Which one do you use? Technical or fundamental analysis?

[ghotib]

Re: Which one do you use? Technical or fundamental analysis

Don't you ever sleep? I've just read the end of the StockVal thread and told myself sternly that I'd talk more nonsense than usual if I tried to respond now. Same goes for this one. But thanks for forcing me back to the books. I've noticed several things today in the Buffet essays that I missed before, and I'm taking Graham to bed with me before I write any more.

See you on the morrow - and not in the morn.

Ghoti

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Don't you ever sleep?

No

But thanks for forcing me back to the books. I've noticed several things today in the Buffet essays that I missed before, and I'm taking Graham to bed with me before I write any more.

Read Graham's Portfolio policy for the Enterprising investor.

He definately recommends smallcaps that you can liquidate for more than they cost.

Whether CMI is one of those companies I am now starting to question.

 

[It's Snake Pliskin]

Re: Which one do you use? Technical or fundamental analysis

Eddie,

No worries Duc - I've said my piece and said far more I have no doubt that if you returned to this thread and acknowledged that what I have been talking about is possible that it may snap some people here out of limiting their goals to returning barely better than benchmark rates. I will have helped some people out.

I don`t dispute that high rates are achieveable.

Until I hear from Duc via PM this is my FINAL post on the matter, other than perhaps to address Snake's concerns.

Just interested in how you manage those holdings. 70 continuously changing per month or 70 in total as a limit regardless of time? Everything I have read, as well as my mentor, has warned against such high levels of holdings. I`m genuinely interested, so would anyone I believe.

Snake

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

70 continuously changing per month

Is that 70 trades a month.

Man, your broker must be rich!!

 

[ducati916]

Re: Which one do you use? Technical or fundamental analysis

cuttlefish

In regards to your post on CMI;

From the ASX site;

The issue is for 13,200,000 fully underwritten Convertible Preference
Shares in the Company issued at $1.20 each.

So 13.2 million Convertible Preferred Shares are offered at Par value of $1.20
Convertible securities must be calculated by the potential investor as a dilution of the common shares for practical purposes, and thus would effect a dilution of net profits on an adjusted basis, but not on a REPORTED basis

10 years - on the 10th anniversary of the Issue Date the Convertible
Preference Shares may be converted into Ordinary Shares at the option
of holders of Convertible Preference Shares or CMI. In certain
circumstances, conversion may occur before that date.

Conversion is not permitted prior to 10yrs.
Excepting special contingencies which are not listed.

Convertible Preference Shares convert into that number of Ordinary
Shares equal to the Issue Price paid ($1.20) divided by the market
price at the time of conversion. Maximum market price is $2.40 with
the minimum being $1.00.

Therefore we have a maximum = 1.2 shares of common, and a minimum = 0.5 shares of common. [always assume the worst, thus 1.2 shares]

RANKING:

The Convertible Preference Shares will rank ahead of Ordinary Shares
for repayment of paid up capital. There is no entitlement to share in
any surplus on a winding up.

In a liquidation, they rank ahead of the Common, but behind debentures etc.
Thus, the holder of the common could be disadvantaged, but probably no more than he is currently.

So much for the facts.
Does the issue serve to advantage either the business, or the owners?
The reasons put forward by the management are as follows;

The issue of these shares will raise up to $15.84 million, which will
be used to assist in funding an on-market buy-back of up to 20% of
CMI's ordinary shares on issue, to retire debt, and raise additional
working capital to build on our past growth in both domestic and
overseas markets.

To retire debt.
The company does not specify the type of debt.
This is actually crucially important.

First, let's assume that it is Bank Short Term debt.
If this is the case, this is a concern, as what is really being said is that the business cannot float funded debt at a lower interest rate, as there are no banks willing to underwrite the float.

Therefore the credit rating must be B or less. In essence a Junk rating.

If it is retiring Funded Debt [Bonds] which is unlikely for the following reason;
Bond Interest is Tax deductible to a corporation.
Preferred Dividends are not.
Therefore the Cost of Capital is significantly higher for dividend payments this obviously is a large negative.

A 20% [up to] buyback of common shares.
Read, absolute maximum of 20%, but really probably 1%
Why?
Because we need additional working capital for expansion.
Expansion where?

Our
contracts to supply the US automotive sector continue to expand and
we are planning to open the second distribution centre in that market
to meet this demand.

