shaun van den berg head of client education at psg online welcome to marketworx: centurion tuesday,...
TRANSCRIPT
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Shaun van den BergShaun van den Berg
Head of Client Education at PSG OnlineHead of Client Education at PSG Online
Welcome to Marketworx: Centurion Welcome to Marketworx: Centurion
Tuesday, 24 July 2012Tuesday, 24 July 2012
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Make Make MoneyMoney
InvestorInvestor
TraderTrader
FundamentalFundamentalAnalysisAnalysis
Research Research ToolsTools
Value Value InvestorInvestor
GrowthGrowthInvestorInvestor
InvestingInvestingfor for
DividendsDividends
TechnicalTechnicalAnalysisAnalysis
WEN ChartingWEN Charting
Break-outBreak-outTradingTrading
Unit Unit TrustsTrusts ETFETF
EquitiesEquities
EquitiesEquities CFDCFD
Marketworx AgendaMarketworx Agenda
SSFSSF
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• To create a second income
• To replace income
• To provide for children’s education
• To achieve Financial Freedom …
Roadmap…to Wealth CreationRoadmap…to Wealth Creation
Financial ObjectivesFinancial Objectives
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Financial FreedomFinancial Freedom
90% Income 90% Income from from ActiveActive
IncomeIncome90% 90% Passive Passive Income Income from from InvestmentsInvestments
10% Income from 10% Income from Investments (Passive)Investments (Passive)
10% Income from 10% Income from Active IncomeActive Income
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Knowledge & ExperienceKnowledge & Experience
Risk ProfileRisk Profile
Time Time MoneyMoney
Financial ObjectivesFinancial Objectives
NoviceNovice?? Advanced?Advanced? Intermediate?Intermediate?
Roadmap …to Wealth CreationRoadmap …to Wealth Creation
Investor?Investor? Trader?Trader? Both?Both?
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Investor or Trader (or Both?)Investor or Trader (or Both?)
Investor
• Passive Management• View > 3-years
– Buy & Hold– Quality, Undervalued
Shares– Balanced Portfolio
• Capital Growth• Dividend Income & Growth• Low Brokerage Costs• Capital Gains Tax (CGT)
– R30 000 exempt– 33.3% inclusion rate– 13.32%
R100 000 Capital GainR100 000 Capital GainLess R 30 000 Exemption Less R 30 000 Exemption = R 70 000 Taxable Gain= R 70 000 Taxable GainInclusion rate 40% x 33.3% Inclusion rate 40% x 33.3% = 13.32%= 13.32% = R 9 324 Tax Payable= R 9 324 Tax Payable
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• Active Management• View < 3-years
– Position Trading – Swing Trading– Jobbing (Speculating)
• Capital Growth– Buy Low & Sell High– Sell High & Buy Low
• Higher Brokerage Costs• Income Tax
– 40%
Investor or Trader (or Both?)Investor or Trader (or Both?)
TraderTraderInvestor
• Passive Management• View > 3-years
– Buy & Hold– Quality, Undervalued
Shares– Balanced Portfolio
• Capital Growth• Dividend Income & Growth• Low Brokerage Costs• Capital Gains Tax (CGT)
– 33.3% inclusion rate– R30 000 exempt– 13.32%
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Investor MatrixInvestor Matrix
PrudentPrudent
Speculative Speculative
AggressiveAggressive
ConservativeConservative
REWARD
High
Low High
Low
RISK
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“If you have the wrong reasons why you want to get started, you will have the wrong reasons for wanting to stop (quit).” – John Maxwell
Extra-Ordinary Person: – Extra Change– Extra Thinking – Extra Effort– Extra Time– Extra Planning– Extra Help
Why do you want to get involved in the share Why do you want to get involved in the share market? market?
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PSG Online websitePSG Online website
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Online Trading CourseOnline Trading Course
Select TutorialsSelect Tutorials
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Marketworx Tutorials Marketworx Tutorials
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Marketworx Tutorials Marketworx Tutorials
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Marketworx PreparationMarketworx Preparation
Activity #2: Apply the Fundamental Analysis checks to the shares in your initial watch list.
Activity #4: Apply the portfolio management checklist to your “prospect” watch list (i.e. after
reducing the “initial” watch list) Remember risk management.
Activity #3: Compile graphs using the technical analysis indicators you have learned about to the
shares in your Watchlist.
Activity #5: Start trading. Build a share portfolio. Select the best opportunities based on your
fundamental and technical criteria.
Activity #1: Ensure that you have compiled your Watch lists in your PSG Online trading account
before moving onto step 2!
