FMG - Fortescue Ltd

[wayneL]

Hi Shark,
M8, A Gap is still a Gap regardless of the reasons - in fact a Gap caused by a Dividend probably caries more weight than a Gap caused by a rogue trade, or a sell-off/spike caused by rumours, or as you mentioned, an unexpected news event.
I will mention however, that an Ex Div Gap probably won't take long to fill, unless there are other underlying issues.
see pages 203 to 212
Cheers.
DrB

Can you explain, apart from sheer randomness, why a gap should fill?

 

[DrBourse]

It's called the "Sheep Effect" - There is no explanation for what Sheep Do.
First of all it's probably an unspectacular event that the Sheep Misinterpret that causes the Gap in the 1st place, then Sheep Mentality sets in and they restore the Status-Quo.

A really "Good Sheep Indicator" may help us all understand the Sheep Effect a bit better.

 

[basilio]

don't know how i missed this earlier, but that gap from 3 sep - 6 sep is purely from it going ex that huge 2.11 div ie. if it weren't for the div, the 6 sep open would have been right on the 3 sep close. does it still carry the same weight that a non-ex div gap otherwise would, given that it's caused by a known and predictable event, rather than from a shift in sentiment or an unexpected news event?

genuine question... i don't consider myself much of a chartist, and i'm not really a day trader either (i mostly sell weekly to monthly options) so i'd be interested to hear how others would interpret it.

I think your observation is spot on. By definition the share value of FMG pre and post dividend is affected by the access to the $2.11 dividend. All analysts seem to agree that, everything else being equal, a SP will fall by the value of a dividend that is being declared. Of course if the dividend is small potatoes then the this could be easily overrun by other factors.

$2.11 was not small potatoes. I am very surprised that Dr Bourse appears to think otherwise.

 

[DrBourse]

I guess that the LOGICAL explanation is that - we as Traders, Trade with the expectation that an Ex Div Date, or an Announcement, or some news event, increasing or decreasing a SP.
So I guess you could blame all Gaps on ourselves.

 

[wayneL]

So a self fulfilling prophecy, in your opinion?

 

[DrBourse]

Hi basilio,

Personally I do not trade for dividends, Dividends to me are an unwanted problem.
If ever I get a dividend payout it's because I mucked up my research.
And besides that, the ATO absolutely love punters that get lotsa Dividends - it's a situation I can do without.
I prefer to enter a trade from AFTER the Ex Div Date drop has occurred - that way in effect, I get the same $2.11 that you received but it takes a few days/weeks for the SP to return to where it was Pre Ex Div Date, AND I don't end up in the ATO's sights.
We are all different, guess I'm just a bit more so, but I've been in this profession a long time now, and ya cannot teach us old folks new tricks, we are just not interested.

 

[basilio]

I guess that the LOGICAL explanation is that - we as Traders, Trade with the expectation that an Ex Div Date, or an Announcement, or some news event, increasing or decreasing a SP.
So I guess you could blame all Gaps on ourselves. ???

I don't follow this Dr Bourse. The change in company value pre and ex dividend is black and white. One day the company has $2billion in cash in its accounts which are reflected in the share value and the next day those funds have been transferred to the individual shareholders and are no longer on the companies books. The arbitrage opportunities around pre and post dividend are legendary.

If the dividend is relatively small in relation to the companies worth then there will be only a small variation. This was not the case this year for FMG, RIO or BHP who all declared massive dividends. And naturally all shares fell by this amount ex dividend.

 

[DrBourse]

Very few people in this world really understand Balance Sheets and the associated Ratio's, Margins of Safety, etc., and the "smoke'n'Mirrors" games that are played out - They are way too complicated to explain here, even if I understood it all, and I don't.


I feel you are confusing the “change in company value ( which you suggest is the Share Value/Share Price)”, with the Company Balance Sheet – they are 2 entirely different things.


The SV/SP of any stock, at any given time is an abstract thing – The SV/SP is something that Brokers try to calculate with their yearly Guesstimates, then they tell the public of that Mythical Figure, then the public go forth and buy up to that mythical amount. - The SV/SP is not dictated by billions of $$ in cash, The SV/SP is decided by US and The Sheep, The SV/SP is derived from what we, the public, are prepared to pay for that share.


The Balance Sheet, supposedly represents the Companys INTRINSIC VALUE.


NOW TO EXPLAIN

An Intrinsic Value is not a TA call - Intrinsic Value Per Share is not a call on where the Share Price will go to - Intrinsic Value is basically what the company is worth Per Share, based on the company’s published Financial Statements - Basically if the company was ‘wound up’, then each shareholder should get that Intrinsic amount - they would not necessarily get the current Share Price.......

