Some thoughts on CSE market situation at present

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!

Good work..very valuable.. Thanks... Slstock and Antonym

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...

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.

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..

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.

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.

@ 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.

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...

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.

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.

Good job Slstock. Nice to see you have identified RICH long ago.

Keep it up

Cheers