Monthly Archives: April 2013

Apple Price Bounce Right on Cue!

I get the question all the time, “How do I know your EBV lines work?”.  Experienced model price users know they work but first time users do find it hard to believe that our pre existing Economic Book Value (EBV) lines do form price support and resistance on our model price charts.

I have seen stock prices bounce off of support EBV lines so often over the last decade that either I have lost the excitement or I have become too mechanical in my own thought process to appreciate the eloquence of the math, which our EBV lines represent.  For me weekends and quiet time can be spent looking at model price charts and a review of the past week.  So when I came upon the model price chart of Apple Inc. I simply had to stare and marvel.

Have a look at the model price chart of Apple Inc. as of Friday, April 26, 2013.

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

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

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

Also I have included a Bloomberg chart showing intraday action from April 18 to April 22, 2013.  Notice on Friday, April 19th, Apple traded down to a low of $385.10 with a significant intraday rally during the day.  This is Apple’s stock price hitting EBV+4 with a subsequent rally from our calculated EBV+4 price support level.

Intraday Price Charts of Apple Inc. from April 18th to April 22, 2013

Intraday Price Charts of Apple Inc. from April 18th to April 22, 2013

Not bad!

Yes, it’s hard to believe.  This happens all the time!

Millions of traders, billions of dollars are coming together trading Apple shares on a daily basis.  However the internal laws of nature, where we derive our mathematical constants that form the basis of our EBV lines, provide a structure where share prices can and do fluctuate consistent with predetermined support and resistance of our calculated EBV lines.

Trading Strategies using Model Price Charts – Barrick Gold (ABX)

Great football quarterbacks not only can see the play unfolding in front of them but also the whole playing field.  When learning and using model price charts you can see the whole playing field through our Economic Book Value (EBV) lines.  You can ask yourself “What if” questions like “What if company ABC has a negative transit of an EBV line?  Looking back over the last 7 to 20 years you can ask yourself “Has this company ever traded at this lower EBV line before?”  The amount of questions – good questions – can be asked and answered with a high degree of accuracy with specific price levels with our model price charts.  Keep in mind that EBV+2 in 2001 is the same EBV+2 of today.  The constants are the same.  You are comparing apples with apples (EBV lines of the past with current and future EBV lines of any company.)  If this happens anywhere else in finance I am not aware of it!

By asking yourself these good specific questions, and you can now visualize the whole playing field where you can get a sense of probability of the price action of the individual company in question.  For example, if company ABC usually bottoms at EBV+2 over the last 10 years, and ABC just had a negative transit of EBV+3, what is the probability of ABC bottoming at EBV+2 again.  Very high, I would say.  Not 100%, but very high.  Would you buy ABC today, after the negative transit of EBV+3?  No, of course not.  You would wait for ABC to trade at EBV+2?  Of course you would.  You don’t know how long this will take, could take months, quarters but you are patient as you see ABC trade lower on a weekly or monthly basis. You see the probabilities of specific levels and specific prices where trading action can occur knowing the probabilities are on your side when investing your hard earned cash.

My first challenge in revealing this work was to convince you and others that these EBV lines and our Model Price calculations work and stock prices are influenced by these mathematical algorithms in real time.  For some of you, I have succeeded.  Knowing that our EBV lines have relevance we can take the next step together and strategize trading strategies on specific companies with a high degree of confidence of future price action.

Once you know or have a high probability of future price action, investment strategies can be worked out knowing your competence level with various investment instruments and the amount of capital in your investment account.  That said, I must reiterate that while I can review in detail various price points and probable future price action, I’m NOT recommending specific stocks to anyone.  Nor am I recommending buying or selling stocks at specific levels.  Model price work stands on its own and how you trade and or apply this work in your investment account is yours to decide.

So with that being said, let me strategize about Barrack Gold (ABX).  Why ABX?  Josh asked me to.  Thanks Josh for the question.

Barrick Gold (ABX)

Let’s start with our model price chart.

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

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

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

Let me know if the above chart looks too busy but I’m trying to point out all the relevant information for you to consider.  I will break down my thoughts on ABX with a review of ABX’s past price history from July, 2012 up to the market close on April 19,2013.  I will continue with my actual trading plan and strategize on an investment strategy for future price action of ABX.

Past Price Review of ABX

Back in July of 2012, ABX has its first negative transit of EBV+2. (Point A) Believe it or not my first thought was ABX was going to EBV or our green line.  This was my highest probability outcome.  Checking the long-term chart (monthly bars) ABX traded down to EBV (green line) in 2008, so in my mind this was likely future event.  However at the end of August ABX had a positive transit of EBV+2.  OK, I was proven wrong with my initial assumption but let’s see what happens.  Bingo, a second negative transit at the end of October (Point B).  Game on, EBV here we come!  Yes, 16 weeks later ABX has a negative transit of EBV+1 (Point C).  My high probability assumption is of course higher because of this event and it’s only a matter of time before ABX trades back to EBV and I will be ready.  Again, 6 weeks later ABX is at EBV (Point D).  Remember our multi colored EBV lines are more significant than our other EBV lines – grey – so I thought our EBV line (green line) would hold considerable price support for ABX.

