Monthly Archives: February 2012

SLF – Sun Life Financial Coming Out of the Blue!

The last quarter was a painful one for Sun Life shareholders (and probably management).  The life insurers in Canada have been forced to adopt IFRS accounting standards and by adopting these strict standards, stricter than Canadian GAAP and American GAAP for that matter, they have been forced to endure losses on their income statements and write-downs on their balance sheet.  We just received the year-end financials for both Sun Life (SLF) and Manulife Financial (MFC).

The exciting part is that in the last week, SLF’s share price has transited above EBV-3.

Sun Life with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of SLF subsequent to this post will be maintained on Facebook, here.

Why should you care?

A trader/investor should always keep an eye on transits up through EBV-3.  We call this “Coming out of the blue”.  Why?  Subsequent to an upward transit of EBV-3, stocks tend to have powerful moves, price wise, that can take a stock from EBV-3 to at least EBV, or EBV+2.  Sometimes investors, if patient, can ride their winners all the way to EBV+5.

We look for “break out/pull backs”, for higher probability trades.  This occurs when a stock transits above EBV-3, then pulls back under, then breaks above again over a period of weeks/months.  To us this means the market is undecided in terms of the price action which zone the stock belongs.  When the market does decide to stay above EBV-3 (for a second or third time), which could coincide with news and/or corporate action, the price action is very positive.

Obviously, if the stock transits down through EBV-3, all bets are off!

We are also keeping an eye on Manulife Financial as well.

Manulife Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of MFC subsequent to this post will be maintained on Facebook, here.

With the Canadian life insurers “breaking above the blue” is a very positive signal not only for the insurers such as Sun Life, but also for the market as a whole.  The last 5 years have not been fun for the above noted insurers and their shareholders.  However, there are signs of spring after a very harsh winter, which is very welcome.

Model Price Blog – Four Items We Changed Since We Started.

Model Price has been blogging now for a month and a half.  The response has far exceeded our most bullish expectations.  These are the things that we learned.

1.   In the beginning we referred and linked to graphs that were posted in our Facebook application.   With recommendations from our readers we now have posted the graph(s) within the blog so readers don’t have to click out of the blog itself.

2.   We initially worried about enough material to blog about.  Well after a month and a half and almost 40 blogs later, we don’t think we have to worry about the frequency of material.

3.   We took some time reproducing our “Key Concepts” description from our Facebook page and placed it in the “Wordpress” blog for ease of staying within the app.

4.   In five or six of our posted blogs we were referring to “Convexity”, which wasn’t referred to under “Key Concepts”.  We have now edited “Key Concepts” to include “Convexity”.

We think we are offering something very unique.  We are offering a new way of looking at finance, a new way of looking at fundamental research, through a graphical interface along with editorializing.  We are looking forward to more cross-talk from our readers and readers who are more experienced with our work helping new readers with their investment decisions.

We are off to a good start, if you have any comments and/or criticisms please let us know.

Suncor – Finally Getting Its’ Mojo Back!

With “Dirty Oil” and Keystone politics making its’ way through this very political year, like a pig passing through a python, Suncor is finally coming back to life after being placed in the penalty box last August.  Let’s have a look at the model price chart.

Suncor with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of SU subsequent to this post will be maintained on Facebook, here.

The calculated model price on Suncor, as at February 24, 2012 is $65.13.  A whopping 76% above the close on the above noted date.  Sometimes on television I’m asked what the difference is between model price and target price.   I seem to interchange these terms at will.  Suncor is an excellent example of the difference in using these terms.  Even though the model price is substantially above the current price, I would use EBV+3 as my target price for Suncor.  That target price would be $52.12, a gain of 40%.  Once reaching EBV+3, we would estimate that further gains would only accrue by the growth in EBV+3, which would be 11.5% annually, still not bad when treasury bills are zero.

Another chart we will present, for the first time in this blog, is one we use for perspective on valuation over long periods of time.