So an Intrinsic Value Call of $2.00 is saying, “are you sure you want to pay $5.53 (the current share price) for a share that is only worth $2.00”. Those people that know what ‘Intrinsic Value” is, understand what is insinuated, - those people that later call us idiots just because the Share Price did not reach that Intrinsic Value are the ones showing their ignorance on the topic…..

Hundreds of times over the past years I’ve made Intrinsic Value calls - which are usually close to the mark - only to be told that I’m an idiot because the Share Price will never get to those values - No one really expects the Share Price to reach those Intrinsic Values, so I usually don’t bother trying to explain it…..

From my perspective if a Company has an Unfavourable IV (as explained above), then I do not proceed any further....

As a "Technimental Trader" the IV Test is "The First of several Analysis Processes" for me, and it is only a Minor Test.....

An IV can be calculated in numerous different ways – A correct and Valid IV relies a lot on what formulas are used, such as, DCFM, DDM, DDMF, PRESVAL, RIV, IVRR, NROE, CGVI, GIVF, BIVF – and there are numerous others - MAKE SURE YOU UNDERSTAND WHICH FORMULAS ARE BEING USED and what the implications are relating to each formula...Remember the old saying, “Garbage in = Garbage out”.......

DCFM = Discount Cash Flow Method, DDM = Dividend Discount Method, DDMF =Dividend Discount Method (Forward Return on Equity), PRESVAL = Calculates the Present Value of the Discounted Future Cash Flow per Share, RIV = Residual Income Valuation, IVRR = Intrinsic Value by Rate of Return, NROE = Normalised Return on Equity, CGVI = Comparative Growth & Value Indicator, GIVF = Grahams IV Formula, BIVF = Buffetts Balance Sheet IV........

Each Analyst/Broker has their own versions of “how to calculate an IV”.....for example –the Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations....... In ModelWare, EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.......



BOTTOM LINE HERE IS --- To use an IV correctly you MUST understand how it is calculated..... Personally, I have an Excel Spreadsheet that incorporates most of the above formulas...



That’s all a bit long winded, but it’s a complicated subject.

Hope you can follow all that.

 

[Value Collector]

I prefer to enter a trade from AFTER the Ex Div Date drop has occurred - that way in effect, I get the same $2.11 that you received but it takes a few days/weeks for the SP to return to where it was Pre Ex Div Date, AND I don't end up in the ATO's sights.
We are all different, guess I'm just

Actually FMG holders that owned the share before the EX dividend were 78 cents better off per share than those that purchased on ex date Because they also received a franking credit worth 90cents.

I expect you are trading to generate a profit, so aren’t you going to “end up in the auto’s sights” anyway, regards of whether you earned a dividend or not, how does avoiding dividends assist you?

 

[Value Collector]

I don't follow this Dr Bourse. The change in company value pre and ex dividend is black and white. One day the company has $2billion in cash in its accounts which are reflected in the share value and the next day those funds have been transferred to the individual shareholders and are no longer on the companies books. The arbitrage opportunities around pre and post dividend are legendary.

If the dividend is relatively small in relation to the companies worth then there will be only a small variation. This was not the case this year for FMG, RIO or BHP who all declared massive dividends. And naturally all shares fell by this amount ex dividend.

I agree,

We can all have different opinions on exactly how much a money box is worth, but we all agree it’s worth $10 less when you remove a $10 note from it.

We also should be able to agree that it’s worth a little more each day as coins are added, but we might all have different estimates to exactly how many coins will be added each day.

 

[Value Collector]

Very few people in this world really understand Balance Sheets and the associated Ratio's, Margins of Safety, etc., and the "smoke'n'Mirrors" games that are played out - They are way too complicated to explain here, even if I understood it all, and I don't.


I feel you are confusing the “change in company value ( which you suggest is the Share Value/Share Price)”, with the Company Balance Sheet – they are 2 entirely different things.


The SV/SP of any stock, at any given time is an abstract thing – The SV/SP is something that Brokers try to calculate with their yearly Guesstimates, then they tell the public of that Mythical Figure, then the public go forth and buy up to that mythical amount. - The SV/SP is not dictated by billions of $$ in cash, The SV/SP is decided by US and The Sheep, The SV/SP is derived from what we, the public, are prepared to pay for that share.


The Balance Sheet, supposedly represents the Companys INTRINSIC VALUE.


NOW TO EXPLAIN

An Intrinsic Value is not a TA call - Intrinsic Value Per Share is not a call on where the Share Price will go to - Intrinsic Value is basically what the company is worth Per Share, based on the company’s published Financial Statements - Basically if the company was ‘wound up’, then each shareholder should get that Intrinsic amount - they would not necessarily get the current Share Price.......