So they are going up against the US suppliers on home territory, and the Japanese etc. Tough business. US consumer spending looking to weaken, not an area I would fancy at the moment.

We will also be looking to continue organic growth through the
selective acquisition of new businesses which have the potential to
strengthen our existing manufacturing and marketing proficiencies as
they become available.

our future acquisition strategy will
concentrate on "bolt-on" businesses that can be bought and
economically incorporated into one of our existing locations.

When management tell lies right to your face, you know things are dodgy.
Aquisitions are not ORGANIC growth
Aquisitions are usually money losing propositions, destroying shareholder wealth. They invariably have serious integration problems, and cost in excess of their value, and very rarely are accretive to earnings anytime soon.

So in regards to current share prices heading south, no surprises there.
This looks like a real ugly mess currently.

jog on
d998

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Hmm, thanks Ducati.

It is a mess. But not too bad..

I've lost $300 on the share price but got $60 in dividends. Down $240 - woop de do. I've made that up on BHP in the past 10 minutes.

I'll continue to hold, even after hearing all the bad news - it still makes a profit and has done so for the past 10 years, and it still pays very good dividends, it is not in financial trouble at all, and is not overvalued at $1.05 (even taking into account the problems you've mentioned).

It is a takeover target for other company's I would have thought?

Yes, this is buy and "hope" at its best.

Thankfully it is the only "undervalued small cap" I've bought - and I'll put it down to learning.

 

[cuttlefish]

Re: Which one do you use? Technical or fundamental analysis

Ducati,

Thanks for the comments - interesting additional information.

In relation to the 26 million CPS figure I got it from the set of announcements put out on the 11 August 05 (there were a couple of three page releases describing the scheme and it mentions that at the time there were 26 million CPS shares outstanding). The original par value was 1.20 and conversion to be based on average share price, but they agreed on a conversion scheme of 1:1 at an EGM.

I haven't noticed whether the class A shares are traded (I'm assuming they are but couldn't see them listed in the fin review).

As you say they are effectively B or less grade bonds.

Interesting comment about the preferred dividends and tax deductions. If the company had kept the shares as CPS instead of converting them to class A (I still don't really see any functional difference between the two anyway except they're no longer converting) then I'm assuming based on the accounting standards change that as part of re-classifying it as debt they would also have been able to then claim the dividend payments as interest on debt and taken it as a tax deductable expense against earnings.

I'm no accountant but maybe taking the hit and counting it as debt would have been the better option.

Realist,

I reckon you're right - its paying good dividends and making pretty good profit and has done so consistently. I'd be keeping an eye on their announcements to make sure nothing changes in this regard but to that end you can only trust that management is reponsible and reports all information to the market - in the meantime as you say you're collecting 12% dividends - better than a bank account - and the downside risk, unless there is some actual adverse news about the profitability of the business, is probably limited.

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Thanks Cuttlefish, I'll continue to hold CMI. (and hope )

Hey, what do you think of RIC?

They consistently make a profit and pay dividends, only problem is a pending Canadian court case.

Is this not a good safe, undervalued company that makes a profit and pays dividends, and a value buy at the current price?

I own them as well - they've done nothing - I've not gained or lost.

 

[cuttlefish]

Re: Which one do you use? Technical or fundamental analysis

heheh - this could become a piece of string so I think I'll stop at CMI.

I haven't looked into RIC at all, but I can say that when I said I've been caught out by all sorts of unexpected things - a change in legislation in relation to one company I invested in was one of them - so don't discount anything - take it all on board and make your own assessment of the potential outcomes of anything like that and how you think they might or might not impact valuations. (and thats not intended to be any comment on RIC - I literally haven't looked at them at all, couldn't even tell you the name of the business).

 

[ducati916]

Re: Which one do you use? Technical or fundamental analysis

Realist

it still makes a profit and has done so for the past 10 years, and it still pays very good dividends, it is not in financial trouble at all, and is not overvalued at $1.05

Well I haven't looked at the financials, so I am in no position to comment.
But how have you appraised the value, and thus come to the conclusion that it is not *overvalued*?

It is a takeover target for other company's I would have thought?

Well, if it is truely *undervalued*, yes it could indeed be a target.

