Monthly Archives: June 2014

I’m on Market Call!

On Thursday, July 3rd, 2014, I will be on Market Call on the BNN network (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Mark Bunting.

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!


Goose Bumps from Our EBV Lines – Lululemon Athletica Inc. (LULU)


Fifteen years. Yes, fifteen years I have seen and witnessed model price math. And I still get goose bumps. Man, look at this chart from last night’s computer run. Look where the price of LULU 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 – Adam Smith’s invisible hand – and share prices conform to our EBV math.


Chart from our Model Price Facebook App

Chart from our Model Price Facebook App


How is this possible?


These mathematical points, these EBV lines, come from natural phenomena observed from nature – yes that’s right ‘mother nature’.


“Are you kidding me!” you say.


No I’m not.


If you are looking for an edge in your stock trading Model Price Theory (MPT) is a ‘new country heard from’ and very simplistic.


I would say elegant.


I get the question all the time, “How do you know these EBV work?”


“They just do!” I respond.


Not a very satisfying answer I know both for the questioner or myself. So I have to document. I have to point out the obvious whenever it happens. I have had 15 years of being amazed of how equity prices conform to these simplistic multi-colored parallel lines.


I have made big dollars from using these EBV Lines. It is worth your time and effort to have a look.


And I hope that 15 years from now you still get goose bumps, as I do, observing stock prices interact with these EBV Lines.


Dai-ichi Life Insurance Deal with Protective Life Confirms Model Price

What are individual stocks worth in the publicly traded equity markets?


This question plagued me for sometime not only early in my financial career but when I started taking finance courses in university. Would you believe the world of finance doesn’t know this basic question? Sure there is the famous ‘Discounted Cash Flow’ [DCF] calculation but having spent 5 minutes doing this calculation and the amount of guess work about time frames, normal business activity and interest rates (discount rate) makes, at least in my mind, the DCF calculation dubious and imprecise. The other well-known calculation of fair market value can be what is known as ‘Enterprise Value’. Again spend any time with this calculation, and its simplistic nature and I have always wondered whether there is a better way.


Unfortunately in today’s financial world, there seems to be no definitive or agreed upon technique – algorithm – about what a company is worth especially public companies. In other words, business valuation is more art (justification) than science (math).


Enter Model Price


After many years of hard work and R&D our algorithm – Model Price – was born in 2002. I have been observing our model price calculation for over 12 years. Four years ago we decided, conceptually, to release Model Price to the public on the Facebook platform. Two years ago we released our Model Price App (Application) on Facebook. This application allows the general public to view our model price calculation (and history) in our database of stocks – over 2,000 companies both Canadian and US listed – at your convenience.


Our algorithm – Model Price – is so robust that we can calculate model price or fair market value for all companies in our database no matter what kind of business or peculiarities a specific industry sector may inhibit, like banking/finance. In my opinion model price represents a major break-through in security analysis and helps me considerably in the evaluation of individual public companies for investment.


Hopefully model price can help you as well!


However in order for you to use model price you have to be convinced that our calculation – algorithm – is relevant.


How do I do this?


Certainly one way is to evaluate M&A activity, where independent parties come together and make acquisitions on an arms length basis. This transaction price would certainly be considered fair market value especially in the transparent world of company boards, investment bankers and various experts on both sides of the transaction.


Yesterday morning Japan’s Dai-ichi Life Insurance agreed to acquire Protective Life Corp. at $70 per share. What was our calculated Model Price for Protective Life you ask?


Here is Wednesday’s model price chart for Protective Life Corp. (PL) after the transaction was announced and our calculated model price of $70.44.


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

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




Our simple dashed purple line, included on our model price charts, probably looks superficial to the sophisticated and complicated world of finance. I prefer elegant!


In my opinion the world of security analysis and investing becomes a much more interesting place when participants begin to realize and have confidence in what the true fair market value of a public company really is. Maybe investing becomes much more ‘rational’, at least for those who use Model Price and may have a significant impact on your net worth.


I have seen model price work for over 12 years. I know this simplistic purple line ‘delivers’ the goods in terms of fair market value. I also realize I need to prove to you that our calculation of model price is relevant. Hopefully this transaction and others are a step in the right direction to that result.

Other links to transactions that have confirmed our model price calculation.

Loblaw’s Deal with Shoppers Confirms our Model Price Calculation

Canada Bread – Confirming Model Price Algorithm

Warnaco (WRC) Acquisition Confirms Model Price Calculation

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

BCE – Agreed to Acquire Astral Media “A” for $50 per share


June 2014 – Monthly S&P 500 Market Strategy Update

What can one say about the US equity markets? No real volatility and hitting new highs everyday – it seems.


As usual let’s have a look at the model price chart of the S&P 500 Index.


S&P 500 Index with EBV lines

S&P 500 Index with EBV 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.


As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2142) this would represent a gain of some 11%. If the market corrected back to EBV+3 (1712) investors would be suffering losses of the same 11%.


