fundamental only trading logs

[bluebellmk]

Hi Guys,

So as discussed in another post I was recently researching AA using a discounted cash flow model. I have decided to trade and build a portfolio only using fundamentals and looking for value investments. My goal is to see how everything goes and to add one stock per month to my portfolio (if an opportunity presents itself) and to do this in as much a risk adverse manner as possible (quite difficult with CFD's).

I am just your average joe working and paying bills and not an experienced trader or investor just someone with a passion for numbers and a passion for the financial markets.

I have busted many trading accounts on the past always trying to use fundamental analysis so have concluded that it does not work for me.

I was introduced to discounting cash flows from a friend who works for a large IB who told me that is how all the analysts value equities there.

So my goal is to add a company to my portfolio every month, add approximately £250 - £500 per month out of my wages to my trading account.

I will post the research I have made and then post the positions I have taken.

I am still learning the process of DCF so for any experienced traders feel free to offer me some constructive criticism on where I could improve.

My first position is in AA PLC please see research and position, I hope the screenshots have appeared as an attachment ?

 

[bluebellmk]

So ....

Caught this huge move up, currently £182 in profit on my initial starting capital of £250 in the last week.

Thinking of banking £125 worth of profits and leaving the remainder in as I still think there is the opportunity for reaching £1.4 per share.

My other line was to hold out to £1 - £1.2 per share and close out around that number as that is getting close to what I defined as fair value.

I am looking at NPV for several other companies but have not yet found another one i like.

So what do you lot think I should do ?

 

[mpups]

Your chart is only showing YTD, maybe also zoom out as far as say 2016 to see the bigger picture

(i don't trade company accounts analysis so can't contribute to this)

 

[bluebellmk]

Your chart is only showing YTD, maybe also zoom out as far as say 2016 to see the bigger picture

(i don't trade company accounts analysis so can't contribute to this)

Chart is below. My idea is to trade on only the fundamentals so not even been looking at the chart only the underlying business.

My predicament is do I look in some profit now or do I allow it all to run as I feel it could easily increase another .20p per share.

The chart below is a weekly going back to January 2016.

 

[Brumby]

Chart is below. My idea is to trade on only the fundamentals so not even been looking at the chart only the underlying business.

My predicament is do I look in some profit now or do I allow it all to run as I feel it could easily increase another .20p per share.

The chart below is a weekly going back to January 2016.

You should revisit the underlying premise of your investment. Were you investing in the entity as a value proposition i.e. it was undervalued by the market or as a growth prospect not fully reflective in its underlying share price? If it was the former, has prices move closer to its fair valuation and if in such a case may justify an exit. It is tempting to take quick profits when it becomes available because there is a psychological aspect in play. If you did not act to crystallise some of your profits and if subsequently price did collapse then such regret can (for better or worse) influence how you make exit decisions in future. Rather than being whipsaw in your decision making it is prudent to be grounded in a process in which decisions are made. Prices don't spike absent any drivers. You should understand what fundamental drivers happened lately that drove prices and evaluate it against your investment plan as to whether it would warrant any exit decisions.

 

[bluebellmk]

You should revisit the underlying premise of your investment. Were you investing in the entity as a value proposition i.e. it was undervalued by the market or as a growth prospect not fully reflective in its underlying share price? If it was the former, has prices move closer to its fair valuation and if in such a case may justify an exit. It is tempting to take quick profits when it becomes available because there is a psychological aspect in play. If you did not act to crystallise some of your profits and if subsequently price did collapse then such regret can (for better or worse) influence how you make exit decisions in future. Rather than being whipsaw in your decision making it is prudent to be grounded in a process in which decisions are made. Prices don't spike absent any drivers. You should understand what fundamental drivers happened lately that drove prices and evaluate it against your investment plan as to whether it would warrant any exit decisions.

Hi Brumby,

Thanks for your response and advice. I have taken the position as a value investment I have an NPV of £1.41 and that is assuming for negative growth and a discount rate of 10%.

I actually feel having listened to the earnings call etc with the new CEO that he can return to growth in which case the price will be north of £2.00.

This is purely a value investment, I would sell 100% when it got around £1.2 level. My issue is do I lock in some profits now and look for another opportunity with a company trading below value or do I just ride this one out and sell it all when it gets nearer the fair value I think it should have?

 

[mpups]

Chart is below. My idea is to trade on only the fundamentals so not even been looking at the chart only the underlying business.

My predicament is do I look in some profit now or do I allow it all to run as I feel it could easily increase another .20p per share.

The chart below is a weekly going back to January 2016.

Charts or not, you trade it according to your trade plan

 

[Brumby]

I have taken the position as a value investment I have an NPV of £1.41 and that is assuming for negative growth and a discount rate of 10%.

How did you end up with a 10 % discount rate? Presumably you understand that the discount rate is a significant arbiter of NPV.

I actually feel having listened to the earnings call etc with the new CEO that he can return to growth in which case the price will be north of £2.00.

A quick read of the financials tell me that the company recently restructured its business by way of a divestment and used the proceeds to recapitalise the Balance Sheet. Financing cost which previously was a drag on profitability has receded but that doesn't mean it is now position for growth. What information did you gathered from the earnings call that would suggest it is on a path of growth?

This is purely a value investment, I would sell 100% when it got around £1.2 level. My issue is do I lock in some profits now and look for another opportunity with a company trading below value or do I just ride this one out and sell it all when it gets nearer the fair value I think it should have?

If your portfolio is fully invested then it is a question of competing priorities or are you simply looking for a reason to take quick profits?

 

[bluebellmk]

How did you end up with a 10 % discount rate? Presumably you understand that the discount rate is a significant arbiter of NPV.


A quick read of the financials tell me that the company recently restructured its business by way of a divestment and used the proceeds to recapitalise the Balance Sheet. Financing cost which previously was a drag on profitability has receded but that doesn't mean it is now position for growth. What information did you gathered from the earnings call that would suggest it is on a path of growth?



If your portfolio is fully invested then it is a question of competing priorities or are you simply looking for a reason to take quick profits?

Arrived at 10% due to US 10 year coupon being 2.75 Company is generating cash every year. 10% I felt was needed as the plan for the company to grow is risky, investing money into the company rather than paying debt off. A 7% discount would be a very safe company in my mind and a 10% one being slightly riskier.

I feel that the company will return to growth due to the new CEO Stephen Breakwell's past history. He was a former director of expedia and also of Uber Europe, both growth businesses. His plan to attract younger drivers to use there service is a compelling one. Their new product Car Genie is a telematics box for the car helping to reduce insurance costs for younger drivers, it is used in conjunction with an app that allows discounts at costa , cinema tickets e.g. They already have the largest driving school in the UK and are investing in insurance underwriting to be able to provide new drivers with cheaper insurance.

The pivot to youth will IMO increase growth massively if successful as their core demographic of customer are likely to continue to use the service as they currently stay for an average of 12 years. The new users from young drivers plus the over 50's they currently have will lead to growth. It is a risky strategy however requiring massive investment in the business.

Even accounting for small to no growth over the next ten years and a 10% discount rate I was still returning £1.41 as a target price.

My initial plan was to invest £250 - £500 per month into my share account or CFD account, using the money to pick a different company I have been researching each month. I still think there is more to go but seeing £182 in profit after a week I would feel sickened if it were to decline again.