Telus – “Getting Ready for Groundhog Day Part III?”

Mike Dal Santo in the Comment Section on our Facebook App posted an excellent question.

Mike writes:

Brian

Do you ever use technical analysis in determining your model price? I was looking at Telus, your model price is quite a bit lower than the current price, for a stock that has been in such an nice upward trend for the last number of years there would seem to be a need for some type of unseen catalyst to have it drop down to the model price. Does your model price incorporate competition such as another player into the Canadian telecom market? I don’t think the fundamentals for Telus, on the surface, are bad at all.

Let me parse this excellent question.

First off, I dislike anything to do with Technical Analysis.  Here is an excerpt from a previous blog I wrote titled “Do these EBV Lines work?” on the subject of Technical Analysis.

First of all our charts do look like technical analysis. Let me be clear…I hate technical analysis.  Early in my career I learned every technical analysis tool ever invented to get an edge in the market. I sat beside some of the greats like Mr. Jerry Favors – Gann Specialist, Mr. Gerald Appel – founder of the MACD indicator – and Mr. Joe Ross to name a few.  When I walked away from these people, I was not satisfied they discovered a competitive edge in the market and guess what, neither did they!  They always had exceptions to their own rules.  I sat in their offices and I saw how they traded and lived.  Believe me they didn’t live on estates and cruised on their yachts. They all could barely afford a car!

And people tell me the reading of the MACD indicator from their canned software program tells them to buy a specific equity. Really!  The man himself who invented the tool barely made a living and you think this tool will make money for yourself in the equity markets over the long haul.

Even though our Model Price charts look like Technical Analysis, I assure you they are not.  These charts are 100% fundamental.

Getting back to TELUS!

Below is our short-term (weekly price bars) model price chart of TELUS.

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

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

 

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

On the surface, I agree with Mike. TELUS’s model price chart doesn’t look bad at all.  Yes, TELUS is expensive in that the company is trading at an 18% premium over its calculated model price or our calculation of fair market value.  And with TELUS’s recent positive transit of EBV+4 – marked with an arrow – the stock does look poised to march higher, if not to EBV+5 or $52.44 (Dollar value of EBV+5 at the time of this blog post).

Looking at our long-term model price chart, below, for TELUS on our Model Price App you can clearly observe TELUS returning to the valuation highs achieved before the financial crash of 2008. So instead of a buying opportunity, is this something to worry about?

 

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

 

I do have a small advantage over Mike and the rest of the users on Facebook Model Price App.   Our in-house model price database reaches further back into history, back to the beginning of 1995.  For our Facebook App we only include model price data at the start of 2007 to unclutter our long-term charts and make the visuals more user-friendly. However there are rare occasions, like I did for TELUS, I do like to check data over a longer period of time to get a sense of the valuation range over the last some 20 years.

Super Long-term TELUS Model Price Chart

Here is our Super Long-term Chart on Telus

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

 

“Does history repeat itself?” or “Getting ready for Groundhog Day Part III”

A picture can be worth a 1,000 words, yes? TELUS’s stock price was flying high in 1998, only to have crashed some 4 years later.  Again in 2006-7, TELUS was AT THE SAME VALUATION LEVEL as 1998 only to have severely corrected in the financial crash in 2008. Believe it or not we are almost here again – the same valuation high – that TELUS achieved back in 1998 and 2006-7. Amazing!

So what do you think, does history repeat itself?

Mike’s point in his question is valid. TELUS does look good here, in the present day.  And maybe who knows, the stock price could reach valuation highs of EBV+5. But Mike could have said the same back in 1998 and 2006-7, obviously before TELUS severely corrected. Wouldn’t you agree?

Going one step further!

Equity investing can be about the possible range of valuation distributions over a period of time.  Yes, I visualize a statistical bell-curve, if you will (see below). Using Mike’s TELUS as an example, what is the possible valuation distribution using our long-term model price chart on our Facebook App, seen above.

By simple observation – a blink of an eye, the valuation range is just over EBV+4 (right side of the bell-curve) to EBV+1 (left side of the same curve).  Using a longer time frame – almost 20 years – with our super long-term model price chart, the valuation distribution is expanded to EBV-3 (left-side) to just over EBV+4 (right-side).  Notice the right side of my imaginary bell-curve doesn’t change but a different and broader left side emerges.  (I have to emphasize that having less time history does NOT disadvantage Facebook Model Price users. With the financial crisis of 2008 included in our data the distribution of the shorter or 7 years of model price data – EBV Levels – will suffice.  More history usually only broadens out the lower end (left-side) of the distribution curve.)

 

Imaginary distribution graph of upper and lower EBV Levels over a period of time

Imaginary distribution graph of upper and lower EBV Levels over a period of time

 

So with my hypothetical statistical ‘curve’ in your mind where would you like to invest, valuation wise, in TELUS?

Hint: The investment “greats” always invest on the left-hand side of my theoretical distribution, never the right. The “greats” in the business invest to make dollar bills with little to no downside where all others play for pennies with all downside.

What kind of investor or money manager are you? This should give you something to think about this weekend.  Yes?

“I’m currently invested in TELUS, what should I do?”

This is an easy question to answer, with Model Price Theory (MPT) ready to help.  The answer being, any negative transit of EBV+4 would be an excellent sell signal at some future date.

Simple!

Conclusion

Great question Mike!  Keep them coming.  It will probably take a year or so for the price action on TELUS to play out but it will certainly be interesting to see what happens. My bet, it will be “Groundhog Day Part III” where a multitude of investors probably losing money on their TELUS investment and of course reiterate to anybody who will listen my favorite expression, “Nobody saw that coming!”

 

P.S.  One observable is that for a utility stock TELUS, over the last some 20 years, has been hugely volatile.  Investors don’t usually associate huge volatility with a utility or regulated company so it would pay investors to be mindful of the fact.

 

P.P.S.  I annotated where at one time TELUS was a “Coming Out of the Blue” stock at one time – back in 2002.  Amazing purchase opportunity for any investor at the time and who knows maybe investors will have this same opportunity sometime in the future as well.  In equity markets anything and everything is possible. Keep on open mind and surplus cash at the ready.  Remember, this is what the investment “greats” do.

 

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