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Marketworx Program Marketworx Program
Before MarketworxBefore Marketworx
Register on PSG Online/ Create a Watch List /Share / Register on PSG Online/ Create a Watch List /Share / Portfolio Management / Start TradingPortfolio Management / Start Trading
During MarketworxDuring Marketworx
Financial Goals / Trader, Investor or both?Financial Goals / Trader, Investor or both?Investment Strategy / Trading Strategy Investment Strategy / Trading Strategy
Post MarketworxPost Marketworx
Review Marketworx presentation / More questionsReview Marketworx presentation / More questionsFundamental & Technical Tasks / Simulator TradingFundamental & Technical Tasks / Simulator Trading
After Six MonthsAfter Six Months
Open a Trading (EQT) Account / ETF & Unit Trust Accounts / Open a Trading (EQT) Account / ETF & Unit Trust Accounts / SSF / CFD Accounts / Offshore AccountSSF / CFD Accounts / Offshore Account
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• How to choose your first shares– Step # 1: Narrow down the choice– Step # 2: Gather fundamental information– Step # 3: Gather technical information– Step # 4: Create a Balanced Portfolio– Step #5: Start Trading
Getting Started: Five StepsGetting Started: Five Steps
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• Step #1: Narrow down the Choice– Top 100 Simulator List– Prospecting: Top-Down Approach– Prospecting: Financial Journalism– Initial Watch Lists (3 x 30)
Getting Started: Step 1Getting Started: Step 1
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Narrow Down the ChoiceNarrow Down the Choice
Select Indices
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Top 100 SharesTop 100 Shares
SelectFutures
Select Select Simulator Simulator
ListList
Print Print ShareShare
ListList
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• Step #1: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism
Getting Started: Step 1 (a)Getting Started: Step 1 (a)
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• International Markets• Economic Indicators• Currencies• Precious Metals• Local Markets• Specific Sectors• Specific Shares• Checklists
Top - Down ApproachTop - Down Approach
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International MarketsInternational Markets
Bullish
Bullish
Bearish (Just!)
Bearish (Just!)
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International MarketsInternational Markets
Bearish (Just!)
Bearish
Bullish (Just!)
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Oil & CopperOil & Copper
Bearish
Bearish
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Precious MetalsPrecious Metals
Bearish
Bearish
Bearish
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Currencies (US $)Currencies (US $)
USD strength / EUR weakness
JPY strength/ USD weakness
USD strength / GBP weakness
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Currencies (ZAR)Currencies (ZAR)
ZAR weakness / USD strength
ZAR strength / EUR weakness
ZAR weakness / / GBP strength
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JSE All Share IndexJSE All Share Index
Bullish
Resistance
Support
Resistance
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Local Market (Sectors)Local Market (Sectors)
Bullish (Just)
Bullish
Bullish
Bearish
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Local Market (Industry)Local Market (Industry)
Bearish
Bullish
Bearish
Bearish Bullish
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Financial JournalismFinancial Journalism
• Read! Read! Read!– Bloomberg / Reuters/ CNN Money– PSG Online / MoneyWeb / Fin24– Business Day / Business Report/ Sake– Financial Mail / FinWeek
• Beware Analysis Paralysis• Scan Headlines – Shares you know• Look for Bad News
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Getting Started: Step 1 (b)Getting Started: Step 1 (b)
• Step #1 a: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism
– Step # 1 b: Create Initial Watch Lists (3 x 30)– Mining Shares– Financial Shares– Industrial Shares
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Creating a Watch ListCreating a Watch List
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Universe of Shares Universe of Shares
± ± 400 Shares400 Shares
Watch ListsWatch Lists
3 x 30 Shares3 x 30 Shares
Core Portfolio
8 - 12 SharesStep 1:Prospecting
Process
Step 2:AnalysisProcess
Getting Started: Step 1 (b)Getting Started: Step 1 (b)
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Creating a Watch ListCreating a Watch List
Step 1:Step 1:ClickClick
Watch ListWatch List
Step 3:Step 3:Click Add Click Add
buttonbuttonStep 5:Step 5:
Click Add Click Add buttonbutton
Step 6:Step 6:Select DustbinSelect Dustbin
to remove to remove
Step 4:Step 4:EnterEnter
Share CodeShare Code
Step 2:Step 2:EnterEnter
Watch List Watch List NameName
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Initial Wish ListInitial Wish List
View View Share Share
MovementMovement
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Initial Wish List – Ranking MoveInitial Wish List – Ranking Move
Select Select Column Column to Rankto Rank
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• Step #1: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism
• Step #2: Gather Fundamental Information– Share Info Page– Company Analysis
Getting Started: Step 2Getting Started: Step 2
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Initial Wish List(s)Initial Wish List(s)
Select Watch
List
Select ShareCode
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Share Info PageShare Info Page
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Research Tools: Share InfoResearch Tools: Share Info
SelectCompanyAnalysis
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Research: Company AnalysisResearch: Company Analysis
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• Step #1: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism– Initial Watch Lists (3 x 30)
• Step #2: Gather Fundamental Information– Share Info: Company Analysis
• Step #3: Gather Technical Information– Technical Chart / Interactive Chart
Getting Started: Step 3Getting Started: Step 3
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Research Tools: Share InfoResearch Tools: Share Info
Select Select InteractiveInteractive
ChartChart
Select Select TechnicalTechnical
ChartChart
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Research Tools: Technical ChartResearch Tools: Technical Chart
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Research Tools: Interactive ChartResearch Tools: Interactive Chart
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• Step #1: Narrow down the Choice
• Step #2: Gather Fundamental Information
• Step #3: Gather Technical Information
• Step #4: Create a Balanced Portfolio– Structure– Spread – Stop Loss?
