THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY. I HAVE A VERY LARGE PORTFOLIO AND I USE DIVERSIFICATION TO SPREAD RISK ALONG WITH TRICKS LIKE HEDGING AND OCCASIONALLY BY THE USE OF STOPLOSSES - IF YOU BUY ANY STOCK YOU REALLY SHOULD FOCUS ON HOW IT FITS IN YOUR PORTFOLIO AND KEEP RISK MANAGEMENT AT THE FOREFRONT OF EVERYTHING YOU DO. BE AWARE THAT ALL INVESTORS/TRADERS GET THINGS WRONG AND MANY STOCK SELECTIONS WILL WORK OUT BADLY - MAKE SURE YOU UNDERSTAND THIS.
Now I’ve confused you. I bet you’re about to look through my Blog Page desperately hunting for Part 1 - but don’t bother - it is not published yet and you know how I love playing little dirty tricks…. I started writing a generic Blog Series about how the Past has gone and although it has its uses with regards to credibility of a Company and Management etc., it is really the likely Future that we as Investors need to focus our minds on. This Blog, Part 2, comes into its own here because I am going to use Utilitywise UTW as an example of precisely what I mean - because it is obvious to anyone that UTW has had a terrible recent History but my contention (and I am backing this with a chunky Long Position) is that the Company is undergoing a significant and profound Transformation that will take it into a serious stage of Growth. And it looks extremely cheap……
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This blog has been on the drawing board (ok, in the WheelieBrain synapses) for many weeks now and I am pretty sure I have attempted to write it at least 4 times but various bits of the Joys/Crud of life have transpired to not let that happen. I recall many weeks ago a discussion on Tweets about Value and Price for a Share but I can’t actually now remember the context - all I remember is that it was something I felt strongly about at the time and that a blog was needed on this important subject.
With the long Bank Holiday weekend I really have no excuses for not getting on with the First Draft but needless to say all my plans for how my day would pan out have been totally gazumped. I squeezed in a quick trip to the local Garden Centre to get some Slug Pellets and got nabbed by one of my wonderfully kind neighbours on the way back who wanted to test out her new Strimmer on the tiny bit of grass at the front of Wheelie Towers. Of course, this then became an epic event and at some point another neighbour turns up with his Formula 1 Racing Lawn Mower (I am sure it was the same Green colour as those old Jaguar F1 Cars which Johnny Herbert had a go in I think - hey, he nearly ran me over at the Goodwood Festival of Speed you know !!), and to shorten this detour I essentially lost 2 hours of my day - so I am starting this blog at 11.42pm on a Saturday night !!
I am totally on a roll tonight and the words are just flowing forth from the Wheelie Fountain - and I haven’t even been near the Old Speckled Chicken !!
I just wrote a really good first draft of the blog about ‘Is it possible to be too Cautious’ (which should appear on the Website in coming weeks) and when I looked at the clock it was still only 11pm and I had bashed that one out in a little over an hour - so I decided that I might as well crack on with this one because it is another Blog that has been on my brain for some time and while I am spewing out words like this I might as well take advantage of it !! I remember after doing one of the early Podcasts with Justin, the question arose about “how do you manage so many Stocks?” - I can’t actually remember if Justin asked me this or whether it came about from a Reader/Follower afterwards but that doesn’t matter - the point is that I don’t think I have ever actually got around to answering it and this Blog hopefully will put that major deficiency to rights. On top of that, it actually fits in a treat with some Draft Blogs I am working on about ‘Cutting out Noise’ and my original intention was to include it as a Part of that Blog Series but then I decided it was so important that it deserves its own Blog. So here it is…….
THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY.
If you’re keeping up with the tinkering I have been doing to the WD Portfolio, you may remember I bought a small stake in Devro DVO some weeks back after they had a Profit Warning and the Shares had dropped a lot. This was quite unusual for me as I tend not to buy into ‘Trouble’ if I can avoid it - however, in this case, DVO is a Stock I have dabbled with in the past and I know the Company reasonably well. My logic here was that this could be a decent chance to buy into them at a good price and I was particularly interested in the increased Capacity that the new factories have brought along and how this could give them space to grow in the future.