Within a week ABX breaks EBV.  Yes, this is shocking but more importantly what is the most probabilistic EBV level in play after this negative transit?  The next colored line in our EBV spectrum is EBV-3 our blue EBV line.  This specific price level (EBV-3) is $15.62.  This EBV level has to be considered in your trading plan irrespective of the fundamentals of the company or its valuation history.  This is a key consideration in my mind.  What would your capital loss be if ABX trades to EBV-3?  This number is easy to calculate.  What would your trading account or RRSP (401K) look like after this hypothetical loss?  If your loss is too great, sell the position.  (You should sell the position anyway irrespective of the size of the loss because of the negative transit.)  Remember knowing when to sell your losing investments can save you more money than what you make on your winners over different periods or market cycles.  See blog here.

My Trading Plan

Once model price theory and our charts become familiar to you, you will realize there are many different trading strategies that you can employ.  I have my own trading strategy, which is personal to my temperament, personality and time – yes I do have a full time job and I cannot see market quotes for long periods of time throughout the day.  I must emphasize this personal trading strategy has nothing to do with Acker Finley Inc., Acker Finley Asset Management or any client(s) recommendations.  I also have a full time compliance officer scrutinizing every trade I make to ensure my trading is free from any conflict, real or perceived – which I have no problem with by the way.

So after all this, may I further add I’m a long position trader only and my universe is large market capitalized securities which are household names.  Very rarely do I short securities or use any exotics like call or put options.

If we are on the same page, here is how I traded ABX.  As I stated back in July, I thought ABX would trade down to EBV (green line) and this is what occurred many months later.  Once ABX traded at EBV I took a position in the company (Point D).  As ABX traded down through EBV, I tried to be patient and that was a mistake.  Yes, I do make mistakes.  ABX quickly fall to almost EBV-1, so I decided to again be patient with the position to see if any bounce would occur at this level.  The next day, ABX gapped down through EBV-1!  Great. So I traded out of the position realizing my losses.  This is very easy for me because I know, as I stated earlier, that EBV-3 is now a high probability.  No thanks.

The Future Price Action of ABX

I want to remind readers of this blog that our EBV lines are fundamental analysis.  Something is going on with ABX, fundamentally speaking, and the negative transits are reflecting this.  As I have said before our colored EBV lines have more significance than our grey EBV lines.  So the high probability future trade is for ABX to go to EBV-3 or $15.62.  If and when ABX reaches this EBV-3 level three possible outcomes are likely.  The first outcome is a tradable bounce in ABX’s stock price to EBV-2 or $18.18.  The second outcome could entail ABX trading along EBV-3 for a period of time.  How long?  I don’t know.  The third outcome is a negative transit of EBV-3 or “Going into the Blue” as we say in our shop.

So for fun, here is my guess.  I believe the most likely event of the three scenarios will be a negative transit of EBV-3.  If there is a negative transit of EBV-3 or $15.62 investors and traders should sell their positions outright.

My Future Trading Strategy

I want no part of any of these scenarios.  ABX has been trading like a hot knife through butter and I want no part of this price action or negative transits.  I will wait on the other side of EBV-3.  What does this mean?  Down the road when we the public have a full and somewhat complete understanding of what is going on with ABX and potential future corporate actions are reflected in the balance sheet of the company, ABX will have a positive transit of EBV-3 sometime in the future.  We call this “Coming out of the Blue” or EBV-3 (which I have blogged about many times) and this investment strategy is the simplest and most profitable strategy using our model price work and these two attributes fit my investment style and personality. So I will wait.

If you want to do something different go ahead.  If you think you are nimble enough for a possible tradable bounce off of EBV-3 be my guest.  This price action could be a distinct possibility.  Who knows?

Conclusion

Yes, our model price charts look so simplistic but there is more information contained in these simplistic charts than anything I have ever seen in conventional finance today.  You can see the whole playing field.  You can assess possible price support and resistance of any equity in our database for the foreseeable future.  You can ask intelligent questions about stock price movements with a high degree of accuracy.  More importantly you can match high probability market outcomes with your investable capital.

Want to know the most valuable feature?  Model Price tells you when to sell your investment.  I should have acted on the negative transit of EBV.  I should have been quicker in selling ABX.  Lesson learned (Again).

$76 Billion Reasons to Sell Gold Stocks (Update 1)

Did anyone tell you to sell your gold stocks?

The market back on February 21th gave investors one of the clearest signals I have seen in almost 20 years of using model price charts to sell any and all gold stocks in your portfolio.  In a blog which I wrote on February 24th, 2013 I highlighted just 3 gold stocks – major gold companies, which all had a negative transits on the same day!  As I noted in the blog, I didn’t think I have ever seen this before or maybe I have and don’t remember. (I’m getting that age!)