Getting Started: Step 4Getting Started: Step 4
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Build a Balanced PortfolioBuild a Balanced Portfolio
Large Large CapCap
(RES)(RES)
Large Large CapCap
(IND)(IND)
Large Large CapCap
(IND)(IND)
Large Large CapCap(FIN)(FIN)
50%50%
Mid Mid CapCap
(MIN)(MIN)
Mid Mid CapCap
(IND)(IND)
Mid Mid CapCap
(IND)(IND)
Mid Mid CapCap(FIN)(FIN)
40%40%
10% Cash 10% Cash Mid Mid CapCap
(MIN)(MIN)
Mid Mid CapCap
(IND)(IND)
Mid Mid CapCap
(FIN)(FIN)
Mid Mid CapCap
(IND)(IND)
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Buy @ 1000cBuy @ 1000c
Stop lossStop loss
10 % of 1000c10 % of 1000c
= 100c= 100c
Value shares @ 900cValue shares @ 900c
@ 1500c@ 1500c
stop loss = 1350cstop loss = 1350c
@ 2000c@ 2000c
stop loss = 1800cstop loss = 1800c
Stop Loss LevelStop Loss Level
Stop Loss Strategy (Equities) Stop Loss Strategy (Equities)
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• Step #1: Narrow down the Choice• Step #2: Gather Fundamental Information• Step #3: Gather Technical Information• Step #4: Create a Balanced Portfolio
• Step #5: Start Trading
Getting Started: Step 5Getting Started: Step 5
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Select Simulator AccountSelect Simulator Account
Select Select SIMSIM
Reset Reset AccountAccount
CheckCheckR100 000R100 000
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Select New OrderSelect New Order
Enter Enter Share Share CodeCode
& & Click Click GOGO
Select Select New OrderNew Order
Select BuySelect Buy& Enter & Enter QuantityQuantity
Enter PriceEnter PriceClick Click
SubmitSubmit
EnterEnterQuantityQuantity
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Select Order BookSelect Order Book
Select Select Order Order BookBook
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Select Portfolio HoldingsSelect Portfolio Holdings
Select Select PortfolioPortfolio Brokerage Brokerage
CostsCosts
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Set up a Price WatchSet up a Price Watch
Enter Enter Share Share CodeCode
& & Click Click GOGO
Select Select Price Price
WatchWatchSelect Select Trailing %Trailing %
Click Click SubmitSubmit
EnterEnterPercentagePercentage
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Set up a Price WatchSet up a Price Watch
Select Select Price Price
WatchWatch
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Macro Fundamentals (Economic Analysis)Macro Fundamentals (Economic Analysis)
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Share Market AnalysisShare Market Analysis
Share MarketShare MarketAnalysisAnalysis
FundamentalFundamentalAnalysisAnalysis
Technical Technical AnalysisAnalysis
MacroMacroFundamentalsFundamentals
MicroMicroFundamentalsFundamentals VolumeVolumePricePrice
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• General Economic Influences– Gross Domestic Product (GDP)– Fiscal & Monetary Policy– Inflation Rate– Interest Rates– The Exchange Rate
• The Investment Cycle
Economic AnalysisEconomic Analysis
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Gross Domestic Product (GDP)Gross Domestic Product (GDP)
Average 4%Average 4%
ExpansionExpansion
ContractionContraction
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Fiscal PoliciesFiscal Policies
Tax CutsTax CutsAdditionalAdditional
Taxes Taxes
Discourage Discourage SpendingSpending
Encourage Encourage SpendingSpending
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Government spendingGovernment spending
Increases Increases or decreasesor decreases
in government spending in government spending
Influences Influences the business the business environmentenvironment
Government spending Government spending has a strong has a strong
“Multiplier Effect”“Multiplier Effect”
Companies that rely on
government spending
Defence, Defence, Social grants, Social grants, Education or Education or InfrastructureInfrastructure
Influence the Influence the General EconomyGeneral Economy
BudgetBudget
PrioritiesPriorities
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Government spending - Multiplier EffectGovernment spending - Multiplier Effect
Road Road BuildingBuilding
Earthmoving Earthmoving EquipmentEquipment
SuppliersSuppliersConstructionConstruction
WorkersWorkers
ConcreteConcreteMaterialsMaterials
ConsumerConsumerGoodsGoods
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““Multiplier Effect”Multiplier Effect”
Road Road BuildingBuilding
Earthmoving Earthmoving EquipmentEquipment
SuppliersSuppliersConstructionConstruction
WorkersWorkers
ConcreteConcreteMaterialsMaterials
ConsumerConsumerGoodsGoods
EqstraEqstra
BarworldBarworld
BellBell
WearneWearne
PPCPPC
M&R M&R HoldingsHoldings
WBHOWBHO
AvengAveng
AfrimatAfrimat
RetailersRetailers
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Monetary PolicyMonetary Policy
Restrictive Restrictive Monetary PolicyMonetary Policy
Reduces expansion ofReduces expansion ofBusinessesBusinesses
More expensive More expensive to finance home loansto finance home loans
Increases Increases borrowing costsborrowing costs
Reduces Growth RateReduces Growth Rate of Money Supply of Money Supply
Reduces supply of fundsReduces supply of fundsfor working capitalfor working capital
Reduces demand Reduces demand for Durable goodsfor Durable goods
Affects all segments Affects all segments of economy & of economy &
Relationship withRelationship withother economiesother economies
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InflationInflation
• Government, industry & consumer over spending.