Suncor charting the difference (delta) between Model Price and the market price going back to 1995

This chart goes back to 1995.  We set model price as a constant, at 1.0, which is represented as the dashed line on the chart.  As the differential between model price and the then current market price goes above 1.0, or visually above the dashed line, this would indicate Suncor’s market price would be overvalued in comparison to model price.  Obviously, anything below the dashed line represents an undervalued situation.  The red lines signify one standard deviation, in either direction, of the differential in model price and the then current market price.  The blue line represents the average differential over the whole period represented on the chart.  Over the last 17 or so years Suncor has, on average, traded below its’ model price.  Notice the discount between the dashed line and the blue line.  Therefore, our prediction on “target” price of EBV+3 versus “model price” price objective.  This prediction obviously assumes a “going concern” basis and not a “buy out” situation.  On a buy out we would hold to model price as our price objective.

As one can see, this is the lowest, in terms of valuation differential the Suncor has traded in the last 17 years.  We do not recommended stocks in this blog, however we want to use our database to show statistical relevant items that investors may miss in achieving good returns for their portfolios.  On the statistical valuation front Suncor stands out.

Canadian Companies Turning Against IFRS

In a previous blog post we highlighted the impact of BCE’s balance sheet with the implementation of IFRS versus Canadian GAAP (here). It seems a number of Canadian Companies are opting to US GAAP instead of IFRS. Great article that we haven’t seen picked up in the main Canadian financial press yet!

Turning against IFRS – Twenty percent of Canadian large-caps are choosing U.S. accounting.

P.S. Whether Canadian GAAP, IFRS, or US GAAP, model price is robust enough to look through the above noted financial standards and has no preference which standard is used.

Model Price Outlines Three Scenarios for the S&P 500 Index

How do we look at the US market as a whole?  Yes, we have individual charts on every company in the S&P 500 (and many more), so if we could aggregate them into one chart, what would that chart look like?  We have, and here is the chart.

S&P 500 Index with weekly price bars, EBV Lines (colored lines)

We calculate this chart on a bottom up basis, using market capitalization identical to the S&P 500.  As we can see, the S&P 500 index has been in a stair-climbing situation since the beginning of the year.  As of February 23, 2012, we have 6.2% to go to reach EBV+3 or 1447.

This presents investors with three scenarios:

Scenario Number One; the S&P 500 could break up and through EBV+3.  This we think would be the most unlikely scenario.  We are still in a very uncertain financial situation with a lot of issues unresolved.  The bears at Zero Hedge could do better a better job then us explaining why this market cannot go any higher.

Scenario Number Two; the S&P 500 goes to EBV+3, and uses EBV+3 as support for sometime until the market gets a green light to break out of EBV+3.  This, at best, is our most bullish scenario.  From the close on February 23, 2012 (1363) to EBV+3 one year out (1607) this represents a potential gain of almost 18%.

Scenario Number Three; the most bearish case, is that the market falls to EBV+2 or 1048.  Which is 23% from the close on February 23, 2012. The good news is that the projected EBV+2 one year from now, with the growth of the balance sheets, would be 1164 or a fall of 14.6%.  Better, however still painful.

What is the most likely scenario?

“Bull markets climb the wall of worry” is an old quote describing financial markets.  The weekly chart of the S&P 500, since the beginning of 2012, certainly describes what is going on in this market.  The majority of companies in the S&P have reported 4th quarter numbers, which taken as a whole were good.  Also US macro economic numbers, including employment have left the market in a positive mood.  If this continues than the S&P should reach our target of 1447, or EBV+3, which would propel the S&P up another 7 percent from the February 23 close.  In our estimation the only additional gains investors can expect is the growth in the book values of the companies themselves or the growth in EBV+3 line (red line).   Also we think the S&P will stay in proximity to EBV+3 for the foreseeable future.

When valuations increase, risk also increases.  If something were to go wrong, (i.e., policy mistake, Europe and seemingly twelve hundred other things) the market will correct from EBV+3, which will present investors opportunities to invest in their favorite names.  Yes, we would buy the dips!  Looking for the market to return back to EBV+3.

Another Data Point for Model Price – Flint Energy (FES)

Over the weekend URS Corp. acquired Flint Energy Ltd. in a $25 per share friendly deal.  What was the model price?

