Monthly Archives: October 2013

Canada Bread – Confirming Model Price Algorithm


Maple Leaf Foods (MFI-ca) is restructuring its corporate operations and it placed its 90% ownership in Canada Bread (CBY-ca) up for sale.  Canada Bread is publicly traded and I have included its model price chart below.

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

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

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

As you can observe CBY-ca had been tracking EBV+3, using our structural EBV line as support (Red line).  On the news that Maple Foods had placed CBY-ca on the auction block the shares in the company immediately traded up to our calculation of fair market value or what we call Model Price.

As the auction process gets underway it will be interesting to see what the actual sale price will be.  Our model price calculation suggests $72.60 and we will see how close the ultimate sale price is consummated.

Publicly announced purchase and sale transactions give users of model price ever increasing confidence that our model price algorithm is robust and accurate with other companies in our database.

Other publicly announced M&A activity:

 

Loblaw’s Deal with Shoppers Confirms our Model Price Calculation

 

Warnaco (WRC) Acquisition Confirms Model Price Calculation

 

Leucadia Purchase of Jefferies Group (JEF) Confirms Model Price

 

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

Netflix – Tracking Carl Icahn’s Footsteps


Sometimes a market professional has to be a Sherlock Holmes – piecing market moves together to get a picture of what the ‘smart’ or big traders are doing in an equity position that you may have.  Sleuthing is part of the job and Model Price Theory (MPT) makes the job a little easier.  Let’s take for example Netflix (NFLX).

As always let’s start with our model price chart of Netflix.

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

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

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

Look at the weekly price bar I have annotated with an arrow in the above model price chart.  This price movement at the time caught my eye because of the negative transit of EBV+8 and I noted it at the time in the ‘Comments Section’ of our Facebook App.  This negative transit was the first sign that should have alerted traders or investors interested in NFLX that caution was warranted in a stock that has gone straight up since mid 2012.

A couple of weeks later, Carl Icahn released disclosure documents with the Securities and Exchange Commission detailing he sold 2,400,000 shares of NFLX on October 22nd, (you guessed it) the very week the annotated price bar highlights.  Carl Icahn, who at the time owned about 10% of the company, initiated a major sale – with this sale and subsequent sales sold half of his position – caused a negative transit of EBV+8.  Netflix, the stock price, subsequently recovered after the highlighted sale on October 22nd and negative transit of EBV+8 and made a parabolic move higher almost trading to $400 a share.  Mr. Icahn used this surging stock price selling even more of his position, after the initial sale, as the stock rocketed upward.

From a model price perspective Mr. Icahn’s initial sale caused a negative transit of EBV+8.  We obviously didn’t know this information at the time however he did leave his fingerprint in terms of the model price work.  Who knows why Mr. Icahn sold his position in the company?  Even with the fundamentals of the company seemingly still strong, there is a point where the valuation of the company makes little sense to all but the most optimistic or momentum style investors.

Conclusion

Negative transits of our EBV lines happen for a reason.  Investors, traders should be on their toes when transits occur especially on stocks that they own or contemplate owning.  The negative transit of EBV+8 on October 22nd in NFLX was a precursor illustrating future corporate news on the ownership of the company.  Mr. Icahn, as I have illustrated in a previous blog, purchased his position in NFLX at the most advantageous time according to our model price work.  Mr. Icahn in selling half of his ownership in NFLX did so at a very opportunistic time and valuation, making perfect sense according to our model price work.

Time will tell, maybe in a couple of years, when we look back at Mr. Icahn’s sale of NFLX shares could be just as opportunistic as his buys.

Apple Inc. – Breaking Out of EBV+5!


So Apple is scheduled to report earnings on the 28th of October– probably Monday night – and the stock has a positive break out (transit) of EBV+5 the week before the news is officially disseminated. Coincidence I think not!

Let’s have a look at our Model Price chart as of the close Friday, October 25, 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)

This is a surprise for me!

In my last blog on Apple, I posed the question, “Will Apple Shares Have a Positive Transit of EBV+5?

My answer, “I doubt it!

I continue in the same blog, “But we will have to see. Again I talk in probabilities NOT certainty. To me this is fun. When watching my quote screen, on the handful of stocks I follow, I know the EBV [price] sic levels. The quotes mean something to me and over time they will mean something to you – if they don’t already.

Well Laurie Stamp, was on the ball and notified the community of Model Price that Apple had a positive transit last week. Thanks Laurie!

This is BIG!