• Printing too much money to finance this luxury.
• By-product of too low interest rates promoting too much growth too quickly.
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Inflation (Continued)Inflation (Continued)
Inflation causes Inflation causes differences between real differences between real & nominal interest rates & nominal interest rates
Inhibits growth & Inhibits growth & innovationinnovation
Influence the trade Influence the trade balance & exchange ratebalance & exchange rate
Beyond domestic Beyond domestic economy - differential economy - differential
inflation & interest ratesinflation & interest rates
Changes in spending & Changes in spending & savings behaviour savings behaviour
Unexpected changes in Unexpected changes in Inflation – difficult to planInflation – difficult to plan
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Interest rates riseInterest rates rise
Negative for profitsNegative for profits
Money is diverted to interest-Money is diverted to interest-bearing securitiesbearing securities
Market anticipates this & Market anticipates this & peaks before interest ratespeaks before interest rates
Lower share prices &Lower share prices &lower company valuationslower company valuations
Consumers spend lessConsumers spend less- Lower profits- Lower profits
Demand for Demand for moneymoney
increasesincreases
Interest Rate CyclesInterest Rate Cycles
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Rand StrengthensRand Strengthens– R7.50 / US$R7.50 / US$
The Exchange Rate (Importer)The Exchange Rate (Importer)
Rand WeakensRand Weakens
R8.50 / US$R8.50 / US$
• Imports are cheaper Imports are cheaper • $50 000 machine @ $50 000 machine @
R7.50 = R375 000R7.50 = R375 000• Buy more importsBuy more imports
• Imports are more Imports are more expensiveexpensive
• $50 000 machine @ $50 000 machine @ R8.50 = R425 000R8.50 = R425 000
• Buy fewer importsBuy fewer imports
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Rand StrengthensRand Strengthens
R7.50 / US$R7.50 / US$
The Exchange Rate (Exporter)The Exchange Rate (Exporter)
Rand WeakensRand Weakens
R8.50 / US$R8.50 / US$
• Exports become Exports become expensive overseas expensive overseas
• $1.00 / R7.50 = $1.00 / R7.50 = R0.1333R0.1333
• R10 Box of grapes R10 Box of grapes = $1.33 per box= $1.33 per box
• Sell less goods – Sell less goods – Not competitively Not competitively pricedpriced
• Exports become Exports become cheaper overseas cheaper overseas
• $1.00 / R8.50 = $1.00 / R8.50 = R0.1176R0.1176
• R10 Box of grapes R10 Box of grapes = $1.18 per box= $1.18 per box
• Sell more goods – Sell more goods – Competitively Competitively pricedpriced
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Competitive?
ZAR vs USD & EURZAR vs USD & EUR
Competitive?
Rand Strength
Rand Weakness
Rand Weakness
Rand Strength
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• Inflation (Relative to Reserve Bank Target?)• Interest Rates (Going up or down?)• GDP (Above 4% or below?)• Exchange Rate (Weakening or strengthening?)
• Foreign Interest Rates (Going up or down?)
The Economy & Investment CycleThe Economy & Investment Cycle
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Stock Market Above Average
Performance
Under Average
Performance
Interest Rates
Declining Increasing
Inflation Declining Increasing
Economy Below Average Above Average
Exchange Rates
Strengthening Weakening
Foreign Interest Rates
Declining Increasing
The Economy & Investment CycleThe Economy & Investment Cycle
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The Investment Cycle
GDP (Economic Growth) Interest Rates Stock Market Growth
Phase I Phase II Phase III Phase IV
Average
-
+
Phase IPhase I Phase IIPhase II Phase IIIPhase III Phase IVPhase IV
Economic Economic GrowthGrowth
Below Below AverageAverage
Above Above AverageAverage
Above Above AverageAverage
Below Below AverageAverage
Interest RatesInterest Rates DecreasingDecreasing IncreasingIncreasing IncreasingIncreasing DecreasingDecreasing
Stock MarketStock Market AboveAboveAverageAverage
BelowBelowAverageAverage
Below Below AverageAverage
Above Above AverageAverage
The Investment CycleThe Investment Cycle
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Key Annual ForecastKey Annual Forecast
Source: www.absa.co.za
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Sector Rotation: Relative to EconomySector Rotation: Relative to Economy
Building & Engineering
Financial ServicesIndustrialsIndustrials
Information TechnologyPackaging &
PrintingGen RetailServices
Transport
BanksFinancials
Life Assurance
MediaPaper
Short-termInsurance
Telecomms
ALSI 40ChemicalsDiamonds
Diversified IndustrialsElectronics
Mining Houses Platinum
Resources
BeveragesEducation
GoldMid Caps
Private EquitySmall Caps
