Monthly Archives: August 2012

ModelPriceGuy will be on Vacation for a Week.

Yes, I will be on vacation.  This week has been slow, not only in the financial markets but also downtown Toronto.  Amazing it only takes me 20 minutes to get to work!  Believe it or not next week is anticipated to be even slower.

Those of you who are new to the blog, I have a lot of back issues to catch up on.  I have read a few of these today, old issues, and they have worked out rather well.

Thanks to all my readers.  See you in September.

CVH – Aetna to buy Coventry Health. Confirmation of Model Price.

When a deal is announced I scramble to my model price charts.  The first thing I review is the announced deal price.  What is the deal price in relation to our model price calculation?  See our model price calculation is our definition of fair market value.  So it would make sense that an announced deal would be somewhere around our calculated price.

Why should you care?

Confirming deals, where real money/shares change hands gives our users of model price more confirmation that our model price calculation can be relied upon.  Since I started this blog – back in mid January – M&A activity has been few and far between, however model price was created back in 2002 so we have had 10 years of validation.  After many small Canadian deals, this Aetna deal is the first major US transaction we have had since I have been blogging.  So let’s have a look at Coventry’s model price chart to see what we can observe.

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

The first observable is our model price calculation of $40.97.  This is very close to the close yesterday, August 20th, 2012.  Aetna will pay $27.30 in cash and 0.3885 Aetna Common shares for each Coventry share.  So some variance has to be given on how the common shares of Aetna trading subsequent to the announcement of the deal.  Aetna shares rose 4% to $39.59 in midday trading which helped Coventry’s close of $42.04.  So our model price calculation looks good compared to the deal terms.

The second observable is that on four separate times – see arrows, CVH tried to break up through EBV.  On the fifth try, you can observe it did.  To me this signals “insider trading”.  Checking daily price movements, Coventry had a price spike on Thursday, August 16 as you can see from the price chart below.

An interesting point to our readers, that EBV was transited with this nonpublic information.  Transits happen for a reason, which to me foretell fundamentals are changing positively or negatively.  So for users of our model price charts pay heed to transits. 

Goose Bumps from Our EBV Lines

Fifteen years.  Yes, fifteen years I have seen and witnessed model price math.  And I still get goose bumps.  Man, look at this Groupon (GRPN) chart from last night’s computer run.  Look where the price of GRPN stopped and paused.  Amazing EBV+5.  Think about this, EBV+5 was predetermined and computed before the stock price arrived and stopped falling.  I have seen this over and over again for 15 years and I still get a thrill every time I see this.  It’s magical.  Tens of thousands maybe millions of people trading shares – the invisible hands – and share prices conform to our EBV math.

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

How is this possible?

These mathematical points, the EBV lines, come from natural phenomena observed from nature.  What, are you kidding me!  No, I’m not.  The financial press and investors can worry about high frequency trading, and the like however longer term I’m suggesting days and weeks this frantic day trading stuff doesn’t really matter.  That’s why we look at weekly and monthly price bars.  Plus stock prices can move within an EBV zone without any meaning, however once a transit occurs on one of our EBV lines, this is meaningful information.  Some securities can spend years in the same zone, others like GRPN slices through 5 zones in 10 months.

I get the question all the time, how do you now these EBV work?  My answer, most of the time is “they just do!”  Very unsatisfying answer both for the questioner and myself.  This is one of the many reasons I started this blog, I can now document these situations and hopefully give more satisfying answers for those who want to follow this work.

Hope this gives you goose bumps as well!

FSLR – First Solar “Coming Out of the Blue”! (Maybe?)

I last blogged about First Solar (FSLR) on April 12, 2012, here.  FSLR entered into the “Blue” which meant the stock price had a negative transit through EBV-3.  Here is the chart I posted in that blog.

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

For those interested, a daily updated chart of FSLR subsequent to this post is maintained on Facebook, here.

