Value Analysis:- How to Determine Fundamentally Weak & Strong Stocks

[belflan]

Looks like there haven't been any contributions so far, but here is a little something that is, IMHO, worth pondering. In the current market spike, stocks with a high institutional holding (as reported by Yahoo finance) have performed very significantly better than those with a low institutional holding.

This appears to be general, extending across many industries.

I have chosen a universe of stocks priced above $5.00 and average daily dollar volume of $1.2M and screened on Jan 18. The first chart shows an equi-weighted index of the 200 stocks with the highest institutional holding from this universe. Percent gain is ~10%.

hi dcraig,

whats your thoughts on this, do you think this is institutional money buying the dip? the the Government buying to stop the market panicing? a random event? do you think these stocks may lead, the rest follow?

thanks
glen

 

[Glenn]

Hi Glen,

when you get a chance, could you post the figures you used for your ARM calculations.

I'm getting together a spreadsheet to calculate fundamentals, I've put in the figures from yahoo finance and I'm getting a target of -$51.50 per share.

It would be useful if i could check the figures i used against your figures

thansk
glen

Hi Glen
It's easier if I post the spreadsheet.
It's a protected sheet with the Input cells unprotected.
Password is Grey1 to unprotect it..

You might get more sensible figures from the later link (mofinet).

Glenn

 

[belflan]

Hi Glen
It's easier if I post the spreadsheet.
It's a protected sheet with the Input cells unprotected.
Password is Grey1 to unprotect it..

You might get more sensible figures from the later link (mofinet).

Glenn

it seems like i can not add to your rep. need to spread some around first so...thank you for your post

Glen

 

[Trader333]

Paul

It is a good idea. Do we get to see the screen shots only or with Grey1 talking to the camera? As for the copying and distribution, please choose the way that suits you. Many thanks,..

This will be audio only with the transcript of members asking questions.


Paul

 

[belflan]

Hi Glen
It's easier if I post the spreadsheet.
It's a protected sheet with the Input cells unprotected.
Password is Grey1 to unprotect it..

You might get more sensible figures from the later link (mofinet).

Glenn

Hi Glenn,

I think i'm almost there with this,

one thing i can figure out; when i walk through the Apple example within motley fool link you provided, it uses the figure 13.21% (Cost of equity) with the calculation of 'Present value of perpetuity' however within your spreadsheet the figure 3% (interest rate) is used.

I'm not sure why this is?

Thanks
glen

PS. the data figures from yahoo seem to tie in ok with yours

 

[Glenn]

Hi Glenn,

I think i'm almost there with this,

one thing i can figure out; when i walk through the Apple example within motley fool link you provided, it uses the figure 13.21% (Cost of equity) with the calculation of 'Present value of perpetuity' however within your spreadsheet the figure 3% (interest rate) is used.

I'm not sure why this is?

Thanks
glen

The AAPL example was in the year 2000 as I mentioned. I used the current interest rate for the ARM calcs, which I assume to be the recently announced Fed rate (rather than the interbank rate).
However looking at his example, it might contain a mistake, because the figure of13.21% he uses happens coincidentally to be the CAPM figure he calculated earlier, whereas the interest rate at the time was, I believe, around 6%.
I haven't studied this in detail, this is just a quick reply and so I could easily be wrong.

Glenn

 

[belflan]

The AAPL example was in the year 2000 as I mentioned. I used the current interest rate for the ARM calcs, which I assume to be the recently announced Fed rate (rather than the interbank rate).
However looking at his example, it might contain a mistake, because the figure of13.21% he uses happens conincidentally to be the CAPM figure he calculated earlier, whereas the interest rate at the time was, I believe, around 6%.
I haven't studied this in detail, this is just a quick reply and so I could easily be wrong.

Glenn

Yes, i think he is getting this figure from his CAPM calcultation. I take it then your calculation is correct, and his is a mistake

many thanks
glen

PS using the interest rate of 6% for the AAPL calculation would have given him a target of $32.83!! and not $20.63. (i guess he exited to early!!!)