In doing a quick recap, Barrick gold is down some 42% from the close on February 21, 2013 to April 17, 2013 – almost 2 months later.  Goldcorp is down close to 16% and Newmont Mining down 20% over the same time period.

Ouch!

I could review some mid to small cap names but what would be the use.  They are all down big, with some down over 50%.

Believe me when I say I hate bragging and the macho crap that goes along with making such a call.  What I can’t resist is highlighting a teachable moment.  Yes, anybody could have made this call including you.  Better still you didn’t need an exceedingly expensive MBA or a CFA to make this call.  There was no complicated spreadsheet analysis, nor industry insider knowledge that you needed.  All you needed was our model price charts, which are free for everyone to see.  The algorithms do the work for you.  Once we overlay stock prices with our EBV algorithms you have more knowledge and sophistication than any gold specialist.  The collective wisdom of millions of traders can be seen and used by you when you are willing to look and make some simple observations.  Better still you can make these observations and tell others including me!

It’s easy…too easy!

Did anyone tell you to sell your gold stocks?

modelprice

Paper Money versus Physical Stuff

Yes, sometimes I do think “Outside the Box” or model price charts, if you will.  Long-term secular trends are my game especially when I’m without my model price charts.

One question that keeps me on the right side of the market is the question “Paper versus Stuff?” What does this mean? I’m asking the question whether paper money is gaining in value or worth versus stuff or physical assets.

Huh?

Yes, a lot of people don’t get this but “Paper” or the money in your pocket does have a market value.  This value is not recorded in any financial newspaper or stock exchange but it’s there.  It’s implied.  See the people all around you, including yourself, are buying and selling products and services on a daily basis.  Tens of trillions of transactions are occurring daily where a sophisticated interplay is occurring between a buyer and a seller.  The seller of stuff is willing to accept “paper” for a product or service.  The buyer is willing to part with “paper” only if they get a product or service of equal value in return.  If value, whether paper currency or product and/or service, is mispriced there are simply no transactions.  In other words the holder of paper is willing to save their money until something of value comes along for a transaction to occur.  Likewise if a seller of a product or service doesn’t get equal value in terms of “paper” money the seller is happy not to transact.  The interplay between these two parties, the back and forth, is called price discovery.  Price Discovery or market forces are one of the great and important forces of the market-based economy and the real defeater of communism in my opinion.

When you know what you are looking for you can gauge the value of paper money quite easily.  The most simplistic way is the price of gold bullion.  Gold is the ultimate in “stuff” or physical property.  If the price of gold increases relative to the currency you are transacting or doing business, the price of paper currency or the $20 in your pocket is coming down.  Conversely if the price of gold is falling the $20 in your pocket is increasing in value.  Yes, a time lag may occur before the economic actors take the market signals into account but rest assure the value of your “paper” is fluctuating.

To me this is rather simplistic stuff and quite frankly should be well known especially by market participants in the market place.  Where I hope to separate myself from the crowd is how I view “paper versus stuff” relative to the equity markets.  I like to watch what an ounce of gold buys in terms of the Dow Jones Industrial Average (DJIA).  I have charted this ratio on my Bloomberg screen and have reproduced this chart for you to see.

Ratio of Dow Jones Industrial Average (DJIA) versus an Ounce of Gold

Ratio of Dow Jones Industrial Average (DJIA) versus an Ounce of Gold

As I have said I do like secular or long-term trends and charts.  This chart spans some 20 years.  Back in 1993, one unit of gold could purchase 10 units of the DJIA.  Starting in 1995, the “Dow” unit value relative to the price of an ounce of gold started to skyrocket climbing up to 40 Dow units for every ounce of gold.  In other words, equity values relative to the price of gold in US dollars massively outperformed in terms of rates of return.

From 1999 to mid-2001, as I highlight on the chart above, the unit value of the “Dow” struggled around 40 units for every ounce of gold – forming a multi-year top in the process.

From the years of mid-2001 to mid 2011 saw a collapse in terms of what an ounce of gold in US dollars buys of the DJIA index.  A low was reached on August 31, 2011 where an ounce of gold only purchased 6.36 units of the “Dow”.  As one reflects on this ten year period physical stuff in general (housing, gold bullion, and commodities) lead the way in terms of rates of return instead of paper or currency in each national currency of choice.  (Physical “Stuff” had its own super cycle with notable bull markets and collapses in its own nominal dollars, Yen, Euros, etc.)  Financial assets and equities in particular offered little returns and probably substantial negative returns to the average investor over this period of time.

(As an aside, the “Dow” and an ounce of gold in US dollars had a ratio of 1 to 1 back in 1980.  Even though the ratio from the above chart fell from 40 units of the “Dow” to 1 ounce of gold to 6.36 units to 1, I did have the worry of a 1 to 1 ratio if the financial policies of the US administration (both fiscally and monetarily) continue down the wrong path as the Carter administration did in the late 1970’s.)

