Long suffering investors, whether Do-it-Yourself (DIY) types or professionals, have parked some of their portfolios (perhaps all) into BCE.
BCE yields 5.44%. Simple. Right. Well NOT so simple.
So let’s have a conversation.
DIY Investor: “I have been burned so many times in this market. I just want to make a return. I have heard the expression, ‘getting paid to wait’ and this makes sense to me. Look BCE is yielding 5.44%, and I’m fine with this.”
ModelPriceGuy: “I hear you on being burned and have empathy with your situation however the equity markets don’t work like this. Equity markets are about valuation. Maybe I should design a bumper sticker that says ‘Yield is NOT valuation’.”
DIY Investor: “I don’t know what you are talking about. What is valuation? BCE trades everyday on the stock exchange. Buyers and sellers are coming together transacting business. Isn’t this fair market value for BCE.”
ModelPriceGuy: “Unfortunately no. There is a missing ingredient, the most important ingredient. You have to ask yourself; ‘What is BCE worth?’ The daily transactions that you may see on the stock exchange, reported in the newspaper or your iPhone is the cost to you if you purchase BCE.”
“In your everyday life, whether buying lemons, cars or services you have a sense of what something costs and the worth of this cost. If these two, cost and worth, are close you do the transaction. Obviously, you will be happy whether you’re the buyer or the seller. You received or given up value approximate with worth.”
“In the stock market, there is a separation between cost and worth. Why? Millions of reasons. Market participants have their own motivation. Let’s just say one participant that we know about is buying BCE for the yield of 5.44%.”
DIY Investor: “OK big shot what is BCE worth?”
ModelPriceGuy: “We calculate that BCE is worth $31.31 on April 17, 2012. If you were purchasing BCE today, you would be purchasing an equivalent product or a service at 27% premium to its’ worth. (Assuming a purchase at the close on April 17, 2012 at $39.88. Forgetting yield for a second, what product or service in your everyday life would you overpay almost 30% and be happy about?”
“We have created a database on Facebook with something like 2000 securities, like BCE, where you can go to find what stocks are worth. We calculate every night what stocks are worth, along with histories, so you can quickly assess cost with worth.”
“Here is the chart of BCE.”
BCE with weekly price bars, and calculated model price. The dashed line is a history of the calculated model price.
For those interested, a daily updated chart of BCE subsequent to this post will be maintained on Facebook, here.
DIY Investor: “I have never heard of such a thing. Can this be true? Are you saying the cost of any and all shares trading, whether BCE, General Electric and Microsoft is not fair market value (FMV)?”
ModelPriceGuy: “Unfortunately it’s true. The vast majority of market participants compare cost to cost. There is a whole body of experts who call themselves Technical Analysts’ that do nothing else but analyze cost on cost and make predictions based on this analysis.”
DIY Investor: “How can I trust your model price calculation is accurate? Are you saying I’m going to lose 20% of my money in BCE? Aren’t utility companies like BCE safe?”
ModelPriceGuy: “First, model price to us is 10 years old. We have seen public transactions take place over the years that confirm the calculations we have performed. Since this blog started, three months ago, there have been three announced deals that have confirmed our model price calculations. (here, here, and here). As time goes by we are sure more confirming M&A transactions will be taking place around model price so your trust can build.”
“Second, your purchasing BCE at $39.88 that has a worth of $31.32 irrespective of the dividend yield. When will the market reflect the worth of BCE? We don’t know. Timing is everything in this business. Just that over the long haul the true worth of the company will be transmitted through the equity price, but we don’t know when this will happen.”
“Third, financial history is filled with market participants losing money on utilities. Just because some market participants think utilities companies are safe investments doesn’t mean you cannot lose money in them. Have a look at Transalta. Back in September, October, November participants were paying over $22 per share for a 5.25% yield. Investors have lost 25% of their purchase price and the current calculated model price (worth) is still below the current trading price or cost.”
See chart below:
Transalta with weekly price bars and calculated model price. The dash line represents the history of our calculated model price.
For those interested, a daily updated chart of TA subsequent to this post will be maintained on Facebook, here.
DIY Investor: “My head is starting to hurt.”
ModelPriceGuy: “No problem. Follow these steps:
Step 1: “As an investor you must get acquainted with cost and worth. Think of buying a stock like buying a product or service.”
Step 2: “Calculate the worth of a company? You can try this yourself or find a resource to an Investment Bank Analyst’s research report, which you can rely on. Or check out apps.facebook.com/modelprice. We believe you will find this service truly unique and will go a long way to helping you be successful in the equity markets.”
Step 3: “Yield is NOT valuation. By buying BCE today, you’re getting a yield of 5.44%. However, you are purchasing an asset that is 27% overvalued and this can fluctuate on a daily basis. When will the market recognize this overvaluation, we don’t know? Could BCE become more overvalued? Thereby making you money as well as yield, absolutely.”
DIY Investor: “This is all I need to be successful in the equity markets?”
ModelPriceGuy: “No, this is only one piece of the puzzle, however it’s a pretty big piece!”
DIY Investor: “Thanks for the help, now I will look beyond yield for my next equity purchase. However, I will certainly consider cost and worth in my investment decision-making.”