Since April 12th, FSLR hit a low of $11.43 on June 4, 2012, almost 50% lower than the price noted on the above chart.  This is why investors’ should always pay attention when negative transits of EBV-3 occur.  I call this “Going into the Blue”.  The best strategy, in my opinion, is to head for the sidelines (sell the position) and see what happens.  Corporate events, such as write-offs of assets on the balance sheet, jettison of low margin businesses, and management changes are the most popular events.  A number of corporate actions can and will occur.  On a number of occasion’s companies that enter EBV-3 may NOT make it.  They go to zero.  This is why these situations are best avoided and may cause a lot of heartache and investment losses.

As I have written many times in this blog about investment situations where the equity price of any security, I fish in the large cap pond, transits above EBV-3.  I call this “Coming out of the Blue”.  “Coming out of the Blue” investment strategy is a very profitable one for those investors’, traders who invest when an equity positively transits above EBV-3.  Would I place my whole portfolio into this one situation?  No!  I would diversify in names, industries and even countries.  The one name you least expect will probably yield investors the most profit, often times that’s the nature of investing.

When companies transit above EBV-3, this is a positive sign.  There can be a number of reasons for this transit, depending on the circumstances.  Also, the positive transit can occur before the positive news is publicly available.

Here is our long-term model price chart of FSLR.

First Solar Inc. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Please note each price bar is one month in duration.  FSLR, was a hot Nasdaq stock, and in 2009 traded at EBV+7.  In 2010 and half way through 2011, FSLR tried to hold EBV+5.  Having failed to hold EBV+5, FSLR went into free fall.  FSLR wrote off goodwill and closed plants.  In my previous blog on FSLR on April 12, management noted a very competitive operating environment.

What has changed?

Since the end of July, FSLR has been on a tear.  The stock is up over 50% for the month of August.  (I have included trading on August 20th.)  I have scanned the financial news and haven’t seen anything obvious.

I’m only pointing out the action on First Solar.  The company has yet to transit positively above EBV-3 or $24.78 and my experience using this strategy (“Coming out of the Blue”) tells me to wait for the actual event or “don’t jump the gun”.  My purpose here is to alert readers of the potential of this happening – “Coming out of the Blue” – which could be of interest.  I know this is interesting to me!

Again my purpose here is not to recommend stocks to my readers.  My purpose is the help investors, traders and persons interested in using our Facebook tool for security analysis for more profitable security selection.

As always, let’s see what happens!

TransAlta (TA) – “Lines of Death”

“A picture is worth a thousand words” refers to the notion that a complex idea (s) can be conveyed with just a single still image.  Our goal at Model Price and modelpriceguy is to give our users a still image where users can interrupt seemingly complex financial ideas such as fair market value, valuation and compounded growth of investors’ equity through time, including the future.

Here is the model price chart of TransAlta.

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

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

Observables a user can glean with a blink of an eye from our model price chart.

1.  Our calculated model price is below the stated close on August 15, 2012.  Model price is our calculation of fair value, taking earnings estimates, balance sheet and interest rates as our main inputs.  Simple.  Would you over pay for a car? A house? Of course not!  Investors’ will be poorer overpaying for equities over a period of time.  So check your portfolio against model price and see how it stacks up.

2.  What are the EBV lines doing?  Are they going up or down?  If the EBV lines are going up, this means there is compounding of the equity (retained earnings) of the company.  This is good.  You as an investor you get to participate in this growth.  Over time accounting equity compounding yields investors significant gains and is the main determinate in equity values.  If EBV lines are going down, look out.  This is negative compounding – if there is such a thing.  This will be a killer longer term and should be avoided.  In our investment house – Acker Finley – we call downward sloping EBV lines “Lines of Death”.  Investors’ common equity is disappearing do they know this?

Hmm, so TransAlta is trading at a 54% premium to fair market value, and has negative compounding for the foreseeable future under the present fact set.  Now let’s give investors a dividend of 7.35%.  Does this change anything?  Apparently it does, because investor’s hunger for yield far outweighs the math it takes to produce this yield.  Does this make economic sense?

Hopefully readers and users of model price charts can see through this dividend rouse to see what actually is going on with their investment, again with a blink of an eye.