Flint Energy with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Nasdaq Hits 11 year High this Week. Six Stocks have “Stand Out” Model Price Charts!

One week ago we suggested a bull market in the making on the social media front, here.  With this post we suggested the financial press and others would point to excessive valuations in social media just like 1998-99 period with internet stocks.  Let’s go a step further in remembering this period.  Investors and portfolio managers suggested instead of investing in the Internet stocks directly, because of excessive valuation, why not invest in the “picks and shovels” of the Internet companies.  No matter what happens in the social media, these companies have to buy/install computers, switches, servers, database software and more.

So we quickly reviewed all the charts in the Nasdaq 100 Index and selected 6 companies that stand out.  What to we mean by “stand out”?  We have a saying, if you hold up these model price charts three miles away and we collectively say, “buy” these investment ideas “stand out” from the rest of the pack.  From past experience, investing gets real easy when we ask ourselves this simple question.  If one has to “squint” at the chart to make an investment case then the odds of a winning position are reduced considerably.  Also these stocks certainly qualify to be the “picks and shovel” stocks people were referring to 12 years ago.

Some observations before we get to the companies themselves.

1               In past blogs we have reviewed several social media equities and have noted these companies trade at EBV+7, 8, and 9.  This is a very high multiple to book.  This is reasonable if growth continues as it has in the past.  However, if growth slows, investors will suffer big losses as multiples shrink, probably quickly.  The companies highlighted in this blog trade at EBV+3,4 and 5.  Big difference.

2               The selected equities are all trading either at their model price or under.  Some of these companies trade at a discount of more than 30 percent of their model price or fair market value.

3               For fun, we will highlight what valuation these companies traded back in ’99 and ’00.  Yes, these companies traded back in’99 – ‘00 where the social media stocks trade today even though they were considered “old” technology.  We have the database; we may as well use it!

In no particular order:

A) Apple Computer (AAPL)

We think we have blogged enough about Apple see:

i) Apple – Model Price Update – Next area of Resistance is $600

ii) Apple – Four Actions Management Can Do to Double Their Stock Price (Without Breaking a Sweat)!

Apple with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Looking back to the ’99-’00 period Apple only traded at the EBV+6 level, which was considerably less than today’s price.  Even though the valuation level wasn’t excessive compared to the others we will list, shareholders were still hurt in the ’00 – ’01 period.  (AAPL shares fell to EBV).

B) Microsoft Corp. (MSFT)

We have written a blog post on MSFT recently see here.

Microsoft with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

In the ’99 – ’00 period MSFT traded at EBV+9.  If MSFT traded at EBV+9 level today the stock would be trading at $ $154 per share.

C) Intel Corp. (INTC)

Intel with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

In the ’99 – ’00 period INTC traded at EBV+8.  If INTC traded at EBV+8 level today the stock would be trading at $ $133 per share.

D) Cisco Systems (CSCO)

Cisco with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

In the ’99 – ’00 period CSCO traded over EBV+9.  If CSCO traded at EBV+9 level today the stock would be trading at $ $180 per share.

E) Oracle Corp. (ORCL)

Oracle with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

In the ’99 – ’00 period ORCL traded at EBV+10.  If ORCL traded at EBV+10 level today the stock would be trading at $ $342 per share.

F) Dell Inc. (DELL)

Dell with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

In the ’99 – ’00 period DELL traded at EBV+10.  If DELL traded at EBV+10 level today the stock would be trading at $ $231 per share.

WE ARE NOT SAYING THESE ARE OUR TARGET PRICES ON THE ABOVE EQUITIES BY LOOKING AT THEIR RESPECTIVE VALAUTIONS BACK IN ’99 – ’00.  We just thought it would be fun to compare oranges to oranges what valuations were like 12 years ago on these companies.  Context.  We hardly see any historical perspective in the financial press, so when we have the opportunity we like to add it!