If, it truely is undervalued, then you would expect Management to utilize the proceeds realized from the sale of the Preferred issue [at fair value] to arbitrage shareholder value by buying in the *undervalued* common shares.
This would be the the most efficient use of the funds.

If, they pursue their stated aquisition program, this either;
*provides no evidence of managements belief in the *undervaluation*
*provides evidence of inept management in pursuing unproven returns, in the face of proven returns.

cuttlefish

then I'm assuming based on the accounting standards change that as part of re-classifying it as debt they would also have been able to then claim the dividend payments as interest on debt and taken it as a tax deductable expense against earnings.

No, Interest payable on debt, secured, or unsecured bonds, debentures etc qualify as tax exempt. Dividend payments are taken from net profits after Tax

Therefore it is highly inefficient for a Corporation to issue Preferred Stock [convertible or otherwise] They should always issue Funded debt.
It is only low credit grade companies that MUST issue high yield preferred shares, as they have no other option, other than issuing more common.

For example J&J can issue 0% Bonds
They have the use of capital at no cost.
They provide a sinking fund to amortize the principal due at maturity
With clever accounting, depreciation can be utilized as a tax exempt way to amortize the sinking fund. Hence the true cost of capital = $0.00

That CMI are having to pay 9% rising to 11% tells you that this is a high risk offering. It is high risk because the underlying earning power must be cyclical, weak, or both.

Incidentally, a declaration of net profit in no way means a net profit has actually been earned. Remember Enron? It is quite legal to show a GAAP profit, yet have losses.

jog on
d998

 

[eddievanhalen]

Re: Which one do you use? Technical or fundamental analysis

OK Snake/Realist - I'll try and address the 70 positions as best I can.

I would agree that 70 positions would be overkill for the majority of people and , in fact, the great majority of people would struggle with the intensity of concentration required to actively manage a portfolio of that size + monitor potential new trades + read most announcements as they happen. I do all that but it's my job - I am a full time trader/investor.

The number of positions is irrelevant to me as long as I achieve my objectives and I can cope with the workload. I peaked at close to 90 positions (say 65 trading positions and 25 longer term investments) before the proverbial hit the fan , very quickly reduced to 30-40 and am currently rebuilding my holdings at cheaper prices. The key point there is "if I can cope" and I am rapidly reaching the point where I cannot handle any more and will either need to increase position sizes (difficult - see later) , move to trading blue chips or look elsewhere. Either way I am approaching the point where the law of diminishing returns with size will surely kick in. At this point that doesn't bother me as I'd still be happy with half my current returns on a larger sum.

The key reason for all of this is that I specialise in small to mid cap stocks and the majority of them have issues with liquidity that restrict position size if you wish to be able to exit at anywhere near market price. As I have grown my capital base I have stayed with that strategy and the only way to do that without increasing position sizes and taking liquidity risk is to increase the number of positions. I have no trouble in most markets finding 70 stocks to hold. The key is being able to handle the workload. The whole small caps vs bluechips (with or without margin) is a whole new argument and something I don't wish to address here. let's just accept that I believe the best returns in the market are to be had outside the ASX100. I do hold a few "blue chips" but not many are acceptable to me.

As far as how often I turn them over ?........there is no answer to that. If all is going well then very little action may be required. The only time I get in there and trade (other than new entries) is when something needs cutting or it has moved so fast that it is wise to take some $$ off the table- I will then hopefully buy back at a lower price. No stock in my portfolio has a need to fear being cut as long as it performs to the level that I require. By the way CGT is not really an issue for me as I am registered with the ATO as a "trader"......it's all income.

I acknowledge that overtrading is an issue many traders face - we all have at one time or another and I have systems in place to ensure I only trade when it is warranted. My broker DOES love me Realist - I estimate they'll make $75k+ in brokerage from me in the current financial year. I am getting very near the point of making claims I cannot justify again but let's just say that I am happy enough that my brokerage expenses as a % of my profit are entirely satisfactory.

Cheers,

Ed

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

My broker DOES love me Realist - I estimate they'll make $75k+ in brokerage from me in the current financial year.

My broker will make $280 off me this year. And the tax department will get 0$ from me.


How much tax will you pay?

I dread to think.

 

[eddievanhalen]

Re: Which one do you use? Technical or fundamental analysis

Well if the tax department got $0 off me I'd probably have to find another job. Unless you're trading out of the Cayman Islands or something :

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

But how have you appraised the value, and thus come to the conclusion that it is not *overvalued*?