SteelAlt X
FurnitureHealthcareHotels &Leisure
Metals &MineralsMining
ExplorationProperty
Under weight Over weightUnder weight
Over weightto Neutral
Underweight toNeutral
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Income StatementIncome Statement
Balance SheetBalance Sheet
Cash Flow StatementCash Flow Statement
Financial StatementsFinancial Statements
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Company AnalysisCompany Analysis
After determining an industry’sAfter determining an industry’soutlook is good:outlook is good:
Analyse & compare individual companyAnalyse & compare individual companyperformance within entire industryperformance within entire industry
Use Use financial ratiosfinancial ratios & & cash flow valuescash flow values to toidentify identify best companybest company in a in a promising industrypromising industry Examine Examine past performancepast performance & & future prospectsfuture prospects
Understand the company & outlookUnderstand the company & outlook
Determine Determine “Intrinsic Value”“Intrinsic Value” & compare to price & compare to price
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RmRmSales (Turnover or Revenue) XXXSales (Turnover or Revenue) XXXLess:Less: ExpensesExpenses (XXX) (XXX)Operating Profit (EBITDA) XXXOperating Profit (EBITDA) XXXLess:Less: Finance Costs Finance Costs (XXX) (XXX)Profit before Taxation (EBT) XXXProfit before Taxation (EBT) XXXLess:Less: Taxation on ProfitsTaxation on Profits (XXX) (XXX)Profits after TaxationProfits after Taxation XXX XXXLess:Less: Preference Dividend Preference Dividend (XXX) (XXX)Earnings (or Net Profit)Earnings (or Net Profit) XXX XXXLess:Less: Ordinary DividendOrdinary Dividend (XXX) (XXX)Retained Earnings Retained Earnings RXXX RXXX
Income Statement of Company XYZ for the Year Ended 31 December 2011Income Statement of Company XYZ for the Year Ended 31 December 2011
Financial Statements Financial Statements
RmRmXXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)RXXXRXXX
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EarningsEarningsNumber of shares in IssueNumber of shares in Issue
ProfitProfit Profit = Earnings
Dividends
Retained Earnings
= Earnings Per Share (E.P.S.)= Earnings Per Share (E.P.S.)
E.PS. = E.PS. = R66 000 000R66 000 000 825 000 000 825 000 000E.P.S. = 8cE.P.S. = 8c
Earnings RatiosEarnings Ratios
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Earnings Per Share (E.P.S.) x 100%Current Share Price
Earnings RatiosEarnings Ratios
= Earnings Yield (%) (E.Y.)
E.Y. =E.Y. = 8 cents per share 8 cents per share x 100% x 100%100 cents per share100 cents per share
E.Y. = 8%
Current Share PriceCurrent Share Price Earnings Per Share (E.P.S.) Earnings Per Share (E.P.S.)
= Price / Earnings Ratio (P/E)= Price / Earnings Ratio (P/E)
P/E = P/E = 100 cents per share100 cents per share 8 cents per share 8 cents per share
P/E = 12.5 timesP/E = 12.5 times
You want a high earnings yield
You want a low P/E multipleYou want a low P/E multiple
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Earnings RatiosEarnings Ratios
Dividends Per Share (D.P.S.)Dividends Per Share (D.P.S.) x 100% x 100%Current Share PriceCurrent Share Price
= Dividend Yield (%) (D.Y.)
D.Y. =D.Y. = 3 cents per share 3 cents per share x 100% x 100%100 cents per share100 cents per share
D.Y. = 3%D.Y. = 3% You want a high dividend yield You want a high dividend yield
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Investor Earnings RatiosInvestor Earnings Ratios
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RmRmAssetsAssets 200 200Less:Less: Liabilities Liabilities (50)(50)Total (Net) AssetsTotal (Net) Assets 150150 RmRmShareholder’s Funds Shareholder’s Funds 150 150 (Capital Employed)(Capital Employed)
Balance Sheet as at 31 December 2011Balance Sheet as at 31 December 2011
How How fundsfunds are spentare spent
Where funds Where funds come fromcome from
Financial Statements Financial Statements
RmRm175175(75)(75)100100 RmRm100 100
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Cash Flow from Operating ActivitiesCash Flow from Operating Activities
Operating Profit before tax & interestOperating Profit before tax & interestDepreciationDepreciationAmortisationAmortisationProvisionsProvisionsInterest PaidInterest PaidTaxation PaidTaxation PaidChanges in working capital (Debtors, Changes in working capital (Debtors, Creditors, Inventory, etc.)Creditors, Inventory, etc.)Net Cash provided by operating activitiesNet Cash provided by operating activities
2011 20102011 2010Rm RmRm Rm 68 5668 5614 13 14 13 1212 22 2 22 2 (3) (2)(3) (2)(20)(20) (15)(15)(21)(21) (12)(12)
5858 4444
Cash Flow StatementCash Flow Statement
Financial Statements Financial Statements
Are they Are they turning turning
cash into cash into profits?profits?