 

[Glenn]

I'm not convinced that this is leading anywhere yet, even as a start.
e.g.
Negative targets are clearly of no use.
Similarly the mofinet method, needing dividends for it's calculation,is of no use for shares with no dividend.
.... and I think that the end-solution, whatever it is, will be more complex than these simple approaches.

Glenn

 

[belflan]

I'm not convinced that this is leading anywhere yet, even as a start.

i guess any start is still a start

e.g.
Negative targets are clearly of no use.
Similarly the mofinet method, needing dividends for it's calculation,is of no use for shares with no dividend.
.... and I think that the end-solution, whatever it is, will be more complex than these simple approaches.

Glenn

Negative targets aren't much use as actual targets but surely they give us one indication of the actual value of a stock. I'm sure other methods will be required to gain a fuller picture.

the end-solution (if there is one) will be more complex, but i guess it will involved these basic calc's within it somewhere

thanks
Glen

 

[belflan]

I'm not convinced that this is leading anywhere yet, even as a start.
e.g.
Negative targets are clearly of no use.
Similarly the mofinet method, needing dividends for it's calculation,is of no use for shares with no dividend.
.... and I think that the end-solution, whatever it is, will be more complex than these simple approaches.

Glenn

it would good at this stage to get a point in the right direction from Grey.

I know he want us to hold back until he runs a webinar on CAPM, but it would be nice to get some research done up front as this is likely to be a few months away

Glen

 

[dcraig1]

hi dcraig,

whats your thoughts on this, do you think this is institutional money buying the dip? the the Government buying to stop the market panicing? a random event? do you think these stocks may lead, the rest follow?

thanks
glen

I don't really know and I think it can be a mistake to try to draw too many conclusions when the facts simply are insufficient to support them. You know the sort of thing posted on message boards and blogs - it's the PPT, it's fund managers buying at end of month, blah, blah, blah. People trying to sound knowledgeable and deluding themselves and others into believing that they possess some unique insight into the markets.

I think it's just sufficient to observe, and most importantly to know what to look for. Unfortunately the latter is a moving target, and may be different in differing market conditions.

I read somewhere that retail investors have been dumping stocks and mutual funds since mid to late December, so I thought it might be worth having a look at stocks with high institutional holding vs those with low. I had no other special insight into what was going on.

If you have a decent screener, I think it is worth spending some time playing around looking at stocks, sectors, industries, large caps vs small caps etc etc and checking out anyhing you can connect with what you are reading about the markets. Relative strength (or weakness) can be a powerfull factor.

To return to the original question about why stocks with large institutional holdings have done better - maybe just the simplest explanation is the best - that retail investors are continuing to dump stocks. Or maybe not.

 

[Trader333]

There is one factor here that has not been discussed (unless I missed it) and that is volume. In my view I would not include stocks that have a volume of less than 1 Million a day. This will cut down the possible list quite considerably and allow a more narrow focus.


Paul

 

[dcraig1]

There is one factor here that has not been discussed (unless I missed it) and that is volume. In my view I would not include stocks that have a volume of less than 1 Million a day. This will cut down the possible list quite considerably and allow a more narrow focus.


Paul

Does it make more sense to screen for "dollar volume" if, for example, you are trading stocks priced in the range $5 to $50 per share ?

 

[Trader333]

Yes that also makes sense as well.


Paul

 

[dcraig1]

Being averse to doing work that others have already done, and probably done better than I could anyway, I've been having a look at Yahoo finance "enterprise value" as a valuation metric for stocks. The results (provisionally) look interesting.

To get a normalized value, I just divided the "enterprise value" by the market cap - crude, but there may be something in it.

Here is the results of a couple of screens:

In both cases, the universe of stocks was stocks priced over $5 per share and with an average daily dollar volume of $1.2M. Screen date Jan 6th.

The first chart (undervalued) is an unweighted index of the 200 stocks with the highest enterprise value / market cap figure.

The second chart (overvalued) is an index of the 200 with the lowest enterprise value / market cap.

Comments ?