The Plunging of Gold on April 15, 2013

In my theoretical battle between “Paper Currency” and “Physical Assets”, paper money has had a series uptick in the last few days.  In other words currency is gaining in value versus stuff.  This is a big change in the last 10 years.  Paper money is the foundation of the modern financial economy and when the foundation is solid and gaining in value this helps equity valuations as a whole.  Equity valuation cannot increase substantially without a good foundation with which to build upon.

So looking again at my chart above, you will notice on the same day gold is plunging in a 7-sigma price move (that’s big by the way, Thanks ZeroHedge), the “Dow” had a breakout relative to gold since the financial crises of 2008.  This is very positive for US equities and for me at least substantially eliminates the worry of a possible 1 to 1 ratio of the “Dow” versus an ounce of gold sometime in the near future and maybe my lifetime!

Secular Long-Term Bull Market in the US is Coming into Focus

You will also notice on the chart above that I have included the years 1993 and 1994.  In these years, as you can see, this ratio solidly crawled along 10 “Dow” units for every 1 ounce of gold.  This is a good foundation for market participants to establish a base value for paper money in daily transactions and from which to build valuation in the equity markets per se.

Let me complete the picture for you by bringing in our model price work.  I have been blogging in my monthly strategy pieces (here) the S&P 500 is currently trading at EBV+3, where the index is today.  We’re on the cusp of a positive transit of EBV+3 in the S&P 500 certainly sometime in the near future.  As I have written the last positive transit of EBV+3 on the S&P 500 occurred in mid 1992 signaling the start of a bull market in equities that lasted some 8 years beyond this positive transit.  This positive transit in 1992 and the subsequent bull market could not have occurred without paper money not only maintaining value but also gaining value relative to physical assets or stuff. These events are eerily similar, aren’t they?

Conclusion

April 15, 2013 was an important day for US equity investors in my mind.  Gold bullion prices collapsed and even though the market in terms of the S&P 500 Index was down over 2%, a strong secular trend – one of my favorites (“Dow” units to an ounce of gold) – broke out to new highs placing this ratio the highest since the financial crises of 2008.  Over the last 5 years the US has been healing from the largest financial crisis since the Great Depression with policy actions, both fiscal and monetary, taking place with close scrutiny and criticism.  Market prices don’t lie, over the long run, and in my opinion “the market” likes what is going on, policy wise.

With the gold price, especially in US dollar terms, falling this is telling me the fever of the financial crisis has broken and the pieces of the puzzle are falling into place not only for a bull market in paper currency, more specifically the US dollar but also a bull market in US assets i.e. US equities.

P.S. You don’t have to look at the above chart very often – I look every 6 months or so – but investors should keep this in their back pocket to ensure they are on the right side of any market you are invested in.  I know I do.

modelprice

FSLR – First Solar Soars 45% Tuesday! Highlighting One of Our “Coming Out of the Blue” Investment Strategy Names.

I have blogged on 4 separate occasions on First Solar over the last year.  For my regular readers this is old news however for new and future readers I will recap my blogs, with relevant model price charts, to illustrate the effectiveness of stocks transiting both positively and negatively one of our Economic Book Value (EBV) lines we label EBV-3.

The first blog was on April 12, 2012, here.  I highlighted through a blog post FSLR having a negative transit of EBV-3.  We call this negative transit pejoratively “Going into the Blue”.  EBV-3 is our last EBV line in our spectrum of EBV lines and when there is a negative transit by any stock of this EBV line this tells you the market – through the stock price – doesn’t believe the stated asset values on the company’s balance sheet (among other possibilities but this is the main reason).  This real time mark to market indicator gives investors a strong signal to sell their investment in the company.

Here is the model price chart at the time contained in my April 12, 2012 blog.

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

Since this blog, FSLR subsequently traded down to the $11 level in June of 2012.

In my second and third blog, I highlighted FSLR “Coming out of the Blue”.  This is an investment strategy – specific to Model Price – where a company’s stock price transits positively above EBV-3.  We pejoratively call this “Coming out of the Blue” and we color our EBV-3 line blue for this very reason.  More specifically in my November 28th, 2012 blog I authored the title “First Solar – Coming out of the Blue! Stalking The Big Game (Returns)”.

Was I too obvious with my title!

Here is the model price chart from this November 28, 2012 blog.

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

Specifically I wrote;

As I have written many times in this blog[roll] 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.  I can only say from experience the one company you least expect will probably yield you the most profit, often times that’s the nature of investing.  In other words it’s healthy to have a bunch of companies, as many as possible, breaking above EBV-3 and you will never know which will be the most profitable.

I revisit FSLR again on February 19th, 2013 with a blog titled “How Jumbo Gains are Possible Using Model Price – Part 2”.   I noted in the blog at that time even though FSLR had a positive transit of EBV-2 in the first week of January of 2013, the stock subsequently traded down but not through EBV-3.  I commented at the time, “Sometimes it’s important to give these names some room to maneuver but also sell when the position transits down through EBV-3.”