P.S.  Just as an aside, because I can’t help myself, let’s review where the analyst’s recommendations are on TransAlta as an investment and my comments.  Of the 12 analysts surveyed by Bloomberg, six rate TransAlta a “sell” – good for them, obvious, with three “holds” – really? Holding for what?  They probably recommended TA at higher prices and don’t have the guts to say “sell”.  And three “buys”! – Wow, are you kidding me! Target prices range from a high of $18 to a low of $14, with an average of say $16.  Again with a blink of an eye, you the user will be more knowledgeable than half of the analyst’s analyzing TransAlta.

P.P.S.  This is my secret of my television appearances – for those who watch me.  Next time I’m on Market Call, as the caller asks a question about a company, call up the chart on Facebook and give your interruption to your dog, cat, or living room chair.  Would you buy, sell, or hold?  All I’m doing on Market Call is describing a picture/chart.  Sometimes it’s easy, other times I wish I could show you the chart …hey what a business idea!

The Coming Social Media Bull (Bear) Market (Update 1)

With Groupon (GRPN) down 27% today, I thought I lampoon myself on a blog I wrote on February 12, 2012, where I announced with great fanfare “The Coming Social Media Bull Market”

To put this disaster in perspective I have borrowed a Chart from Zero Hedge and reproduced this chart below.  Yes, my friends in three IPO’s, Facebook, Groupon and Zynga, Zero Hedge have calculated a $60 billion dollar loss for investors.  (Notice they didn’t include LinkedIn (LNKD), which IPO proved successful – however why quibble?)

What Went Wrong?

1.  The endless growth that these companies were growing in the past few years seems to have come to a halt in the last 3 to 4 months.  Is this cyclical or secular?  Not sure, however the frothy valuations these companies were taken public, is disappearing as these companies share prices fall to earth.

2.  The macro business environment is most uncertain.  Investors want the certainty of dividend streams and businesses they understand.  New and unproven companies will be thrown aside for the time being.

3.  Groupon came public at over EBV+9, Facebook at EBV+7 and Zynga at EBV+6.  In hindsight these valuations were too rich for the given state of the market.   It will be interesting to see where valuations bottom out.  Zynga is already at EBV, but does it hold?

4.  Convexity added to these above companies’ problems.  Under our “Key Concepts” tab, we talk about convexity.  To some convexity is a hard concept to grasp, but one that shows itself in the market place nonetheless.  GRPN had convexity numerical value of 15 as of the March 30, 2012 balance sheet.  This is very high.  (Comparing this to Google at 0.07 or Apple at 0.15).  Convexity can work both ways; good while the stock is going up, however very bad when the stock is falling down.  Convexity can be thought as an accelerant not only for the stock price as a whole but also for daily price variability.

To me, GRPN and ZNGA should have taken in more cash on their balance sheets from the IPO process, like Facebook did.  This would have increased the size of their balance sheets (R+P) and reduced their convexity calculation and probably made them more stable companies longer term and on an intra day basis.  However, this is hindsight.

What Happens Now?

See where the dust settles out, in terms where each stock settles valuation-wise.  Each stock needs to go through a bottoming process, which could take months or quarters.  I have been writing blogs on Facebook, because to me, this is the gorilla of social media.   The key level for Facebook is EBV+5, if this level breaks than further downside is likely not only for Facebook but also for other social media stocks as well.

As these stocks are falling like a “hot knife from the kitchen table”, model price charts are here for those wishing to “hold out their hand” at the appropriate EBV level.  As for my blog, I should have named it “The Coming Social Media Bear Market”.

Monthly S&P/TSX 60 Market Strategy Update

My last comment on the S&P/TSX market was on June 5, 2012, here.  The Canadian market as represented by the above noted index has moved sideways, albeit in a positive slope.

First here is an updated model price chart of the S&P/TSX Index calculated as at August 3, 2012.

S&P/TSX 60 Index with weekly price bars, EBV Lines (colored lines).