Does Model Price Work? The Defense calls Gennum (GND.CA)

We didn’t have our blog up at the time, however we tried to note this transaction on Facebook.  On January 24, Semtech announced plans to acquire Gennum for $13.55 per share.  Here is our model price chart on GND.CA.

Gennum with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

The defense rests.  This should give our readers a little more comfort on the calculation of model price.  (We see this stuff all the time!)

BCE – Impact of IFRS on BCE’s balance sheet and Model Price Chart

Not that anyone is noticing, maybe Al Rosen, we just imputed BCE’s year-end financials for December 31, 2011.  Canadian investors should and may know public Canadian companies must report their financial statements conforming to IFRS standards as opposed to what was known as Canadian GAAP.  Canadian companies started doing this on quarterly basis in 2011, and are now releasing annual financials based on IFRS.  From what we understand, annual financial statements follow stricter rules than the quarterly numbers under these new standards.

As more Canadian companies are reporting their year-end numbers we are interested in the differences occurring in the reporting standards, between IFRS and Canadian GAAP.

One interesting example is BCE.  (There are others, which we will get to over time.)

BCE took a write-off of equity (retained earnings) of $4.7 billion from last year’s annual financial statements.  This dropped total equity of the company by almost 19%.  Most of the write-off had to deal with BCE’s pension obligations, in that, their plan’s deficit (assets minus liabilities) had to be recorded on the company’s balance sheet under the new standards.

One can see the impact on our Model Price chart.  See the EBV lines, and the decline in these lines over the 2011 calendar year.  This is the long-term chart of BCE going back to 2005.  A simple observation, of the EBV lines (parallel lines), they seem “wavy”.  For a seemingly stable utility, the net equity in BCE over the years has been volatile.  Remember these lines loosely represent the balance sheet equity of the company.

BCE with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of BCE subsequent to this post will be maintained on Facebook, here.

What is the “Bottom Line”?

1.  We are just drawing our readers attention to the write off BCE has taken from a switch in accounting standards from Canadian GAAP and IFRS.

2.  This write-off against retained earnings reduced the net equity of the company by almost 20%.

3.  We account for this in our model price charts, since these charts represent a fundamental basis of the company’s financial statements.

4.  This write-off positively affected model price!  This is not surprising.  Why?  If the company is earning the same amount of money (income) on a lower equity base, the rate of return increases making the company more valuable.  Because of the above noted write off the model price has increased by 10%.

5.   EBV+3 seems to be the maximum valuation the market seems to want to give BCE (see long term chart above).  This makes sense because model price is always below where the stock has been trading going back to 2005.  With EBV+3 now being $37.54, we wouldn’t be surprised, over time, the stock falling to this level and continue to grow along EBV+3.  We can also calculate EBV+3 one year out.  For February 2013, we have EBV+3 at $39.65.  Comparing this price ($39.65) to February 15, 2012, close of $39.37 doesn’t give much upside room for BCE.  So to be clear, if BCE crawls along EBV+3, which would be our most optimistic scenario, investors can only expect to collect their yield of 5.51% over the next year.  (See chart below.)

BCE with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Microsoft – Quietly flying below the Radar. (Good Model Price Math!)

Here is the model price chart on Microsoft (MSFT).

 

Microsoft with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of MSFT subsequent to this post will be maintained on Facebook, here.

Notice how the stock price follows along EBV+5.  Again these EBV lines are derived from the balance sheet.  Forgetting model price for a moment, we can calculate EBV+5 one year out to February, 2013 by adding to Microsoft’s balance sheet consensus earnings forecast and reducing dividends paid on a pro rata calendar basis.  We calculate EBV+5, one year out to be $36.58.  From the close posted on the chart of $30.05, this implies a gain of 21.7%.  Plus add in the dividend of 2.7%, and an investor has a low risk expectation of a 24.4% gain over the year.

We calculate model price to be $40.49, which is our definition of fair value. That implies an almost 35% potential gain above the close on the chart of $30.05.  Closing this gap in value can happen anytime.

As stated in our “initial post” we do not recommend specific stocks to our readers, however we can point to the power of the model price math and how it favors investors who currently have a position and/or contemplating an investment.