For those who have reading this blog for a while know that EBV+5 is a significant EBV level and that any positive transit would have critical importance. My first response was to check when Apple’s earnings would be released. I quickly found out that Apple’s earnings would be released on Monday, the 28th, probably after the close. Wow, could this be a coincidence? Will the Apple earnings blow away ‘the street’? Will there be corporate action, such as a special dividend, that will make shareholders and the market happy? I have no idea, my guess is as good as yours.

But I don’t have to over think this move. I can just be a part of it. Yes, I took a position in Apple. That was the easiest thing to do. Go with the flow. I have seen this occur so often over the last 10 or so years it is of little surprise to me. See people always know corporate events before they are publicly disseminated and they act according to their own interests. Isn’t that insider trading, you ask? Maybe! I know I’m not trading on any inside information. Model price is telling you something is up and I’m just going with the flow.

I have stipulated many (hundreds of) times that I’m not here to recommend stocks to anybody. I’m just telling you my trading strategy on this positive transit of EBV+5.

Who knows what will happen? But as I have said before, the likely hood of Apple having a positive transit of EBV+5 was a low probability event. That low probability event occurred just before Apple’s yearend financial results are about to be released. Call me crazy but Model Price is telling everyone who will listen there will be good news coming!

As always see what happens!

NASDAQ 100 (NDX) – Positive Transit of EBV+5


Friday, October 18, 2013 was an historic day in the financial markets.  The NASDAQ 100 Index, a modified capitalization-weighted index, of the 100 largest traded companies on the NASDAQ had a positive transit of EBV+5.

Here is our short-term model price chart of the NASDAQ 100 Stock Index confirming the breakout.

NASDAQ 100 Index (NDX) with weekly price bars and EBV Lines (colored lines).

NASDAQ 100 Index (NDX) with weekly price bars and EBV Lines (colored lines).

As a reminder, I have republished our long-term model price chart of the same index using monthly bars and going back to 1995 – some 18 years.

NASDAQ 100 Index (NDX) with monthly price bars and EBV Lines (colored lines).

NASDAQ 100 Index (NDX) with monthly price bars and EBV Lines (colored lines).

Observables from our model price charts.

1.  Looking at the history of valuation of this index, especially in the late 1990’s and much of 2000, the NDX Index has always traded above EBV+5.  During the financial crisis of 2008, you can see the index had a negative transit of EBV+5 bottoming at EBV+3.

2.  Over the last 5 years the Index tried, without success, to transit above EBV+5.  (See arrows on our long-term model price chart)  EBV+5 was a barrier or resistance that collectively these companies could not transit.  Hopefully readers can see the significance of this transit and the struggles this particular Index has had to achieve this transit over the last 5 years.

3.  The other observable is where this index topped out in 2000.  Yes, this index topped out at EBV+9.  Just for fun EBV+9 in today’s terms for the NASDAQ 100 Index would be 17,369.  Four times what the index is trading today.  I not saying we are going there again anytime soon, but at least for reference purposes you can see what valuation level this market achieved in the past.

What is so important about EBV+5?

In Model Price Theory (MPT) every EBV level has a history and a story.  Some EBV levels are more significant than others.  EBV+5 is significant.  At this valuation level and above, companies are given a special valuation by the market.  These companies have, what we call ‘Economic Velocity’.  ‘Economic Velocity’ is a state an individual company is in, that the market recognizes, is operating or has the ability to operate at full potential.  The wind is at the company’s back, proverbially speaking.  Everything the company does in the interaction with its customers and suppliers – it business process – is easy and massively profitable.

Another way of looking at this valuation level is the equity markets are giving the company market value or an asset for management of the company, through its share price, to use to grow the enterprise.  Equity capital can be used by management, either issuance of shares or by way of acquisition, at relatively cheap cost to further their business process or strategy to promote even faster growth than what management is already getting.

EBV+5 Plus Convexity Equals Substantially Higher Equity Valuations

All market participants, at one time or another, have observed parabolic or positive dramatic momentum moves in stock prices.  Many market professionals simply observe these phenomena without a general understanding of why these stock moves exist.  Others like George Soros, have a better understanding of this phenomena and have given these market moves a name like ‘reflexivity’ but cannot give mathematical reasons why these moves exist.