Getting ready for the ‘Dog Days of Summer’


Summer is finally here after a long and painful winter and iffy spring. One of the old quotes about the market handed down from one generation to the other is “never sell a dull market short”. I think this quote is apt because superficially the US market does seem dull. However on a daily basis all the major US indices seem to be a few points below their all-time highs until a late afternoon rally pushes them forward (up) giving the financial press and media urgency to report ‘all-time market highs’ to the distracted and disinterested.


“Does anyone really care?” I ask myself frequently.


So what is there to say? After a fairly slow economic report for the first quarter of 2014 – US GDP contracted 1% – everyone is looking for a reacceleration of economic activity for the rest of 2014. Equity values are still cheap (S&P 500 just over EBV+3) with lots of room to the upside.


So relax, take it easy because second quarter earnings are on the way and with September and October coming, these two months always seem to be eventful for one reason or another.


As always, see what happens.

Apple’s Stock Split – Why Stock Splits do Matter!

With the news of Apple Inc. announcing a 7-for-1 stock split, the subject of stock splits have been in the financial news often. The consensus from journalists and academics alike seems to be that stock splits don’t matter – a simple division exercise.

What if stock splits do matter? What if the very act of splitting a company’s stock price, in this case Apple, from the low $600’s to $90 a share substantially increases our calculation of fair market value or model price?

What if I disclosed here that Apple’s “innocuous” (I will explain this quote later in the blog) 7-for-1 stock split increased the company’s fair market value by 22% or a cool $120 billion dollars.


Heresy, you say!


Let’s examine or parse a couple of financial articles – one article and one video – discussing Apple’s stock split that I found interesting over the last week.


The first article that caught my eye on the subject of stock splits was written by Mr. David Milstead of the Globe and Mail’s Report on Business. (Thursday, May 29th)


Mr. David Milstead writes.


Apple’s split is scheduled for June 9, benefiting all who own the shares as of June 2. In the strictest sense, the split will “do nothing,” [referencing Tim Cook’s comments on stock splits some time ago], as one Apple share trading at $700 is no more valuable than seven Apple shares trading at $100. That’s the basic economics of a stock split, and the reason why market professionals say splits have little meaning.


David continues,


Academic research has suggested stocks that split tend to outperform the shares of similarly sized companies in the near term…


Yes, this above noted phenomena has been reported in academia for quite sometime (over performance usually after the announcement of the stock split) and David continues his thought by offering what some academics are thinking as to why these gains are seen.


… in part because they’re an underappreciated signal of confidence: A management team that recommends a split to its board is confident the shares won’t drift lower.



The other article (video) of note on the subject of stock splits comes from the 67th CFA Institute Annual Conference held in Seattle this past May (2014) .  (OK, I can’t help myself poking fun at these guys!)

In this video (6:46 minutes) Mr. John Authers of the Financial Times interviews Mr. Aswath Damodaran, professor of finance at NYU Stern Business School about Apple.


In this interview, Mr. Damodaran correctly comments that in 2013 Apple announced a cash dividend (its first ever), corporate stock buybacks and significant borrowings (debt) and Apple’s stock did nothing to trend lower. He continues his observations by noting in April of this year Apple announces a dividend increase, more corporate buybacks, additional borrowings and an “innocuous” (7-for-1) stock split; further observing “seems to have triggered a move in the market [of the stock]”.


What’s going on here? Antidotal evidence seems to be piling up? Stock splits seem to have an unexplained positive impact on share values even though the simplistic theoretical textbook explanation seems to be wanting.


Enter Convexity


Model Price Theory (MPT) has many new concepts to offer the field of finance and investment management. Each of the new and original concepts – see Key Concepts tab – is grounded in a theoretical framework that is unique to MPT. Our convexity calculation variable is so important it’s one factor in our 3-factor algorithm that produces our model price value that you see on our model price charts.


Of course all public companies produce financial statements that include a balance sheet. All balance sheets have unique qualities that are specific to the company’s business, industry and choices made by the CEO and the Board of Directors on how they want to run the company. By analyzing each company’s balance sheet Model Price Theory (MPT) determines how the economic structure of the balance sheet is configured. More specifically a company’s economic structure can be viewed as a convex curve representing the specific nature of the balance sheet in question.


After a multitude of calculations we produce a convex curve that is unique to each company in our database. Some companies have very steep convex curves while others are relatively flat. The companies with steep convex curves may have little or relativity small amounts of recorded capital on their balance sheets’ for the simple reason they need little to no capital to run their businesses. Conversely companies that have very large balance sheets, relative to the size of the business, have convex curves that are relatively flat.


An example of a Convex Curve calculated from a public company's balance sheet

An example of a Convex Curve calculated from a public company’s balance sheet


So why should anybody care about the steepness of some calculated convex curve?


There are a lot of influences that are brought to bear on a public company’s stock price. One of the influences, according to Model Price Theory (MPT), is the feedback between the actual stock price dollar value and the calculated convex curve. As the stock price value (the actual number) moves up or down and depending on where the dollar value and the steepness of the convex curve intersect, feedback between these two variables will impact the fundamental value or fair market value of the company.


