This 3-part post is all about following best practices for selecting the optimal valuation method…namely the one that’s going to derive a price target more accurate than consensus.
As noted in Part 2 of this 3-part series, there are limitations to every valuation method, but some are better than others. For years I had been looking for an information source that quickly summarized the best method(s) to use under each circumstance, but couldn’t find one. So I created the flow chart below.
The idea is to start at the top of the flow chart and work your way down as far as possible, to get closer to the methods that measure free cash flow. Note the blue shapes are single-period multiples-based methods whereas the tan shape, DCF, is a multi-period cash flow method.
Callout: The further you can go through the flowchart, the closer you are to valuing the company’s free cash flows.
Continue reading "How to Select the Optimal Valuation Method to Build Better Price Targets (Part 3 of 3)" »
I was in the process of working on an article
about why fund sponsors were failing the
funds and their pension beneficiaries. The
article was going to focus on the role
sponsors take in the management of the
fund, identify their shortcomings and
propose solutions. Coincidentally, I
was watching The Daily Show with Jon
Stewart one night while his guest, Wall Street Journal reporter Ellen Schultz, was promoting her new book. “Retirement Heist” talks about the deliberate mismanagement of pension funds for the benefit of the sponsor and their executives. The next day I stopped by the bookstore and picked up her book. Once I began reading, the focus of my own article shifted from solely looking at the role of fund sponsors in the management of pension funds to also consider the sponsors’ place in society and the long-term consequences of their short-term focus.
Continue reading "Why Fund Sponsors Are Failing" »
Investors are presented with a barrage of marketing material from funds and
managers trying to raise capital, and
what all these reports have in common is
that they all focus on performance. That
is not surprising considering the
relatively large number of funds available with the few strategies being
used, managers feel they can only
differentiate themselves through performance. Attend enough sales presentations and you will have heard how “my long-short equity strategy has consistently outperformed the market and that is why you need to invest with us.” By the way, the “Past performance is no indication of future results” is usually said with much less gusto.
This is not to disparage managers and funds alike but rather to help investors identify the good managers whose past performance is more than likely a good indication of their future performance. Although a thorough performance evaluation requires the skill set of a performance specialist, any investor can begin such an evaluation by questioning one simple and important component of the performance marketing material, which is the benchmark.
Continue reading "Don’t Overlook Benchmarks" »
Is it a bad idea to make predictions in your investment commentary because clients will slam you when you’re wrong? Whenever you make predictions, you run the risk of being wrong. But being wrong isn’t a problem, in my mind, if your prediction reflects good thinking.
Lesson from my winning prediction
Accurate predictions alone don’t make you seem smart. I remember the time I participated in a betting pool with members of an investment policy committee. I had to predict where a certain number—probably the 10-year Treasury rate—would be one quarter later.
Continue reading "Are financial predictions too risky for investment commentary writers?" »
In my prior post I discussed the importance of identifying the optimal valuation method, which includes researching the valuation method used by most other equity analysts who cover the sector and stock being researched.
In this entry, I delve into the pros and cons of the most popular valuation methods. To ensure I wasn’t missing one of the more popular valuation methods, I researched the topic and came across two studies, one from the U.S. and one from the U.K. Given that buy-side analysts don’t publish their reports, these studies relied entirely on sell-side analysts and therefore they may not be representative of buy-side analyst’s work. The studies were conducted independent of one another and therefore shouldn’t be viewed comparatively. Instead, they provide an idea of the top 5 valuation methods used by equity research analysts in their respective markets. Having been based in London for part of my career, I can verify DCF is more extensively used in Europe than in the U.S.
Continue reading "How to Select the Optimal Valuation Method to Build Better Price Targets (Part 2 of 3)" »
The End of Banking: Money, Credit, and the Digital Revolution. 2014. Jonathan McMillan.
Announcing the demise of the financial system as we know it has become popular in the aftermath of the Great Recession. In fact, the Financial Times has dedicated an entire series to the topic, aptly named Death of Banks, wherein author Izabella Kaminska chronicles the downfall of traditional banking.
A recent book called The End of Banking goes one step further: In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers’ risk taking. The book proposes a fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy.
Continue reading "Book Review: The End of Banking By Manuel Stagars, CFA, CAIA, ERP" »