Model Price Theory (MPT) has captured, mathematically, the preconditions, and adjustment process to capture this dynamic feedback mechanism that exists between the balance sheet of a public enterprise and the public market equity price of the company in question to determine the model price or our calculation of fair market value for the company.  We call this dynamic feedback mechanism and mathematical variable ‘Convexity’.  We believe ‘Convexity’ is an appropriate name in that the mathematical relationship is a convex one.  The greater the convexity, or bend, the greater the sensitivity the Economic Structure Value (ESV) has to changes in its stock price.  Or simply, the smaller the company’s balance sheet is relative to the public market value the higher the ‘Convexity’ variable of the company.  The higher the company’s ‘Convexity’, the higher the dynamic feedback mechanism as the company’s stock price goes higher.

It should be said ‘Convexity’ has a dark side as well.  As a company’s stock price falls this dynamic feedback mechanism can work in the opposite direction.  That’s why the ‘Technology Crash’ of 2000 was swift and just as fast as the ride up in share prices, making the boom – bust symmetrical in appearance on a log scale.  (See our long-term model price chart)

For those who are lost on this discussion, no problem!  Our Model Price calculation has ‘Convexity’ mathematics included in our algorithm.  ‘Convexity’ is one factor in our three-factor model that we use to calculate model price.

I only bring the ‘Convexity’ subject up, because of the importance of the positive transit of EBV+5.  ‘Convexity’ becomes more relevant factor and help boost share valuation significantly when ‘Convexity’ and share prices work in tandem elevating share prices ever higher.

Conclusion

The NASDAQ Index has been on a tear over these last few months culminating in a positive transit of EBV+5.  This is very positive for the US equity markets and adds another positive to the growing list of positives this equity market and the US economy has achieved over the last 5 years since the financial crisis of 2008.

Another aspect of this blog I wanted to review with my readers is the impact of ‘Convexity’ can have on valuation.  Like stored up energy, ‘Convexity’ has been a non-factor since 2008 and lays in wait to positively impact valuation like a turbo boost in a European sports car.  Having the NASDAQ 100 (NDX) Index transit positively over EBV+5 certainly is a pre condition of allowing ‘Convexity’ to play a larger role in valuation of a company.

Twitter’s IPO – A First Look!

“The Muppets must be fed!” I say to myself.

Sorry let me start at the beginning.

I was so excited!  When Twitter, Inc. filed their preliminary prospectus with the SEC I downloaded it immediately.  I love this stuff.  The intimate details.  Who will run the company?  How many shares will they have? Who is on the board?  How much were the executives paid when the company was private?  And most importantly, who will be worth what when the IPO is all said and done.  Call it financial porn.

So I have been fingering through this massive document, as I have done with hundreds of others, trying to get a sense of the company.  I restlessly pick up the document multiple times over the last week only to slam it back on the table feeling unsatisfied.  This document is slowly getting dog-eared and marked up.  Something is wrong here.  The feel is wrong.  I couldn’t put my finger on it until the latest issue of my New Yorker was found in my mailbox a week ago.

I know what you’re thinking, what does the New Yorker, a literary magazine with poetry, have to do with the prospectus and IPO of Twitter, Inc.?

Well in the October 14th issue is an article by Nathan Heller called “Bay Watched.” Subtitled “How San Francisco’s new entrepreneurial culture is changing the country”.  (Unfortunately The New Yorker magazine hides behind a paywall so I cannot link this article but if you’re an technology investor this article is a must read.)  There is a lot in this article, but I found a few sentences that targeted my problem with Twitter, Inc.:

“A record number of late-phase companies… are lingering in venture portfolios, instead of going public or being acquired.  … by the time a startup goes public, much of the tech community has put its money in and reaped its benefits.”

“ ‘By the time the company goes public, there’s no money to be made, in my eyes,’ Juda Gomila, an avid startup entrepreneur and investor who co-founded the mobile-gaming platform Heyzap, says” the article continues.

And then for the knockout punch the article introduces you to Ms. Diane Mulcahy.

“Not long ago, Diane Mulcachy, who manages the private-equity portfolio at the Ewing Marion Kaufman Foundation, led a quantitative study of venture capital over the past two decades, showing that recently the average V.C. fund has barely broken even.”

The article continues,

Mulcahy discovered that it was a bad deal for investors.  Her foundation scaled back its V.C. investments, and so did a lot of others.

Wow, so much for the Wall Street Journal, and the other business rages.  A literary magazine tells it the way it is, in and around the tech scene on the streets of San Francisco and suddenly one can clearly see what is going on here.