So an Intrinsic Value Call of $2.00 is saying, “are you sure you want to pay $5.53 (the current share price) for a share that is only worth $2.00”. Those people that know what ‘Intrinsic Value” is, understand what is insinuated, - those people that later call us idiots just because the Share Price did not reach that Intrinsic Value are the ones showing their ignorance on the topic…..

Hundreds of times over the past years I’ve made Intrinsic Value calls - which are usually close to the mark - only to be told that I’m an idiot because the Share Price will never get to those values - No one really expects the Share Price to reach those Intrinsic Values, so I usually don’t bother trying to explain it…..

From my perspective if a Company has an Unfavourable IV (as explained above), then I do not proceed any further....

As a "Technimental Trader" the IV Test is "The First of several Analysis Processes" for me, and it is only a Minor Test.....

An IV can be calculated in numerous different ways – A correct and Valid IV relies a lot on what formulas are used, such as, DCFM, DDM, DDMF, PRESVAL, RIV, IVRR, NROE, CGVI, GIVF, BIVF – and there are numerous others - MAKE SURE YOU UNDERSTAND WHICH FORMULAS ARE BEING USED and what the implications are relating to each formula...Remember the old saying, “Garbage in = Garbage out”.......

DCFM = Discount Cash Flow Method, DDM = Dividend Discount Method, DDMF =Dividend Discount Method (Forward Return on Equity), PRESVAL = Calculates the Present Value of the Discounted Future Cash Flow per Share, RIV = Residual Income Valuation, IVRR = Intrinsic Value by Rate of Return, NROE = Normalised Return on Equity, CGVI = Comparative Growth & Value Indicator, GIVF = Grahams IV Formula, BIVF = Buffetts Balance Sheet IV........

Each Analyst/Broker has their own versions of “how to calculate an IV”.....for example –the Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations....... In ModelWare, EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.......



BOTTOM LINE HERE IS --- To use an IV correctly you MUST understand how it is calculated..... Personally, I have an Excel Spreadsheet that incorporates most of the above formulas...



That’s all a bit long winded, but it’s a complicated subject.

Hope you can follow all that.

I would say you are confusing intrinsic value with book value.

 

[DrBourse]

Warren would love to hear you say that VC - surely you are joking!
IV has nothing to do with BV.

 

[Value Collector]

Warren would love to hear you say that VC - surely you are joking!
IV has nothing to do with BV.

I didn’t say IV has anything to do with BV, they are completely different things, I said you we’re confusing the two eg when you described what you called IV you were describing BV, you said IV was the winding up value, which it’s not, for most companies that aren’t dying IV will be the value of the going concern not what would be returned to shareholders if it was liquidated.

but I will re read your post to make sure I haven’t read it wrong.

 

[Value Collector]

The Balance Sheet, supposedly represents the Companys INTRINSIC VALUE.


NOW TO EXPLAIN

An Intrinsic Value is not a TA call - Intrinsic Value Per Share is not a call on where the Share Price will go to - Intrinsic Value is basically what the company is worth Per Share, based on the company’s published Financial Statements - Basically if the company was ‘wound up’, then each shareholder should get that Intrinsic amount - they would not necessarily get the current Share Price.......

This is what I am talking about-

You are not describing Intrinsic Value here, you are describing book value.

Unless I am reading it wrong, or you are describing it poorly, it sounds to me like you are saying the Intrinsic value, is what the financial statements say the companies net assets are, this is not what IV is.

“Intrinsic Value” can only ever really be estimated, and it is an estimate of what a company is worth, and would represent a fair value for the share, based on its earning power over time.

As I said in a post above, we might all have different estimates of what a money box is worth, but we all know is worth $10 less if we remove a $10 note from it, this is how shares work, so basillo was correct, when a dividend is paid a companies intrinsic value declines that day, but it regrows over time as the cash pile regrows as the earnings come in.

 

[DrBourse]

Well all I can say is that I tried my best to explain Warren Buffet & Ben Grahams Intrinsic Value is, so I guess your next post should be to tell them both that they are wrong - Good Luck with that.
And by the way you had better tell Warren that most of his books are wrong also.

You have your opinions and I have mine, lets just leave it at that.

 

[Value Collector]

Well all I can say is that I tried my best to explain Warren Buffet & Ben Grahams Intrinsic Value is, so I guess your next post should be to tell them both that they are wrong - Good Luck with that.
And by the way you had better tell Warren that most of his books are wrong also.

You have your opinions and I have mine, lets just leave it at that.

As some one who has read every single book Graham has written, I can tell you that you didn’t actually explain Intrinsic Value, you explained book value.

As for Warren, he hasn’t written any books, how ever I have read every single annual letter he has written to share holders since 1977 and all the buffet partnership letters written before that in the 60’s and 70’s, and watched every single interview, talk and meeting I can find of Buffett on you tube, and I can also tell you his definition of Intrinsic value is nothing like your book value description either.

