derivative positions. in fact, this is done as potential future liabilities may be in fact understated in balance sheets.
sometimes we just have to think "outside the box" and use common sense to determine whether the NAV stated in financial statements are understated or overstated (for eg. negative goodwill). for Eg, going back to Buki, The stated NAV as at 2012 march is Rs 230 i..e usd 1.70 per share. so therefore then is Buki's net assets worth only usd 170 million ? they own approx 63 % of GoodHope Asia and 45 % of Carsons.
In our eagerness to compartmentalize value in terms of current earnings, nav, dividends etc, we may miss the bus of some potential future world class companies, in strategic sectors which are also relatively unaffected by Sri-Lankan macro economic issues. A JKH on the other hand also appears overvalued in the formula context but foreign funds are buying on liquidtity, free float, lack of controlling shareholder and excellent management yardsticks.


Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Yes at that time market was at the higher end or the decent of the mountain. But not sure whether that formula had 3 variables as this one.

One thing to note is that, we might need to use our own judgement and any external information to analyse certain shares with hidden assets. ( ex: CIT , RENU ,CABO)

What I meant about BUKI,CARS and CARG is that they can sometimes have hidden plays that might not be captured into a formula. Soem stock such as CARG can play as a growth stock in certain minds due to aggressive expansion. Also when the bull comes illiquidity can play a role to raise even overvalued shares going by the formula to 100% gains, BUKI has dropped from Rs 1600 one time to Rs 750. Though this looks overvalued CARS and BUKI can have some special qualities in a bull market.

So in essence, like Antonym said before, these formulae should not be used blindly. They are a good entry level black box input and out put method to make some evaluations based on fundamentals.

Thanks again for adding depth to the discussion.


@Antonym wrote:
@slstock wrote:I remember using one of your old formulae but at that time I could only find a very limited number of shares that fit to it. Now I can say there will be many shares that fit to this good formula.
...
But what will happen to BUKI, CARS, CARG, etc.?
Very few shares fit the old formula because they were probably over-valued...

This is the elimination round
; so, if too many shares fit this formula, that's not good... We need to identify the best of the lot. So, you can tighten it, something like this:
(3 x EPS) + (0.5 x BVPS) + (10 x DPS)
That's how flexible it is!

BUKI, CARS, CARG, etc. don't qualify? Then, don't buy them - unless you have some information that is not evident in the financials...

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
YEs alchemist some of your notes should be duly noted. But I think all of us will agree that this formula will give an easy black box approach with inputs and output to value certain fundamentals as a secondary yard stick.

@The Alchemist wrote:@ Antonym & slstock, very interesting discussion of ideas & knowledge. thanks. sometimes when we restrict ourselves to formulas and go strictly by reported info on EPS, NAV etc, we maybe missing the bigger picture as i'll explain shortly. sometimes we must also think "outside the box" using qualatative factors especially in a sri-lankan context specifically our short term macro situ as trailings earnings may look very different to future earnings. furthermore, stocks that look attractive based on a formula may underperform due to macro / micro economic factors affecting that particular company / industry in the future. nevertheless, its a interesting concept and factors to keep in mind are as folls :

1. Dividends :
a. some companies never pay dividends and stockpile cash. Apple never paid a dividend between 1991-2011 and stockpiled usd 100 Billion cash. now analysts are saying stock will go from usd 600-usd 1000 by 2014.
b. some companies barely pay a dividend but re-invest all their retained earnings in aggresive expansion to create shareholder value. Buki for eg barely paid a dividend in the past 8-9 years but the stock is a 240 bagger between 2003/2004 and 2011/2012. 24,000 % return in 8-9 years ! on a dividend screen for payout / yield, most would have missed it, because those numbers were paltry.
c, some companies payout 90-95 % of their earnings as dividends.NEST, CTC, LLUB etc come to mind. In Nest case EPS was approx Rs 50 and they paid a Rs 47.50 dividend which amount to a 95 % payout. but the stated Book value is only Rs 70 (maybe more if you consider other factors), so investors are willing to pay now 16 times book value to get a 4 % dividend yield ?

2. Earnings (EPS) : Quality of Earnings is the key to consider. do the reported numbers include extra-ordinary, non-recurring items ? Hayleys, Fort Land Group, entire LOLC / Brown umbrella of companies include this, so quality of earnings may be poor. sometimes companies, for eg, Buki, report a significant amount of earnings off income statement with a note to the accounts, which we have to consider too. for eg, Buki reported Rs 42 EPS in income statement and additional Rs 38 per share in note to account as a fair value gain in changes to biological assets according to IAS, but not recognised according to SLAS in 2011/2012.

3. NAV : due to historical cost accounting convention, this is the least reliable figure in the accounting statements. Assets, land, buildings, Plantations & Biological Assets, equity etc are not marked to market and do not reflect fair value. so if you are using this figure in any formula, you may be way off target. The Volcker Rule in the U.S.A. specifically seeks to rectify this by making it mandatory for banks in the U.S. to mark to market their derivative positions. in fact, this is done as potential future liabilities may be in fact understated in balance sheets.
sometimes we just have to think "outside the box" and use common sense to determine whether the NAV stated in financial statements are understated or overstated (for eg. negative goodwill). for Eg, going back to Buki, The stated NAV as at 2012 march is Rs 230 i..e usd 1.70 per share. so therefore then is Buki's net assets worth only usd 170 million ? they own approx 63 % of GoodHope Asia and 45 % of Carsons.
In our eagerness to compartmentalize value in terms of current earnings, nav, dividends etc, we may miss the bus of some potential future world class companies, in strategic sectors which are also relatively unaffected by Sri-Lankan macro economic issues. A JKH on the other hand also appears overvalued in the formula context but foreign funds are buying on liquidtity, free float, lack of controlling shareholder and excellent management yardsticks.


Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
This is what I posted when the market was depressed some time ago. Most of the content here still hold and some who bought selective shares during that time would have gained 10-30% by now. Some penny stock would have gain 50% since then.



Last edited by slstock on Tue Aug 21, 2012 4:49 pm; edited 1 time in total

Rapaport

Rapaport
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Good job Slstock. Nice to see you have identified RICH long ago.

Keep it up

Cheers

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