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01 December 2018FINDING VALUE 1.
During November the Indexes continued their decline and the markets were volatile. Increasingly voices are being raised about the prospect of a “Bear” market which we have been talking about for a while. We are mostly in cash so now we can start looking for possible candidates as we wait for the market upturn which will eventually come.
First lets us look at Indices, no point in buying a share in your favourite Index if that index is showing down. As a rough guide you could look at the S & P 500 index as when it begins to rise sooner or later most other indexes will follow.
So what would constitute a rise in an Index from down to up? You could use a monthly moving average, or something like a Heiken-Ashi monthly bar colour change or an indicator like the monthly Coppock crossing zero on the way up. Anything that you are happy with to stop you trying to pick the market bottom.
Having established a plan for the Indexes we now need to start looking for shares that have value built it and that are strong cash generators. In other words strong companies that have currently a cheap share price. So what constitutes a cheap share price? A price that does not reflect the value of a company ie a price that does not carry much (if any) of a premium to the underlying asset value. To do this simply multiply the price with the number of shares on issue and compare the resulting figure with the total assset figure in the last balance sheet. You can search for such companies either in the financial press or by using specialist software that can be rented for a relatively small monthly outlay and which will do this for you. Now you will have a list of undervalued companies so the next step is to pick out the diamonds from the dross. We will begin to look at this next month.
01 November 2018UNDER VALUED STRONG COMPANIES
Last month we were pondering over what to do with all the mixed signals coming from the world economies and the fact that our holdings (currently mostly in cash) were not generating much (if any) return. We decided to look at buying strong companies cheaply. So how to do that?
What does a strong company with cheap valuation look like? How can we measure it? Early last month Aston Martin the UK luxury sports car maker was floated on the London Stock exchange at a valuation of approximately £5bn. Should we buy the shares? Strong brand with a global appeal that is long established. Firstly, we need a comparison with a like company to see of the Aston Martin price looks reasonable. Ferrari might be said to have similar traits, strong brand, long established with a global appeal so this might seem to be a reasonable starting point. Ferrari is listed on the New York Stock Exchange so we can see its valuation which is around 40 times earnings. By comparison the Aston Martin float price valued the business at around 65 times earnings a whopping 62% higher than Ferrari. So we need to ask ourselves where are we going to find value at this price? Is the probability that the shares are going to advance from here and thus going further ahead of Ferrari or not? Is the probability that the shares price is going to decline to come more into line with Ferrari?
These are the questions that investors need to ask themselves and we will delve more into this next month. Company valuations are tricky but the clues are available.
01 October 2018After The Holidays
Hope that you all had a nice holiday.
Back to business - aside from World Wars has there ever been this much uncertainty in the business world? In the Eurozone we have the UK leaving, so called Brexit, causing no end of uncertainty principly because nobody knows what "leaving" will look like on both sides of the channel. In the US ever increasing Trade tarriffs and the rise of protectionist policies creates uncertainties in many zones around the world who trade regularly with the US. Additionally Interest rates are rising. And if that was not enough Stock Markets are at or near to all-time highs. All of this would seem to indicate an imminent Stock market fall of some proportions, but conversely in the US at least the economy is booming, and usually if the US economy is doing well the rest of the worlds economies tend to follow suit.
So what to do? In order to participate in what may be rising markets for some time while at the same time protecting ourselves should the markets crash we should look at companies that are solid, but for whatever reason have fallen out of favour with investors. We will look at possible methods to do this next month.