Current model price chart, including the big price gain on Tuesday, April 9, 2013.

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

First Solar Inc. 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 will be maintained on Facebook, here.

Conclusion

If history is any guide – my history over the last 15 years with model price math – I will be updating FSLR additional times in the future hopefully highlighting substantial gains (no specific prediction on FSLR, just going with the percentages of “Coming out of the Blue” companies making the positive transition of our EBV-3 line.)  I would also like to note that patience is required with these individual stock plays.  They need room to “run” if you will, just as long as these companies stay above EBV-3.  If these same companies have a negative transit of EBV-3, you guessed it; this company would be “Going into the Blue” and should be sold.

P.S. Also see my blog Q&A about “Coming out of the Blue”

CPG – Having an Adult Conversation about Crescent Point Energy

This blog has two objectives.  The first is to highlight the valuation divergence currently underway between our model price calculation and CPG’s stock price.  The second objective is to discuss why we use Net Income or earnings for our valuation analysis instead of cash flow per share.

Valuation divergences occur all the time in financial markets especially with individual equities.  Where the fundamentals and the market price of an individual stock price can go in opposite directions for whatever reason.  These divergences can correct themselves, with fundamentals changing positively or the stock price correcting to the appropriate valuation level without warning, so investors have to be vigilant.  Model Price is a service that calculates valuation, model price or fair market value, for over 2000 companies using the same company data for our algorithms.  No special treatment is necessary or special calculations for individual companies.  Also divergences can last for a prolonged period of time.  Timing when divergences can disappear is very hard to predict.

Sometimes a picture is worth a thousand words.  So let’s start with a picture.  Here is the long-term chart of Crescent Point Energy.

Crescent Point Energy with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Crescent Point Energy with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

This model price chart displays our calculation of model price over the last 7 1/2 years.  After peaking in mid-2007, model price or our calculation of fair market value has steadily fallen over the last six years.

So what’s going on here?

Crescent Point Energy finally issued their 4th quarter and full year results on March 14, 2013.  I have downloaded the most recent financials, just as I have done with every annual report filed by CPG for the last few years.  This is fun reading for me.  Nothing like getting into the numbers, the balance sheet and don’t forget the all-important notes to the financial statements.

Three Reasons Crescent Point is notable!

First, the company clearly had a model price valuation either above its stock price – see chart above – or in the neighborhood of CPG’s trading value back in 2006 to 2009. Over time, since 2009, our model price calculation has eroded with no impact on the share price of CPG.  The gap in our calculated model price and CPG’s actual share price is getting wider as time goes on.  The market doesn’t seem to notice or doesn’t seem to care about this widening valuation gap.

One has to wonder why this is the case?  Doesn’t the market recognize the deteriorating fundamentals of the company’s earnings per share?  Certainly other Canadian oil companies have seen their share prices erode over the most recent past.  (Suncor and Imperial Oil are examples of this)  Are investors so enamored with the company and its annual distribution of $2.76 paid monthly that oil industry fundamentals are ignored?

Second, CPG has repeatedly paid investors distributions in excess of earnings for the last 4 years as I highlight in the table below.

2012 2011 2010 2009 2008
Cash Flow/Share 4.69 4.80 3.48 4.08 4.72
Net Income/Share 0.58 0.73 0.09 (0.19) 3.74
Distributions 2.76 2.76 2.76 2.76 2.61

The third item of note is the amount of shares Crescent Point has issued in the last two years.  The company has issued some 171 million shares!  At an average price of say $40 CDN, that’s a cool $6.8 billion of market value.  These shares were issued for company acquisitions and secondary offerings to investors.  CPG had a market capitalization at the end of 2009 of some $8.3 billion.  CPG’s market cap has grown to $14.8 billion as at mid March 2013, without a material change in the company’s share price!

Are you with me so far?

Let’s get into the current numbers and our model price chart.

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

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

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

As you can see we have calculated model price or fair market value of CPG to be $21.25 as at the close on April 9, 2013.  This is a 43% discount to CPG’s stock price of $37.67.  We use expected earnings estimates to determine the fair market value for every stock included in our database comprising of some 2,000 securities including CPG.  At the time of our calculation CPG had a mean earnings estimate for 2013 of $0.56.

Positives on Crescent Point

Are you shocked!  Yes there are positives.

The first positive is the company’s solid execution of production, which was ahead of consensus.  For instance, in this latest quarter – 4th quarter – production was 108,007 boe/d ahead of consensus of 102,000 boe/d.  This increase in production drove funds flow, highlighting …

… The second positive, again in the 4TH quarter funds flow came in at $1.18 and ahead of consensus of $1.14.  The company beat on both metrics keeping investors and investment bankers happy for another quarter.  Several analysts revised upward Cash Flow per Share (CFPS) to recognize improved company performance.

The company seems to be a well run company, executing in a industry that seems to be struggling with commodity pricing, output cost inflation and decreased industry equity valuations.