But you do you, if you want to call book value intrinsic value good right ahead, what ever works for you.

 

[wayneL]

This is why I like technical analysis.

in almost every case where I have tried to understand and apply fundamental analysis to stocks I just can't accept the current valuation.

Furthermore I think that stock prices in totoare merely a derivative of the bond market, and to a lesser extent energy prices and currency valuations.

I don't profess to be any sort of an expert in this regard, but by the bond market we can track the flow of money. With technical analysis and with am I on those other factors above we can also attempt to track the flow of money in the stock market.

In these posts reality days and the cantillon effect, that is by far the most effective way to get an edge.

Of course there are individual fundamental and sentiment factors such as in the case of Fortescue.

All the other stuff, BV, IV, hand all the ratios and whatnot, are very much a dismal science.

But, I only know enough to be dangerous.

 

[sptrawler]

@DrBourse and @Value Collector you both have more idea, than I ever will, so as long as you both keep posting your thoughts on stocks I'm exceedingly happy.

 

[DrBourse]

This is a quote from The Warren Buffett Way.

Please make sure you take note of the sentences in the middle of the snapshot below:-
Originally, Intrinsic Value was thought to be the same as a company's Book Value, or the sum of it's real assets minus obligations.
However, analysts came to know that the value of a company was not only its Net Real Assets but, additionally, the value of the earnings these assets produced.

======================================

The following is a snapshot from a Google Search
https://www.quora.com/What-is-the-difference-between-the-book-value-and-intrinsic-value-of-a-company
Niels Andersen
, Strategy Consultant, CEO and startup founder
Answered 1 year ago
Here is a quick definition of the two, which is followed by an example.
In very rough terms, it can be seen like this:
Book value is the amount of money the company would be left with if it sold all assets and paid all debt. This is the asset value minus liabilities you would see in their financial report.
Intrinsic value is the value of all the company's future cash flows to its owners (investors). This includes dividends and the eventual sale of the company to another owner (investor).
The difference is then, that the amount of money the owner(s) would get if the company was closed today is the book value, whereas the intrinsic value is the sum of all future distributions of dividends to the owner(s) plus the value of the company when sold sometime in the future.

Let's take an example below.
Company XYZ is a wholesaler of flour. They own a fleet of trucks for delivery, which they paid 10 million for through 5 million of their own money and 5 million borrowed money. The fleet would net them 6 million if sold, and they haven't repaid any of their debt yet. They also own a warehouse worth 10 million if sold, which they paid for themselves entirely.
The company is expected to earn and distribute 2 million to its shareholders annually through dividends for the next 10 years, and after the company will be sold for 12 million.
The company’s book value is then:
Book value = Warehouse value + Fleet value - Debt = 10 + 6 - 5 = 11 million
The company’s intrinsic value to the owner (investor) is then:
Intrinsic value = annual dividend * years + value of sale of company = 2 * 10 + 12 = 32 millions

I hope this was helpful.
Note: If you actually go and liquidate a company, there are of course some expense to do so, and the amount of money you’d be able to recover from this after these expenses is the liquidation value, not the book value. In the above example, the way the company values its assets is based on, what they would be able to get if sold. If other practices are used by a company, which they usually are, the book value can vary considerably from this.
==========================================

And here are some of the Formulas used to determine the IV

AND

AND

AND

AND,There just happens to be more - such as:-
An IV can be calculated in numerous different ways – A correct and Valid IV relies a lot on what formulas are used, such as, DCFM, DDM, DDMF, PRESVAL, RIV, IVRR, NROE, CGVI, GIVF, BIVF – and there are numerous others - MAKE SURE YOU UNDERSTAND WHICH FORMULAS ARE BEING USED and what the implications are relating to each formula...Remember the old saying, “Garbage in = Garbage out”.......
DCFM = Discount Cash Flow Method, DDM = Dividend Discount Method, DDMF =Dividend Discount Method (Forward Return on Equity), PRESVAL = Calculates the Present Value of the Discounted Future Cash Flow per Share, RIV = Residual Income Valuation, IVRR = Intrinsic Value by Rate of Return, NROE = Normalised Return on Equity, CGVI = Comparative Growth & Value Indicator, GIVF = Grahams IV Formula, BIVF = Buffetts Balance Sheet IV........
==========================================
Hope that clarifies where I'm comming from.

Cheers.
DrB

 

[DrBourse]

And if you have a look at the Forum "MND - Monadelphous", page 18 you will see the last IV publication showing how most of us calculate the IV.
Those formulas shown above are basically what Brokers & Analysts like myself use.

Remember that Book Value, although referred to in todays climate, it is very much Old Hat, since Warren Ben proved it was NOT representative of a Stock Valuation/IV.