Other ways to Value Companies/Stocks
There are a few other ways to value Stocks but probably the only one I use a lot is the ‘Discount to NAV’ approach. I have very rarely used the Price to Sales Ratio (PSR) but I just don’t see any need to over complicate things although many people do seem to use some incredibly complex approaches. Discount to Net Asset Value (NAV) This is an extremely useful and important method and regular Readers (it’s that All Bran again) may have seen me use such an approach with my Buy Rationale Blogs on Quintain Estates QED and Avation AVAP (there are links to these Blogs at the end of this one). I will try and explain this in simple terms - in essence we take the Net Asset Value (NAV) of the Company and compare this to the Market Capitalisation and really we want to see a decent Discount - in other words, the Market Cap needs to be a fair bit less than the NAV.
Trading with regard to P/E Ratios
As I mentioned earlier in the Blog Series, I ideally want to be buying Stocks which are Priced in the Market on a Forward P/E that I think is lower than what it really should be and where the Market has misunderstood a Growth Story or perhaps Oversold a Stock with Problems and not given the appropriate ‘Value’ in terms of P/E Ratio - often with the latter a Company has been in trouble but is in the early stages of a Recovery and the Market has not yet woken up to the improvements. Another great example comes about from IPOs (Initial Public Offerings) - I quite often find that Stocks that are new to the Market are on a lower P/E than they should be - and this creates a wonderful opportunity as the Market wakes up to the Story and gets to know the Stock - I want to be in before the Herd (I have written about this recently in a separate IPOs Blog - I will put a link at the end of this Blog Series).
Part 1 of this Blog Series was scribbled about a week ago - I recommend reading that and understanding it before trying to get your head around this one - it’s an extremely important topic but not particularly easy to get a grip of.
How to Interpret the P/E Ratio Right, now we have got to the critical bit. Calculating a P/E Ratio (remember, I prefer the Forward P/E Ratio) is one thing, but it is not much use if you have no framework and knowledge to put that Number into context. The following list should help with that interpretation (well, that‘s the plan anyway - you may need to read it a few times and perhaps makes notes - this is extremely important):
Don’t panic, I haven’t morphed into Tony Bliar; although I have been drinking the odd beer or three tonight and maybe we could all do with some “Education, Education, Education“. I am very aware that in recent weeks I have been nonchalantly discussing and tweetering about ‘Valuations’ being on the high side and I often bandy this term around, but I perhaps haven’t really defined in detail what it actually means.
I am pretty sure that I have regularly referred to P/E Ratios (Price/Earnings Ratios) and Valuations in various Blogs etc. but I don’t recall ever doing a Blog which is pretty much dedicated to the P/E Ratio and what it means and how to interpret it. It has certainly come to something when I have bashed out so many Blogs that I am starting to forget which ones I have written and which ones I haven’t - throw in some Old Speckled Hen and a sniff of Alzheimers and I guess it’s not such a huge surprise (if you go to the ‘Useful Links’ page and scroll down, you will find the Full List of blogs published up to now and I strongly suggest that people who are new to the whole WD malarkey have a nose through - there is a lot of useful stuff in there I believe.)
I regularly hear or read comments about how the FTSE100 is ‘cheap’ in Dividend Yield terms compared to other Assets and Stock Indexes etc., and I am sure I have generally accepted this as pretty sensible. However, I was reading the excellent Chris Dillow in this Week’s Investors Chronicle (4 March - 10 March 2016, Page 16) under his column headed ‘Yields’ weak signal’ and it made me realise that perhaps this advice is rather more nuanced in practice (as with so many Financial concepts, the Theories we read everywhere are barely workable in practice and often downright false.)
After my last Blog, this is rather more Sober - or even Sobering, as you can probably sense from the Title…….
Twitter Followers may have seen some comments from me recently about how I am feeling that the majority of Stocks are starting to look a bit expensive. This has particularly become the case in recent weeks when I have been plodding through the ‘Company Results’ Section at the back of Investors Chronicle and I am finding a lot of interesting, Quality, Companies but their Valuations look very high and not really the kind of levels I want to be buying at - I would more likely be selling. |
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