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• Turnover Growth• Operating Profit Growth• Operating Margin• Interest Cover• Earnings before Tax
(EBIT) Growth• Effective Tax Rate• Profit Attributable to
Ordinary Shareholders Growth
• Dividend Cover• Retention Rate• Earnings per Share
(EPS) Growth
Ratio AnalysisRatio Analysis
• Headline EPS Growth• Net Asset Value (NAV)
growth• Return on Equity (ROE)• Return on Tangible
Assets• Return on Capital (ROC)• Debt/ Equity (Gearing)• Share Price (Cents per
share)• Price/ Earnings (P/E)• Dividend Yield (DY)• Price/ Net Asset Value
(P/NAV)• Cash Flow / EPS
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Fundamental Analysis ChecklistFundamental Analysis Checklist
UndervaluedUndervalued
Risk Risk ManagementManagement
ProfitableProfitable
P/E < 12.3P/E < 12.3PEG < 75%PEG < 75%
PRICE/NAV < 2PRICE/NAV < 2
ROE % ROE % > 15%> 15%
Interest CoverInterest Cover> 3 times> 3 times
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Valuation: Valuation: PEG RatioPEG Ratio
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"Any company on a very high PE ratio is living on borrowed time as far as its
market rating is concerned.
Sooner or later the growth rate will slacken and the PE ratio will fall to a
more normal level and then to the average or even below it.”
John Slater
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Although both shares are trading at a P/E of 15 our forecast growth rate is 30% for stock 1 versus 10% for stock 2.
PEG ValuationPEG Valuation
Name Share Price EPS Growth P/E PEGStock 1 100c 30% 15 50%Stock 2 200c 10% 15 150%
Average 20% 15 75%
This means Stock 1 trades at a PEG of 50% (15/30),which is considered very cheap; Stock 2 at 150% (15/10) is expensive..
On average the sector is on a PEG of 75% (15/20), and, therefore, indicating value.
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• PEG = P/E Ratio / Forecast average growth over next 5 years
• Select companies with not only low P/E ratios as such, but those companies with P/E ratios low relatively to their EPS growth
• Trying to target the better companies trading on low P/E’s
• Earnings growth rate must be higher than the P/E ratio at time of investing
ValuationsValuations
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Net Asset Value (NAV)Net Asset Value (NAV)Valuation: Valuation:
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• Net Asset Value (NAV) is the Ordinary Shareholders' Funds divided by total number of shares issued.
• In theory if the company sells all of its assets at recorded prices & pays off all debt, the net amount will then be available for distribution to shareholders.
• Share prices should rarely trade below this value. .
Net Asset Value (NAV)Net Asset Value (NAV)
NAV = NAV = Ordinary Shareholder’s FundsOrdinary Shareholder’s Funds Total number of shares issued Total number of shares issued NAV = RNAV = R276 000 000276 000 000 850 000 000 850 000 000 = 32.4 cps = 32.4 cps
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• Price/Net Asset Value (P/NAV) together with return on equity (ROE) is one of the most powerful valuation tools, but is seldom used correctly.
• The calculation is simply the current share price divided by the NAV.
Price / Price / Net Asset Value (P/NAV)Net Asset Value (P/NAV)
P/NAV = P/NAV = Current share priceCurrent share price Net Asset Value (NAV) Net Asset Value (NAV) P/NAV = NAV = 100 cps100 cps 32.4 cps 32.4 cps P/NAV = 3.1 times P/NAV = 3.1 times
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Profitability Ratios (ROE)Profitability Ratios (ROE)
ROE = ROE = Profits attributable to ordinary shareholdersProfits attributable to ordinary shareholders Ordinary shareholder’s funds Ordinary shareholder’s funds
ROE = ROE = R66 000 000 x 100%R66 000 000 x 100% 276 000 000 276 000 000
ROE = 23.91%ROE = 23.91%
ROE = ROE = EPSEPS Opening Net Asset Value (NAV) Opening Net Asset Value (NAV)
ROE = ROE = 7.4 cents x 100%7.4 cents x 100% 28.8 cents 28.8 cents
ROE = 25.69%ROE = 25.69%
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Debt / Equity RatiosDebt / Equity Ratios
Debt / Equity = Debt / Equity = (LT + ST interest bearing debt) - (Cash + Bank) (LT + ST interest bearing debt) - (Cash + Bank) Total Shareholder’s funds Total Shareholder’s funds
Debt / Equity = Debt / Equity = (R115 000 000 + R43 000 000) - R14 000 000(R115 000 000 + R43 000 000) - R14 000 000 R288 000 000 R288 000 000
Debt / Equity = Debt / Equity = R158 000 000 - R14 000 000R158 000 000 - R14 000 000 R288 000 000 R288 000 000
Debt / Equity = Debt / Equity = R144 000 000R144 000 000 R288 000 000 R288 000 000
Debt / Equity = 50Debt / Equity = 50
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Interest CoverInterest Cover
Interest Cover = Interest Cover = Earnings before interest & tax (EBIT)Earnings before interest & tax (EBIT) Net interest paid Net interest paid
= = R115 000 000R115 000 000 R20 000 000 R20 000 000
= 5.75 times= 5.75 times
• One of the most important ratios to consider financial riskOne of the most important ratios to consider financial risk
• A three times cover means sufficient profits to pay the current interest charge three times - manageable
• This is normally the minimum cover required - below this level, we would rarely contemplate an investment!