Assuming a company has a highly convex economic structure and a very low stock price (say penny stock), the feedback between the two can cause the stock price to be volatile. As the stock price increases in price value, say from $0.80 to $0.85 cents, the fundamental market value of the company increases substantially more than the change in price value because the steepness of the company’s convex economic structure curve. With the fundamental market value of the company increasing exponentially relative to the price movement may provide a further warranted price move, say $0.85 to $0.90 cents, recognizing the positive change in fundamentals. This feedback loop, between the company’s stock price and the convex economic structure of the company’s balance sheet, can go back and forth creating visible stock price momentum – oversized capital gains.

Unfortunately before you get too excited about this phenomenon the same feedback loop can happen on the downside as well.


Anecdotally this explains why lower priced stocks have more actual price volatility, especially penny stocks, than higher price stocks. Also this feedback loop is prominent in what is known as momentum stocks.


We Reduced Convexity to a Single Variable


We realized that looking at convex curves and their steepness was going to be a lot of work and interpretation. So we computed a variable that would combine the steepness of a company’s convex curve with the stock price dollar value of the company. So a company that has a convexity value of say 1.5 has a lot less convexity or share price feedback loop than a company with convexity of say 5.0.


Make sense.


With this background let’s start talking about Apple, Inc.


First let’s look at this table comparing the convexity values of the undernoted companies.

Companies Convexity Score
Microsoft Corp. 1.58
Oracle Corp. 1.54
Intl. Business Machines Corp. 1.14
Intel Corp. 1.65
Cisco Systems Inc. 1.89
S&P 500 Index 1.27
Apple 0.12



As one can see Apple’s convexity score (value) is very low compared with other large capitalized technology companies and the S&P 500.


If Apple’s management increased it’s convexity value the calculation of our model price or fundamental value would also increase.


So how do you increase Apple’s convexity?


There are two ways of increasing Apple’s convexity. The first is to focus on the balance sheet. Reducing the overall size of Apple’s balance sheet would make Apple’s convex curve steeper. This steepness would enhance the feedback loop between the positive stock movement and its fundamental value. Apple’s management starting in 2013 started this process by initiating a cash dividend and corporate stock purchases. Both of these actions in effect reduce the size of Apple’s balance sheet. Unfortunately the dollar size of these above noted corporate actions with Apple’s ample ongoing cash flow has had a negligible impact in doing anything to our convexity calculation. Laughingly with Apple’s bond deal (replacing Apple’s depleted cash) Apple’s convexity has gone from 0.14 back in January 2012 to 0.12 as of last week. You can see why Apple’s share price has languished for much 2013.


The second way of increasing convexity is to lower the stock dollar value of Apple’s share price. Yes, by doing a stock split. The lower the stock price dollar amount the higher convexity value computed. (Note: the act of splitting a company’s stock and lowering the monetary value of the stock price will not change the shape of the company’s convex economic structure curve but will change the intersection or the steepness where the Apple share price intersects on our computed curve)


Apple’s management shocked everybody, including myself, by announcing a 7-for-1-share split in April. So the question is what would happen to our calculation of convexity value with this corporate action. Not surprisingly our convexity value will increase from the present value of 0.12 to 0.84. This is probably one of the largest jumps in convexity I have ever seen – granted there are only a handful of companies with convexity value as low as Apple’s to begin with.


So what does this mean?


Below I have reproduced our model price chart of Apple, Inc. for Wednesday, May 28th from our Facebook application.


Apple's Model Price chart on Facebook captured on Wednesday night

Apple’s Model Price chart on Facebook captured on Wednesday, May 28, 2014


I have annotated on the chart where Tim Cook announced the stock split and the market’s positive reaction. This announcement helped close the gap between Apple’s share price and our calculation of fair market value. This is the fundamental view of how Apple looks at present and note that our calculated model price value is $628.99.


For fun, (yes, it’s fun) I split Apple’s stock in our database on the announced 7-for-1 basis and allowed our algorithms to recompute a new model price value allowing for the recalculated change in the value of our convexity score because of Apple’s lower stock price value producing the model price chart below.


Apple's new Model Price chart showing the impact of the 7 for 1 share split as of the same Wednesday May 28, 2014

Apple’s new Model Price chart showing the impact of the 7 for 1 share split as of the same Wednesday May 28, 2014



No other data inputs have been changed from the original Apple model price chart produced above. The only change I made was the share split announced by company’s management. With a lower share dollar value producing a higher convexity value (0.12 to 0.84) Apple’s new model price value would be $109.50 post split. Multiplying Apple’s new model price of $109.50 times 7 is $766.50.


Yes, just by changing the dollar value of Apple’s share price through a share split Apple increased their model price from $628.99 to $766.50! That’s a 22% increase or $120 billion increased in Apple’s market capitalization. Not bad!




Share splits do have an impact on fair market values of publicly traded companies both in terms of intrinsic fundamental value and over performance contrary to ‘experts’ in the field of finance and investment management. Model Price Theory (MPT) through our mathematical variable called convexity can help explain why share splits can have positive impacts on share price performance. By doing an “innocuous” share split Apple’s management will benefit all stakeholders, especially common shareholders, in making Apple more valuable. Hopefully through management’s other corporate actions we’ll see a steady increase in our convexity value further increasing the fair market value of Apple in the future.