Simply..
If the Price / (Average Earnings over the past 5 years) is less than 20 and P/B less than 1.5 and it has a yield above 5% and it has consistently made profits the past 5 years, and consistently paid dividends then it is undervalued compared to other stocks.


How do you value a stock?

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Well if the tax department got $0 off me I'd probably have to find another job. Unless you're trading out of the Cayman Islands or something

Haha, fair enough for a trader. I'm just baiting.

I have no tax on shares this year, yet a tidy profit.

I have a secret, I just don't sell any - it works quite well!!

 

[It's Snake Pliskin]

Re: Which one do you use? Technical or fundamental analysis

Eddie,

Thanks for the explanation.
Snake

 

[bullmarket]

Re: Which one do you use? Technical or fundamental analysis

Hi realist

Simply..
If the Price / (Average Earnings over the past 5 years) is less than 20 and P/B less than 1.5 and it has a yield above 5% and it has consistently made profits the past 5 years, and consistently paid dividends then it is undervalued compared to other stocks.


How do you value a stock?

Regarding 'Average Earnings over the past 5 years' I assume you are talking about earnings per share (EPS)

If so, imo a better EPS to use than a historical one is a 6-12 month forcast EPS especially since markets are generally 6-12 months forward looking.

Although past performance can give an indication of future performance it by no means guarantees that the next year's earnings won't be less than the previous years for all sorts of reasons.

Imo, most investors when valueing a company will value it on anticipated future earnings with very little if any weight on past earnings.....ie...if I was looking to buy an investment property I would value it on what rents I could expect in the future and I would care very little about what rents were in the past......similar logic can be applied to company valuations imo.

In my average market PER's spreadsheet I uploaded here a few months back I use the following year's general consensus forecast EPS numbers when calculating company PER's.

cheers

bullmarket

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

imo a better EPS to use than a historical one is a 6-12 month forcast EPS especially since markets are generally 6-12 months forward looking.

Although past performance can give an indication of future performance it by no means guarantees that the next year's earnings won't be less than the previous years for all sorts of reasons.

Imo, most investors when valueing a company will value it on anticipated future earnings with very little if any weight on past earnings.....ie...if I was looking to buy an investment property I would value it on what rents I could expect in the future and I would care very little about what rents were in the past......similar logic can be applied to company valuations imo.

Thanks Bullmarket, I agree analysts and most investors use forward EPS to predict future stock prices and estimate current stock prices. It is very commonly accepted and widely used.

I don't use them, don't read them, and don't care about them though.

I only go on past results - I do not try and predict the future, nor do I care what analysts think about the future of a company.

Forward EPS forecasts are missed (both over and under) as often as they are hit.

If most analysts believe a stock is a crap and it has a poor future outlook I am more likely to buy it - because it is cheaper. If most analysts think a stock has an excellent future it is already too expensive for me to want to buy it.

If anything I try and do the opposite of analysts, and I ignore any predicitions - especially future EPS guesses.

If a company is making consistent profits, paying consistent dividends, and the P/E and P/B ratios are low I will definately consider buying it.

If a company does not make a profit but has just discovered 1Million tonnes of Uranium, platinum, gold, oil, and cream cheese, as well having rights to the fountain of youth, and the holly grail - I wont buy it. I don't care what a company can do, I care what it has done.

This is against most peoples ideas of course - which is why I do it!!

 

[nizar]

Re: Which one do you use? Technical or fundamental analysis

Realist

Outlook is more important than historical performance

A perfect example is BlueScope Steel

Former market darling; earnings heaps of cash

Then u get zinc spot price increasing and iron ore price increasing and they are finished; and will not earn another NPAT of $1billion for a long, long time

If a company does not make a profit but has just discovered 1Million tonnes of Uranium, platinum, gold, oil, and cream cheese, as well having rights to the fountain of youth, and the holly grail - I wont buy it. I don't care what a company can do, I care what it has done.

And thats exactly why you are happy with 12% a year

WHAT A COMPANY HAS DONE IN THE PAST WILL NOT DRIVE THE SHARE PRICE

 

[nizar]

Re: Which one do you use? Technical or fundamental analysis

And dont 4get that every1 is out there to make money for themselves

Its no coincidence that brokers/instos upgrade recommendations on companies in which they own a large stake