One does have a sense, like any other growth stock, if CPG were to disappoint in the above noted metrics, oil production and cash flow, investors will be annoyed with possible consequences for CPG’s stock price.

Cash Flow versus Earnings

This is where the rubber hits the road for investors.  Crescent Point, as I stated earlier, is paying out an annual $2.76 a share in distributions on a monthly basis.  This payout offers investors a yield of 7.3% based on CPG current stock price.  This yield is “juicy” and certainly higher then anything else of quality in the fixed income area.

Highlighting my table (see above) the company seemingly does have the cash flow to pay such a generous distribution to its’ shareholders.  However earnings of the company over the last few years have been meager to say the least.  So which row of numbers, cash flow/share or net income/share, is more relevant to you the investor?

We use earnings per share in the calculation of model price.  Why?  Here is the distinction.

Ask yourself why the accounting profession, which I belong, has spent the last hundred years trying to define earnings of a company.  The reason for this pickiness is the earnings of a company belong to the common shareholders after all actual and potential stakeholders are accounted for.  An accumulation of these earnings is held in the retained earnings of the company.  The company builds equity, if you will, over time through compounding belonging to the owners of the company – the shareholders.

Cash Flow belongs to the enterprise.  Various stakeholders, debt holders, pension liabilities, banks, suppliers, employees all have claims against the cash flow of the company.  A company must continually invest in plant and equipment, people, R&D to maintain their competitive position.  Various managements, over time in the annals of financial history, can and have, restricted expenditures, boosting cash flow substantially in the short term only to the determent of the company longer term.  (I am NOT saying this is the case with CPG) In other words cash flow can be manipulated, volatile and of little use to the common shareholder as information regarding the financial net worth of their company.  Don’t get me wrong, cash flow is important to the company.  Without positive and sustainable cash flow the viability of the company can be impacted.  I am not arguing otherwise.  The issue becomes what number, cash flow or earnings, is more credible for valuation purposes – we favor net earnings of the company.

Lastly I found this quote from Graham and Dodd!

“No one questions the importance of cash flow– it is required to service debt and finance future growth, and it is the best predictor of the future stream of dividends.  However, we reject the notion that cash flows should be thought of as being the same as earnings.”  From Graham and Dodd’s Security Analysis – Fifth Edition. Page 262.

Model Price is falling for CPG

CPG maybe meeting and exceeding expectations with regards to production and cash flow however actual net income along with other metrics we use in our model price algorithm has been less impressed yielding a downward sloping model price calculation over the last 5 years.

Looking at the published financial statements of Crescent Point Energy (CPG), December 31, 2012, we can review the retained earnings to see how much has been accumulated on behalf of shareholders.  The retained earnings balance has a deficit of $2.755 billion dollars.  In other words the company has paid common shareholders $2.755 billion more than what they are entitled to.  So there is an overdraft, if you will.  Who is covering this overdraft?  Strangely enough, the common shareholders themselves are covering this overdraft with dilution of their own shares.

Huh?

OK, the accountants – yes the guys and gals with the green eyeshades – have determined that common shareholders have been paid too much by way of distributions relative to accumulated of Net Income – retained earnings – of the company since inception.  So who made up or funded this $2.755 billion difference?  The common shareholders with additional shares issued!    As additional shares are issued the less fractional share of the company you own.  From the beginning of 2010 – assuming you purchased shares on this date – your share or ownership stake in CPG would have been diluted by some 45%.

So What?

“So what?” you say, and continue;  “My CPG shares are trading in the stock market at the same value that I purchased them back in January 2010 and I’ve been receiving my distribution to boot.  Certainly this makes CPG is one of the best performers investment wise considering both equity and fixed income alternatives.”

To which I say; “Yes, you are right!  However …”

One has to ask, “Without major corporate finance activity in the last two years would CPG have been able to pay their distributions?”

“What if CPG is too generous with the company’s distribution (yield), which is directly responsible for the elevated valuation of CPG’s current stock price?”

“What if CPG is relying on secondary share offerings to fund the company’s current high distributions instead of relying on its’ own business operations?”

“What if capital markets, which can be fickle, are not as generous to CPG in the future as they have in the past?”  The last secondary issue for CPG was back on November 1, 2012 the company issued 18.75 million shares at $40 per share.  With investors down 6 percent, will they readily accept more shares even though they have been collecting their distribution?

The second consideration is the law of large numbers.  With a market capitalization of $14.8 billion and distributions of over $1 billion dollars annually to shareholders Crescent Point is no longer a small-capitalized company.  As companies get larger, laws of compounding and acquisition size become problematic, as the numbers just get unrealistically large for the company to manage or to meet shareholder expectations.

I’m just saying there are limits both in terms of investor’s appetite for additional CPG shares and compounding law of large numbers.  Today there are “clear blue skies” and no sign of investor fatigue of corporate activity but in the future who knows.  I do have to ask the question with corporate activity possibly diminished can CPG sustain its distribution policy to its shareholders.  Leading to the ultimate question of this blog, without the generous distributions of CPG are investors and market participants more willing to see the clear divergence gap opening up between our model price calculation and the CPG’s share price.  Who knows!