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Cash Flow from Operating ActivitiesCash Flow from Operating Activities
Operating Profit before tax & interestOperating Profit before tax & interestDepreciationDepreciationAmortisationAmortisationProvisionsProvisionsInterest PaidInterest PaidTaxation PaidTaxation PaidChanges in working capital (Debtors, Changes in working capital (Debtors, Creditors, Inventory, etc.)Creditors, Inventory, etc.)Net Cash provided by operating activitiesNet Cash provided by operating activities
2011 20102011 2010RM RMRM RM 68 5668 5614 13 14 13 1212 22 2 22 2 (3) (2)(3) (2)(20)(20) (15)(15)(21)(21) (12)(12)
5858 4444
Cash Flow StatementCash Flow Statement
To compare this figure with EPS, subtract capital expenditure to maintainTo compare this figure with EPS, subtract capital expenditure to maintainoperations. Not always readily available – so subtract operations. Not always readily available – so subtract depreciation. depreciation.
Financial Statements Financial Statements
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Cash Flow from Operating ActivitiesCash Flow from Operating Activities
Net Cash provided by operating activitiesNet Cash provided by operating activitiesDepreciationDepreciationAdjusted cash provided by operating Adjusted cash provided by operating activitiesactivitiesCash Flow per ShareCash Flow per ShareEPSEPSCash Flow / EPSCash Flow / EPS
20112011 2010 2010RM RMRM RM 58 4458 44 (14) (13) (14) (13) 44 3144 31 5.18 3.645.18 3.647.4 7.37.4 7.30.69 0.500.69 0.50
Cash Flow Statement
Any ratio above 0.75 can be considered very good.Any ratio above 0.75 can be considered very good.
Any ratio consistently below 0.50 should be questioned. If a companyAny ratio consistently below 0.50 should be questioned. If a company cannot convert its profits into cash then something is wrong! cannot convert its profits into cash then something is wrong!
Financial Statements Financial Statements
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Company AnalysisCompany Analysis
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Research: Company AnalysisResearch: Company Analysis
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Company AnalysisCompany Analysis
UndervaluedUndervalued
UndervaluedUndervalued
UndervaluedUndervalued
Manageable Manageable FinancialFinancial
RiskRisk
ProfitableProfitable
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• Big Picture – Economy (GDP growth) – Inflation & Interest Rates
• Company Analysis:– EPS Growth & Turnover Growth > 10%– Valuation:
• Price/NAV < 2 / PEG > 35 and < 75 (Undervalued)
– Profitable:• ROE > 15%
– Manageable Financial Risk• Interest Cover > 3 times
– Cash Flow• Cash /EPS > 0.75
Summary: Fundamental BenchmarksSummary: Fundamental Benchmarks
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Investment StrategiesInvestment Strategies
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Watch ListsWatch Lists
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View Watch List as “Investor”View Watch List as “Investor”
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““Rank” Watch List as InvestorRank” Watch List as Investor
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Strategy: Value Investing
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“Price is what you pay, value is what you get”
Warren Buffet
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Research Tools: Value FilterResearch Tools: Value Filter
Select Select DefaultDefault
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• Debt- free? Interest cover• Generating cash? Spending money
efficiently? Cash Flow / EPS• Turnover & earnings growth beating
inflation? • Gross profit, Operating profit & Net profit
margins growing? • Company well-positioned to beat
competitors? • Generating value for shareholders?
Quality (Safety)Quality (Safety)
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Research Tools: Quality View Research Tools: Quality View
Select Select Share Share CodeCode
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• If you had invested $10 000 at inception into Berkshire Hathaway in 1965 … your nest egg would be worth more than $50-million.
• Warren Buffet is a patient & cautious investor. • He ignored the tech-bubble entirely & still does not hold a
single technology or internet stock. • He likes shares he can “see” & “understand”• “It is much easier to predict the relative strength that Coke
will have in the soft drink world than Microsoft will in the software world”
• Buffet likes to know the companies intimately.• Holds onto them for the long term, or as long as they pass his
growth tests without becoming over-priced. • Advice: The key to success is to think of yourself
as part-owner of the business.
Successful Investor: Successful Investor: Warren Buffet
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• Value investing is the strategy of selecting shares that trade for less than their intrinsic values.
• Value investors actively seek shares of companies that they believe the market has undervalued.
• They believe the market overreacts to good & bad news, resulting in share price movements that do not correspond with the company's long-term fundamentals.
• The result is an opportunity for value investors to profit by buying when the price is deflated.
• Typically, value investors select shares with lower-than-average price-to-NAV or price-to-earnings (PE) ratios and/or high dividend yields.
Value InvestingValue Investing
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• The big problem for value investing is estimating intrinsic value.– There is no "correct" intrinsic value. – Two investors can be given the exact same information & place
a different value on a company. – For this reason, another central concept to value investing is
that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.
• The very definition of value investing is subjective. – Some value investors only look at present assets/earnings &
do not place any value on future growth. – Other value investors base strategies completely around the
estimation of future growth & cash flows. • Despite the different methodologies, it all comes
back to trying to buy something for less than it is worth.