The game is up.  V.C.’s are getting squeezed because clients want better returns.  How do you get better returns?  Higher valuation exits as investments are sold from the V.C.’s portfolios – if and when they can exit (sell) their positions.  Twitter, Inc. has name recognition with the general public and its revenues are growing but still not profitable.  Why not wait for profitability before the IPO?  Simple, will Twitter ever be profitable?

But wait.  Doesn’t this happen all the time?  Twitter, Inc. is no different than any other high tech IPO or otherwise, isn’t it?

Yes, I agree this is done all the time.  But Twitter seems different, a little bit like a “scorched earth policy” in terms of valuation.  Usually IPO’s, high tech or otherwise, leave something on the table for the general public.  For the last guys (and gals) in the line, the company and the underwriters leave a little something.  Not too much mind you, but a little.  In this deal, it seems to me, they’re leaving nothing – not a crumb for anybody.

Back of the Envelope Model Price Calculations

So this is where I have fun.  I dig out my pencil and calculator and push around some numbers.  Now keep in mind this is early days and the prospectus is filled will holes (blanks) where the numbers should be.  However I calculate on a pro forma basis after the IPO, Twitter, Inc. will have a calculated Economic Book Value or EBV (Green Line) of $1.59.  (Again this is my estimate based on a limited financial disclosure.  I will fine-tune these numbers as time goes on and more information and common stock pricing is made available.)

Rumour has it Goldman Sachs, Twitter, Inc.’s lead underwriters, wants to price the company’s IPO at $25.  This would mean Twitter’s valuation would be between EBV+8 and EBV+9!  Keep in mind Facebook’s IPO valuation initially came at EBV+7 and promptly dropped to EBV+5 over a period of several months post its’ IPO.  Also Facebook, the company, was making money!  Twitter, Inc. has never made money and just recently reported a higher loss than the previous quarter even though revenues were higher.

But hold on, back on October 7th, Robert Peck of SunTrust Robinson Humphrey place a $50 price target on the company.  Really! If Twitter came to market at $25 and climbed to $50 a share this would make Twitter, Inc. one of the most expensive stocks in our Model Price database. A valuation level almost reaching EBV+10!

Conclusion

This IPO process and Twitter, Inc.’s first day of trading will be fun to watch.  Since Goldman is the lead underwriter I couldn’t resist poking fun at what disgruntled employee Greg Smith said in his resignation letter to Goldman that was published in the New York Times recalling five different managing directors referring to their own clients as “Muppets”.

On second thought it is a good thing the Twitter, Inc.’s corporate logo is a bird.  In my opinion, sooner or later the stock price will need a set of wings to help it with its’ valuation of the company if the company’s fundamentals – earnings – don’t materialize soon.

Twitter

I’m on Market Call!

On Tuesday, October 15, 2013, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Michael Hainsworth.

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

Would you say anything different based on your interpretation of Model Price Theory and chart?  You can make your comments via Facebook.

Should be fun!

Talisman Energy – Carl Icahn Takes a Position

Mr. Icahn tweeted this bit of news out last night.

Voila_Capture35

Tweet by Carl Icahn

Really?

Another Canadian company comes under attack from a US hedge fund manager.  (I’m thinking of Bill Ackman and CP Railroad as the other.)  What should we make of this?

Immediately I go to our Model Price Facebook app and punch in TLM – Talisman’s stock symbol – and look at our model price chart.

Here is the long-term (monthly price bars) of Talisman Energy going back to 2006.

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

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

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

Observables From our Long-Term Model Price Chart

1.  Our calculation of model price has been falling since 2011.  Earnings over the last few years have been drying up leaving a significant gap between our calculation of model price and TLM’s share price.

2.  Back in 2006, TLM traded at EBV+5.  EBV+5 – comparing apples to apples – as of last night’s computer run is $35.72.  That’s a stunning 173% from last night close of $13.07 CDN.  (I’m not saying TLM is going to EBV+5, I’m justing observing where TLM has traded in the past.)

3.  For the last 8 years the stock has traded in a range, with performance being lackluster for shareholders.

If any company is in need of a shakeup Talisman should be it.  Mr. Icahn investment should be welcomed news for long suffering shareholders and hopefully a catalyst for a higher share price sometime in the future.  Maybe the Calgary oil culture has gotten a little to cozy for their own good.  An outside agent, like Mr. Icahn, possibly can shake up management and the board of the company giving shareholders and Mr. Icahn something to cheer about.

I know I will be keeping an eye on this situation and monitoring our model price math hopefully with a happy ending like most situations Mr. Icahn participates in.