Conclusion

So there you have it.  This will be an interesting situation in seeing how this divergence gap, between our model price calculation and CPG current stock price resolves itself, and I will be in the front row.  With all the corporate activity CPG has been doing over the last few years, both acquisitions and secondary offerings, coupled with large distributions relative to what is available in fixed income, investors can be challenged in deciphering what fair market value would be for Crescent Point Energy in the public markets.  The Model Price Service – our Facebook App – crunches the numbers and calculates model price consistently focusing on the relevant inputs that calculate our model price, including our focus on earnings instead of cash flow.  Pundits and experts may rely on cash flow and yield but unfortunately these attributes are NOT variables that make up fair market value of a public company in my estimation or variables used in our calculations.

$BBRY – BlackBerry Reports 4th Quarter Results – A Model Price Review

BlackBerry (BBRY) reported 4th quarter results on March 28, 2013 and believe me when I say this report carried something for everyone, both bull and bear alike.  I wanted to wait a week for this blog after BlackBerry reported to capture the changes in analysts’ estimates that directly impact our calculation of model price for illustrative purposes.

The highlights included:

– BlackBerry made money in the 4th quarter ($0.22 or $98 million dollars) where the street was expecting a loss. ($-0.29)  The difference being very strong gross margins and higher average selling prices BBRY was receiving on the new phone the Z10.

– The big disappointment was the loss of 3 million subscribers.  The bears pounced on this negative number.  Subscribers came in at 76 million from the low 80 million plus.  BBRY changed the pricing model of their phone sales where users can use their phones without BBRY’s subscription network charges.  Without these subscribers nonrecurring revenues are venerable making analysts’ nervous about future earnings and making BBRY more reliant on phone sales for profitability.

– The second disappointment is the retiring of Mike Lazaridis.  This wasn’t telegraphed beforehand and a shock to say the least.  For me I place this news in the negative column.  To me this is an equivalent to Steve Jobs retiring from Apple.

So there you go, a very mixed bag of news.  Interestingly BBRY closed relatively unchanged in price on Thursday, with the bulls and the bears fighting for most of the day.

So let’s have a look at the most recent BBRY model price chart updated with the company’s new balance sheet.

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

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

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

Since mid January BBRY has traded between EBV-2 and EBV-1.  As I have indicated on our model price chart EBV-1 is $15.69.  So if BBRY has a positive transit of this level this would be very bullish for the company.  Likewise, if BBRY has a negative transit of EBV-2 or $13.11 this would be bearish.

I have noted several times on the Facebook – Comment Section, in my opinion this stock has been untradeable over the last six months.  The volatility has been high, with prices transiting our EBV lines with each rumor on the internet.

The other item I like to point out is our calculation of model price, which you can see at the bottom of our model price chart above.  After the 4th quarter earnings release all analysts have moved their earnings estimates positively.  The mean estimate was negative before BBRY’s earnings release and is now a positive $0.27 per share for February 2014.  This positive change is obviously having an impact on our model price calculation.

I have included, below, a long-term model price chart of BBRY from our database that is a little different from the Facebook application.  In this chart you have a better view of the turnaround in our calculation of model price, which relates directly to analysts mean earnings estimates.  Usually the market is ahead of analysts – positive transits of EBV lines – and BBRY is no exception.  We often see this in turnaround situations.  BlackBerry could be a situation where analysts are always late reacting to company news or business conditions resulting in the stock price leading our model price calculation. Eventually analysts will get overly bullish if a turnaround is real and model price jumps substantially above where the stock is trading.  Unfortunately this usually occurs at EBV+3 (red line), or worst EBV+5 (yellow line) with investors missing out on substantial profits.

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

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

Conclusion

When Blackberry – old Research in Motion – had a positive transit of EBV-3 or “Coming out of the Blue” back on November 25, 2012 I highlighted this positive transit, here.  BBRY continues its transition into a profitable company and the market senses a turnaround with a higher stock since the above noted blog post.  I have blogged considerably on this company in the past and will continue from time to time.  Hopefully the volatility in the stock price lessens in the future so transits can be traded profitably for those interested.  I do want to emphasize for a “Coming out of the Blue” company where an investor “Buy and Hold” positive transits of EBV-3, BBRY is typical of a turnaround situation (fans and critics, bulls and bears) including having our model price calculation lag BBRY’s actual stock price.  Patience is required with this “Coming out of the Blue” stock strategy that’s why you want as many of these “Coming out of the Blue” positions in your portfolio and don’t look at them too often!  See my blog “How Jumbo Gains are Possible Using Model Price – Part 1”.