 

[dcraig1]

I guess this falls somewhere under the umbrella of "value analysis" - an interesting view of the sub-prime fallout:

Asia Times Online :: Asian news and current affairs

In particular he suggests that VAR (Value at Risk) models have failed dismally and are next to worthless. I think Talib has been saying this for years.

He also suggests that finance will be a shrinking proportion of the US economy in the years ahead. Who knows ?

 

[Glenn]

Getting back to CAPM .......

Firstly may I take this opportunity to emphasise my agreement with Grey1's approach using Fundamentals as the way to determine weak and strong stocks. When I started out in trading and investing years ago I was fortunate to come across this principle early on and it works - period.
If you were going to bet on a football team to win a Premier League match, would you choose Arsenal or Derby ? And if you were going to pick a team to lose a match, which would you pick ?
If you pick Arsenal to lose then most of the time you will be wrong.
Why back a winner to lose ? Why back a loser to win ?

So before you place your bet you need to understand what you are betting on. That is why Fundamentals are so important when you are risking your money on stocks.
If you think you can rely on Technical Analysis alone for trading stocks, then you are taking unecessary risks with your money. Trading is hard enough for many as it is, so why make it harder ? Would you choose to drive your car using only one hand, or bald tyres or no brakes ?
Apologies if I am teaching grandmother to suck eggs, I mean no disrespect to those who already accept these principles, but this concept is so important that it must be emphasised for those who do not.

After researching the topic further, here is a basic procedure for calculating the projected value of a stock based on Capital Asset Price Modelling. Comments/criticism welcomed:-

The data you need for this are:-
1. The stocks Beta. B
2. The stocks Dividend amount D
3. The risk-free rate of return, represented by something like the yield of the 30 year Treasury Bond. RFR
4. The Average return of the Market. AR

First calculate the CAPM C:-
C = RFR + (AR - RFR) x B

Then calculate the Value of the stock i.e. the Target Price T, usind the Dividend Valuation Model:-

T = D / CAPM expressed as a decimal.

Example:

B = 1.1
D = 40c
RFR = 6%
AR = 10%

C = 6 + (10 - 6) x 1.1
= 10.4 % or 0.104

T = 40c / 0.104 = 385c = $3.85

If the anticipated next dividend is 20c instead of the current 40c, then
T = 20c / 0.104 = 192.5 or $1.925.

(Current values of RFR and AR for the US market are 5.68% and 12% respectively.)

Once you have a target price you can determine whether there is enough of a difference (Reward) between the current price and the target price to justify taking a position.

Then you can use the top-down approach (Market first, Stock second) of Technical Analysis to determine when to enter and when to exit.

Glenn

 

[dcraig1]

What do you do for stocks that don't pay dividends ?

 

[rajibde]

Getting back to CAPM .......

Firstly may I take this opportunity to emphasise my agreement with Grey1's approach using Fundamentals as the way to determine weak and strong stocks. When I started out in trading and investing years ago I was fortunate to come across this principle early on and it works - period.
If you were going to bet on a football team to win a Premier League match, would you choose Arsenal or Derby ? And if you were going to pick a team to lose a match, which would you pick ?
If you pick Arsenal to lose then most of the time you will be wrong.
Why back a winner to lose ? Why back a loser to win ?

So before you place your bet you need to understand what you are betting on. That is why Fundamentals are so important when you are risking your money on stocks.
If you think you can rely on Technical Analysis alone for trading stocks, then you are taking unecessary risks with your money. Trading is hard enough for many as it is, so why make it harder ? Would you choose to drive your car using only one hand, or bald tyres or no brakes ?
Apologies if I am teaching grandmother to suck eggs, I mean no disrespect to those who already accept these principles, but this concept is so important that it must be emphasised for those who do not.

After researching the topic further, here is a basic procedure for calculating the projected value of a stock based on Capital Asset Price Modelling. Comments/criticism welcomed:-

The data you need for this are:-
1. The stocks Beta. B
2. The stocks Dividend amount D
3. The risk-free rate of return, represented by something like the yield of the 30 year Treasury Bond. RFR
4. The Average return of the Market. AR

First calculate the CAPM C:-
C = RFR + (AR - RFR) x B

Then calculate the Value of the stock i.e. the Target Price T, usind the Dividend Valuation Model:-

T = D / CAPM expressed as a decimal.