As you can see from the model price chart, the Index is between EBV+2 and EBV+1.  Upside to EBV+2 from Friday’s close being 12.4% and the downside to EBV+1 (5.64%) yielding a good risk reward for investors.

With all the potential financial potholes and possible Euro contagion I don’t see this index crossing into EBV+2 anytime soon.  So to my mind, EBV+2 becomes resistance.  So as the US market moves to EBV+3 (my previous blog), does the Canadian market move to EBV+2?  Yes, I believe so!  As you can see from the percentages, the Canadian market has more room to the upside than its American counterpart, which makes sense because of the cyclical composition of the S&P/TSX 60 Index.

If we have such a move in each market, US’s S&P500 move to EBV+3 and Canada’s S&P/TSX move to EBV+2, by the fall (October, November time frame) future market action with both indexes “at the top of the zone” will be interesting to say the least.  Can’t wait!

Monthly S&P 500 Market Strategy Update

Yes, I’m enjoying my holiday Monday.  This summer in southern Ontario has been the best I can remember.  You may think I’m crazy but I enjoy nothing better than review my model price charts when it’s the most quiet.  As I have said a few times in my blogs sometimes the charts talk to me!  They show themselves.  Any market anxiety that I may have disappears, and excitement begins to flicker.

On February 24, 2012 I wrote my first blog on the S&P 500 and outlined my Market Strategy.  I updated this original blog on April 11, then on June 4, and again on July 4.  This being August 6, 2012 it seems mentally I have been doing this on a monthly basis.  Who knew!  So let’s make this formal, at the start of every month I will review both the S&P 500 and the S&P/TSX 60.

Starting, as always, with the Model Price chart of the S&P 500.  For those new to my blog, the S&P 500 chart is a composite of all 500 companies in the S&P 500 index.  Remember its just math!  This chart is very useful to give a 40,000-foot view of what is going on in the market itself.  To my own detriment, I can get carried away on individuals companies, while forgetting about risk reward probabilities on the market as a whole.  Maybe together (you and me), we can do a better job on this!

Model Price Chart on the S&P 500, Friday’s Close, August 3, 2012.

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

These colored lines, or our EBV lines may look simple however, these lines include all reported companies balance sheets reported up until Friday night, August 3, 2012.  As a side note, EBV+3 back in February was 1447, today its 1484.  That is 2.5% growth (retained earnings) collectively in all companies in the S&P 500 since February.  This is why our EBV lines advance over time.  This represents compound growth to you as an investor, and our charts show this compound growth over time.

So what does our Model Price Chart say?

As readers can see EBV+3 is calculated at 1484.  So from Friday’s close, 1390.99, this represents a 6% difference.  When I was on the Canadian business show “Market Call” last Tuesday, I said the maximum rally investors would experience in the US markets would be 6%.  You now know where this percentage comes from.  With all the negatives in the market, I find it hard to believe that the market has the strength to break through EBV+3.  This is what I said back in February, in my original blog about the S&P 500, and I still feel the same way today.

To make this simple, let’s use a traffic light analogy.  I would use the signal yellow to signify caution.  As this market continues to approach EBV+3, I would turn from yellow, to the color red.  I will let you know when this occurs.

Since the end of May, the S&P is to be moving in an upward direction, methodically.  It seems to me this “stair stepping” advance will continue or we rally hard to the top of the zone, or EBV+3.  I’m sure, with the S&P 500 yielding investors double-digit returns for 2012 investors will be the most bullish at EBV+3, that my traffic light will turn red looking for a correction.  Yes, I do hate quoting myself, but I also hate repeating myself as well.  As I said in my April 11, blog

Hopefully, you see the most likely scenario unfolding before your eyes.  As the S&P 500 advances to EBV+3, everyone gets bullish.  Then the market corrects for duration of time and magnitude, the bears win.  Then we rally back to (you guessed it), EBV+3.  Overall the US equity market will move higher, as book value increases. (EBV+3 will increase 18% over the next year.)  However “feel good” traders and market timers, people who only invest when the market “feels” good, will probably suffer losses over the next year.