Problems: Value Investing
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• Compared to charting, value investors have tons of financial documents to read. It is very labour-intensive.
• The value investor is often subject to management buy outs, or "going private" phenomenon.
• You have to wait for market forces to realise that the company is undervalued to move it up. You need loads of patience.
Problems: Value Investing Problems: Value Investing
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Growth at a Reasonable Price (G.A.R.P.) Growth at a Reasonable Price (G.A.R.P.)
Peter LynchPeter Lynch
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• He was in charge of Fidelity’s Magellan Fund between 1977 – 1990.– Posted an average annual return of 29%. – No fund manager has ever run a fund of its size
($14-billion) so successfully for such a long time.
• Attributes success to the skill of finding investment opportunities in areas you are already familiar with.
• Looked closely at stocks for which he & his family had “positive personal experiences as consumers”
• Looked for the simplest of businesses to invest in …
Successful Investor: Peter LynchSuccessful Investor: Peter Lynch
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“Go for a business that any idiot can run, because, sooner or later, any idiot probably is going to run it.” Peter Lynch
Successful Investor: Peter LynchSuccessful Investor: Peter Lynch
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• His book was published in 1989 has the same relevance today.– Introduced the Holy Grail of investing …
the “Ten Bagger”– Make 10-times your money within 5-years
Successful Investor: Peter LynchSuccessful Investor: Peter Lynch
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• Peter Lynch, pioneered a hybrid of growth & value investing with what is now commonly referred to as a "growth at a reasonable price (GARP)" strategy.
• Another acronym SWAN – Sleep Well At Night
• GARP combines the two successful strategies of value & growth investing– Value investors look for relatively cheap shares
compared to their earnings & NAV– Growth investors look for companies that will grow
faster than others
Growth at a Reasonable PriceGrowth at a Reasonable Price
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• GARP investors do not look for companies in trouble or drastically undervalued, nor do they look for high-flying growth shares– Stop short of investigating the
companies’ business in great detail– More concerned with historical growth &
stock price than qualitative factors– Seek growth from:
• The firm itself (Organic Growth)• Headline Earnings growth (HEPS
Growth % > 15)• PEG ratio < 100
Growth at a Reasonable PriceGrowth at a Reasonable Price
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Filter: GARPFilter: GARP
Select Default
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• GARP might sound like the perfect strategy (S.W.A.N.).– Being greedy for both growth & value is
not easy.– If not mastered, you could buy mediocre
shares rather than good GARPs.
Problems: GARPProblems: GARP
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Strategy: Investing for DividendsStrategy: Investing for Dividends
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• Most straightforward share selection strategy
• Pick investments that provide a steady stream of income every month, quarter or year
• Combination of ordinary shares, bonds or preference shares that pay regular & substantial dividends
• Assess older, more established firms that have a very predictable earnings stream
Investing for DividendsInvesting for Dividends
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Investing for DividendsInvesting for Dividends
Dividend Yield = Dividend/ Price x 100%Dividend Yield = Dividend/ Price x 100%= 6c / 100c = 6c / 100c
Dividend Yield = 6% Dividend Yield = 6%
Ave. Dividend Yield = 2.4%Ave. Dividend Yield = 2.4%Dividend investors want 5%+ Dividend investors want 5%+
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• On R1-million investment, this would produce R50 000 – R60 000 in income, tax free
• Do not invest on the basis of dividends alone - high dividends do not mean that it is a good company
• Dividends are paid out of net income– Lower retained earnings (Future growth?)– Large dividends would be better spent invested
in the company.
Investing for DividendsInvesting for Dividends
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• Value of original investment can drop.• Dividend distribution & level of payouts are not
guaranteed with shares as with bonds.• Should the company experience financial hardship
or a great investment opportunity comes along that requires significant cash outlay.
• Investigate company fundamentals & not do not just look at dividend yield.
• Income investing is not perfect.– Maintain a well-diversified portfolio.
Risks: Investing for DividendsRisks: Investing for Dividends
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Filter: Dividends Filter: Dividends
Select Default
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RecommendationsRecommendations
Large CapsLarge Caps
Investing for Dividends
BFA ConsensusBFA ConsensusBuy Recommendations Buy Recommendations
Undervalued, Undervalued, Quality SharesQuality Shares
IFR DailyIFR DailyRecommendationsRecommendations
Small CapsSmall Caps
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Investment StrategiesInvestment Strategies
Value InvestingValue Investing Objective: Defensive investment in bear marketObjective: Defensive investment in bear market
Growth at a Reasonable Price (GARP)Growth at a Reasonable Price (GARP)Objective: Look for undervalued & high growth potential stocks Objective: Look for undervalued & high growth potential stocks
(Bull Market)(Bull Market)
Investing for Dividends Investing for Dividends Objective: Assess older, more established companies for regular Objective: Assess older, more established companies for regular
& substantial dividends & substantial dividends
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• Develop your own style of investing– Match investment strategy to your
personality• “It is far better to buy a fine company at a
fair price, than a fair company at a fine price.”
• Decided, based on fundamental analysis a share is a good investment …
• The next question is … when to buy?
Conclusion: Investing Conclusion: Investing