April 2013 – Monthly S&P 500 Market Strategy Update

Here is our Model Price chart for the S&P500 for the market close on March 28, 2013:

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

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

Remember we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

Isn’t this model price chart amazing!  Look what the market, as defined by the S&P 500 is doing.  The market looks like it has “melted” into our EBV+3 (red) line – see Economic Book Value (EBV) under Key Concepts.  Not only “melted” but also one has to ask, “Where is the variability (volatility) of the market?”  Remember these are weekly price bars!  The market has spent the last four weeks barely moving in terms of volatility.  You have to squint to see what the market has actually done relative to our EBV line.

What to make of this phenomenon?

EBV+3 has become the ceiling for this market at least temporarily.   The S&P 500 from the low of mid November (1343) to March 28, 2013 (1569) has climbed 16.8%, not including dividends.  As predicted in my earlier blogs the S&P 500 Index has reached EBV+3 or 1569.

So what happens now?

From my perspective three sceneries are possible:

Scenario 1: A good old fashion correction.  Remember what a correction is?  We haven’t had one for quite some time.  Queue the Europeans!  A correction in the S&P 500 would create value for traders and investors leaving room for the market to rally back up to EBV+3 maybe in the fall of 2013.  As I have written previously this would give the market a “saw-tooth” pattern, which has been in evidence for a good deal of time in the last four years.  (You can see our long-term Model Price chart contained in other blog, here.)

Scenario 2: The second way the market could create value is to have corrections within individual sectors.  Almost rolling corrections, if you will, where investors and traders seek out value and make returns as money rotates within these individual sectors and industries.  These rolling corrections can occur while the S&P 500 Index itself stays relatively calm and hugs our EBV+3 (red) line in the future.

Scenario 3: A positive transit of EBV+3 (red) line.

Which scenario?

The easiest scenario to discuss is Number 3.  As I have said in previous blogs I don’t feel it’s time for a positive transit of EBV+3.  Why? Time spent with model price charts and a guess, is my answer.  Major market indices usually like to hang around their EBV lines before a major transit.  The most popular model price chart formation – where price bars intersect with our EBV lines – I have seen is the “break-out pull-back”.  In other words, the market will have a positive transit only to break down through the EBV line only to have a secondary positive transit back up through this respective or aforementioned EBV line, in this case EBV+3.  All this market action takes time, especially with weekly price bars, so market participants have to be patient until the market does its thing.  I believe a late summer or fall positive transit – either primary or secondary positive transit – will give the market time from here to consolidate, wait on economic data, and get a sense of earnings over the next few quarters.

I will grant you Scenarios 1 and 2 are a variation on a theme.  To my mind, the market, from here, has to create value for investors, traders and maybe shake out some nervous longs. All individual sectors or sub groups in the S&P 500 are up significantly since the beginning of the 2013.  Certainly the consumer staples, financials and healthcare sectors are due for a rest or consolidation.  Will the dividend payers continue their upside action? What sectors will take over this leadership role when sector leaders consolidate?  Is it time for large cap technology companies to make a run?

Discussion of EBV+3

Some EBV lines are more important then others.  We have color coded EBV lines that have more significance and you will notice our EBV+3 line is red highlighting its’ worthiness.  I believe once the S&P 500 has achieved a valuation in excess of EBV+3 this will signal the US economy is strong enough to support and sustain an equity valuation level that allows individual companies to trim their super solvent balance sheets thereby creating additional equity valuations.  This positive feedback loop will help create additional valuation thereby further increasing valuations over a secular period of time.  Yes, a bull market! (I have discussed in detail this positive feedback loop in my blog “S&P 500 – Why the US stock market is going up (Part 2)”.)

I do expect the S&P 500 to have a positive transit of EBV+3 sometime in the future.  As I have pointed out the last positive transit of EBV+3 involving the S&P 500 was back in 1992.  This positive transit was a precursor of a major bull market from 1992 to 2000, an 8-year run.  I do expect a similar bull market in our future both in terms of longevity and gains of this prior “Bull Run”.  Yes, hard to believe but the math is the math.

If the S&P 500 Index were to crawl along our EBV+3 (Scenario 2) this would be good news for investors because of the compounding which occurs in the companies within the S&P 500, as we add earnings estimates, on a bottom up basis, while subtracting established dividends, calculating on a pro forma basis where our EBV+3 line will be next March of 2014.  We calculate our EBV+3 (red) line to be 1734 or some 10.5% higher than the close on March 28, 2013.  Not a bad potential return even after this market run from mid November to present, considering potential fixed income returns in the future.

Conclusion

Back in September 2008 the S&P 500 broke below EBV+3.  As at the end of March of 2013 we have traded back to EBV+3, some 4 and a half years later.  Increased valuation in equity markets is of a result of positive and correct fiscal and monetary policy no matter what the newspapers and bearish pundits say.  Indeed the US economy seems to have some positive momentum and equity valuations are increasingly recognizing this fact.  A positive transit of EBV+3 would be significant and a precursor of much higher equity valuations in the future.  We are on the doorstep of equity markets giving a positive signal that the financial wounds of the past are clearly healing opening the door for normal markets in the years to come.