P.S. My last investment with Mr. Icahn’s participation was Netflix and that investment had a  very happy ending indeed.  See my blog on Mr. Icahn and Netflix here.

October 2013 – Monthly S&P 500 Market Strategy Update

Talk about cross currents!

Syria on, Syria off, Tapering on, Tapering off and US Government shut down on….

In this seemingly binary world the only thing that doesn’t care are the US equity markets.  The word that most represents what is going on and strikes the fear of every market participant is Complacency.

As usual let’s have a look at the S&P 500 Model Price chart.

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).

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

You can observe from our model price chart the S&P 500 closed at 1693.87 on October 2, 2013.  EBV+3 is calculated at 1605 for the month of October.  This represents a potential gap of 5.25%.  This represents the risk in the US equity markets.  In other words the S&P 500 Index could fall 5%, fall to support (EBV+3), at anytime or not at all.

Why hasn’t the S&P 500 fallen to EBV+3 already?

Good question.  I know several clients who sold or reduced equity positions last December on the potential US Federal government shutdown only to see the US equity markets climb healthily without their participation.

So I kind of see a stand off.  Those in the equity market saying “Why Sell?” – especially those who sold last time – and those out of the equity market are saying “Why Buy?”.

This tug of war will probably continue until certainty begins to develop on the political front or the economic front.  Keep in mind we are a week or two away from third quarter earnings news – I know, third quarter already! – that will be the main driver of stocks both up and down.

Until then, enjoy the political theater (or yelling if you prefer), baseball playoffs and if you’re Canadian, an early Thanksgiving knowing that the market downside risk as gauged by where the S&P 500 Index, relative to our calculated EBV+3 (red) line, is manageable.

Yes, I guess…. Call me complacent as well!

Yahoo – Continues to Perform

I said I was a fan of Marissa Mayer – Yahoo’s current CEO. (Blog)

Yahoo stock price continues to perform, since my blog post on August 21, 2013.  Of course let’s start with our model price chart of Yahoo as of Friday, September 27, 2013.

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

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

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

I love this Trading Pattern

I have said many times before I hate technical analysis.  Many people think our model price charts are technical analysis.  But let me go one step further, which will be controversial to many, I believe the whole body of work or what is considered technical analysis is a more complicated and roundabout way of picking up the interaction between our EBV lines and the company’s stock price.  I can hear the critics booing from the cheap seats on this statement.  But trading patterns do emerge when talking about fundamentals just to make everything I said previously more complicated.

When fundamentals are charted, along with the company’s stock price, patterns to occur.  The trading pattern with Yahoo, as displayed in the above model price chart is one of my favorites.  As you can see in the middle of May, YHOO traded to the top of EBV+3.  Nine weeks later, in the middle of July, YHOO had a positive transit of EBV+3 with a pull back under in the following week.  Seven weeks later YHOO had another positive transit that I highlight as ‘Break Out #2’.

The reason why I love this trading pattern is fundamentally the market – through YHOO’s stock price – is testing whether it belongs, valuation wise, in a higher zone.  The first transit, ‘Break Out’ on the above chart, I rationalize the market is testing whether YHOO actually belongs in the zone between EBV+3 and EBV+4.  The shallow pull back is the market contemplating whether a transit is warranted.  The second positive transit, especially on no corporate news, is the tell tale sign the market has changed its opinion on YHOO and that a higher valuation zone is validated.

Again, this is fundamentally driven, as YHOO is achieving a higher magnitude of economic velocity and the market is signaling its approval with a higher valuation of the company’s shares.

EBV+3 is significant for Yahoo

I have reproduced our long-term model price chart below as well.

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

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

As you can observe YHOO had a negative transit of EBV+3 back in 2008.  For the last 5 years YHOO’s stock price has been languishing under this EBV level.  YHOO having a positive transit of EBV+3 just recently highlights a milestone for the company’s valuation and signals increasingly positive fundamentals with YHOO achieving valuation liftoff with this latest positive transit.

Conclusion

Things are looking up for Yahoo after years of seemingly management misfires and boardroom antics.  Marissa Mayer, Yahoo’s current CEO seems to be shaking things up with new acquisitions and initiating a mobile strategy.  Also, don’t forget Yahoo’s holdings in Alibaba Group that will be coming to market in a high profile IPO later this year.  Model Price is confirming and giving a higher valuation to a company that has stagnated over the last few years and under Mayer’s guidance seemingly relevant again after years of misdirection.