Example:

B = 1.1
D = 40c
RFR = 6%
AR = 10%

C = 6 + (10 - 6) x 1.1
= 10.4 % or 0.104

T = 40c / 0.104 = 385c = $3.85

If the anticipated next dividend is 20c instead of the current 40c, then
T = 20c / 0.104 = 192.5 or $1.925.

(Current values of RFR and AR for the US market are 5.68% and 12% respectively.)

Once you have a target price you can determine whether there is enough of a difference (Reward) between the current price and the target price to justify taking a position.

Then you can use the top-down approach (Market first, Stock second) of Technical Analysis to determine when to enter and when to exit.

Glenn

Hi Glenn,

Thanks for continuing with this topic as this imho is a very important one.
But do you not feel that just CAPM alone is not sufficient to indicate if the stock is fundamentally strong? my reason is-being an 'effecient market' the stock price should most of the times reflect the values derived from CAPM (and other valuation figures e.g.NPV etc); using the CAPM calculator(attached a few posts ago) I find the current prices of the 'strong' stocks are already much higher......

Now it would be interesting to know what other (publicly available) factors do the likes of Warren Buffet and other professionals (e.g.Grey1) consider to decide the future potential of a stock.

I must add here-cnbc is quite an informative channel (thanks Iraj for the suggestion).

Raj

 

[moreagr]

Getting back to CAPM .......

Firstly may I take this opportunity to emphasise my agreement with Grey1's approach using Fundamentals as the way to determine weak and strong stocks. When I started out in trading and investing years ago I was fortunate to come across this principle early on and it works - period.
If you were going to bet on a football team to win a Premier League match, would you choose Arsenal or Derby ? And if you were going to pick a team to lose a match, which would you pick ?
If you pick Arsenal to lose then most of the time you will be wrong.
Why back a winner to lose ? Why back a loser to win ?

So before you place your bet you need to understand what you are betting on. That is why Fundamentals are so important when you are risking your money on stocks.
If you think you can rely on Technical Analysis alone for trading stocks, then you are taking unecessary risks with your money. Trading is hard enough for many as it is, so why make it harder ? Would you choose to drive your car using only one hand, or bald tyres or no brakes ?
Apologies if I am teaching grandmother to suck eggs, I mean no disrespect to those who already accept these principles, but this concept is so important that it must be emphasised for those who do not.

After researching the topic further, here is a basic procedure for calculating the projected value of a stock based on Capital Asset Price Modelling. Comments/criticism welcomed:-

The data you need for this are:-
1. The stocks Beta. B
2. The stocks Dividend amount D
3. The risk-free rate of return, represented by something like the yield of the 30 year Treasury Bond. RFR
4. The Average return of the Market. AR

First calculate the CAPM C:-
C = RFR + (AR - RFR) x B

Then calculate the Value of the stock i.e. the Target Price T, usind the Dividend Valuation Model:-

T = D / CAPM expressed as a decimal.

Example:

B = 1.1
D = 40c
RFR = 6%
AR = 10%

C = 6 + (10 - 6) x 1.1
= 10.4 % or 0.104

T = 40c / 0.104 = 385c = $3.85

If the anticipated next dividend is 20c instead of the current 40c, then
T = 20c / 0.104 = 192.5 or $1.925.

(Current values of RFR and AR for the US market are 5.68% and 12% respectively.)

Once you have a target price you can determine whether there is enough of a difference (Reward) between the current price and the target price to justify taking a position.

Then you can use the top-down approach (Market first, Stock second) of Technical Analysis to determine when to enter and when to exit.

Glenn

Hi Glenn

very good post!

but as far as the risk free rate in many books and on the net they refer the Risk free rate to someting close to 3 month tres yield. or libor rates. not sure which one is better.