mcturra2000 on $NPT.L – NetPlay TV… soicowboy on $NPT.L – NetPlay TV… soicowboy on $NPT.L – NetPlay TV… mcturra2000 on Markets correction Metier9 on Markets correction
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This is a mathematical diversion to while away some time, and stim-
ulate your brain. Try solving it before looking at the paper, as it states
some basic equations and approaches quickly. The problem is stated be-
There is a vertical wall, and a horizontal floor. A box, measuring 1m
x 1m x 1m lies on the floor, and is flush against the wall and the floor.
The problem is actually in 2D, so you can ignore depth. Suppose there
is a ladder, of length c, which is propped so that the top of the ladder
touches the wall, the bottom touches the floor, and somewhere along its
length it touches the corner of the box. The question is: determine
b, the horizontal distance from the bottom of the box to the point at which the
ladder meets the floor. You may assume c= 3 if that helps. There are no
tricks in the statement of this problem.
To read the full article (which has mathy stuff in it so I can’t type it here): http://pdf.markcarter.me.uk/ladder.pdf
ASC (ASOS) finals are out today, prompting Paul Scott to tweet: “Lousy figures from ASOS. Is this co really any good? Have my doubts. Op margin only 5%. Profits down”. The market response was very positive, though, sending the shares up 16.4% to 2263p, as at the time of writing.
The shares are down 62.9% YTD, and down nearly 69% from their all-time high of 7195p. When high growth, high momentum shares stall, they do so with fanfare. I had written in the past that I valued ASC at about £20 per share. To my amazement, the shares actually reached that level. It just goes to show: if you wait long enough, then you will often find that things go your way.
A number of incidents happened to ASC since that valuation, and I said that it would probably need to be revised downwards. I thought it might be worth trying to value ASC again. I am being lazy, so I will use the application that I just published as a two-phase growth model. Here’s what the screenshot looks like:
I have been really sloppy as regards cost of capital, and so-forth. I just simply wanted a quick estimate. As you can see, the company looks to be worth about £1200m, or 1440pps, which is significantly below its current market cap of £1900m.
A better model would use a three-phase growth model, which would make it much more valuable than the figures I have suggested. Work would also need to be done on the assumptions about the cost of capital and terminal figures.
Nevertheless, I think you’d have to put in some pretty wacky assumptions to reach Barclay’s former share target of 8000p. I am completely puzzled as to how they came out with that figure. Even using a three-phase model with robust growth assumptions, I did not come out with anything like their valuation. It’s also difficult to see what pricing models they might have been using. Seriously, I think much of the time analyst’s target prices make no sense. They mostly seem to be anchored on prevailing share prices, tweaked with momentum expectations. I don’t see how else they can do it.
It will be interesting to see what happens from here.
Last week I posted an article of Stocks showing at least 50% upside using a DCF model. I have now made an application which uses the most interesting parts of the model. You can download it using this link. Here is a screenshot:
The application is quite small, and requires no extra libraries, as far as I know. It is for any Windows platform. It’s all pretty self-explanatory, really. You enter in operating profit, dividend cover, etc., press the Calculate button, and out pops the intrinsic value for the value of common stock using DCF.
The model assumes that operating profits grow at a rate of ROCE*(1-1/DCOV), where DCOV is the dividend cover, for the next 5 years. It then assumes market returns for the terminal stage. If you are lazy, then you can leave the terminal cost of capital, terminal growth, cost of capital, and even tax rate, alone. Operating profit, dividend cover, ROCE and net cash are the numbers you are likely to want to play with first.
I notice that BLNX (Blinkx) has appeared on Stockopedia’s Greenblatt Magic Formula screen, with a ROC of 52.6% and an EY of 27.1%. It also has a QV rank of 93.
BLNX has net cash of £75m, a market cap of £118m, a PE of 7.18. Revenues have increased more than sixfold over the last four years. Its one-year relative strength is -79%. So, OK, how comes a company that’s grown revenues sixfold has a PE of 7 and massively underperformed the indices?
Here is some commentary over at Stockopedia:
* Paul Scott, 30 Jan 2014: calls BLNX’s website an inferior copy of YouTube.
* Paul Scott, 6 May 2014: neutral on Blinkx. Results look impressive. Raised cash. Profits look real. Debtors are modest relative to turnover, Balance Sheet excellent.
* Paul Scott, 2 Jul 2014: suspicious where a share price does not rebound when it should. Trading update is a clear profit warning
* Edmund Shing, 28 Aug 2014: posted a bullish article, highlighting its value. Points to Bloomerg Businessweek article of 7 Feb 2014, alledging that BLNX inflated its traffic stats to boost commissions.
* Paul Scott, 1 Oct 2014: reports profit warning, as he expected. Says he doesn’t really understand the business model. Calls H1 a disaster.
I’ll add my own observations below.
Firstly, as soon as I hear that there are accounting shenanigans from sources I have no particular reason to doubt, it’s Shields Up time. From then on, a company is guilty until proven innocent.
Secondly, look at all that cash. You would think that I would be bullish about that, but I actually take it as a warning sign. If you look at many foreign stocks , you will find that they are awash with cash. Why? Scam after scam Chinese company seems to have plenty of cash. There will be some legitimate exceptions of course. FCCN (French Connection), for example.
Next, I took a look at the cashflow statements. They issued $30m of stock in 2011, $15m in in 2012, and $66m in 2014. That’s a massive amount of equity for a company that is worth only £118m. Clearly, all that money did not translate into shareholder value. The company made acquisitions of £33m in 2012, and £25m in 2014. This is another huge warning sign.
Next, look at Stockopedia’s calculations of Return on Capital: a paltry 6.52%. It’s ROE is 5.98%, a wholly inadequate figure. If a company is growing rapidly, always check these figures. It can alert you as to whether the company is investing sensibly, or not.
Conclusion: despite the PE of 7, this one’s going down. Avoid. IMO, DYOR, yada yada.
BLNX 29.5p. ASX 3369
There are many screens like Greenblatt, that attempt to measure “cheap and good”, or GARP screens that use a combination of “value and growth”, but there are not any scrrens that attempt to measure discount to intrinsic value. Yesterday, I realised that it was possible to actually do this using Stockopedia.
The values I needed were: market cap (MKT), operating profit (OP), ROCE, net cash (NCASH), and dividend cover (DCOV).
Given DCOV, it is easy to calculate an earnings re-investment rate, which, combined with a ROCE, tells me at what rate I expect OP to grow. I then assume OP grows at that rate for 5 years, and then switches to market-expected rates. Those are the basic assumptions of the model, and allows me to compute an intrinsic value for the company. I can then compare it to the market cap, and apply a filter below 50% upside, The model adjusts for NCASH.
Stockopedia only returns 200 qualifying companies, so I have restricted my search to companies with a market cap of at least £250m, have excluded as many AIM-listed shares as possible, and sorted by ROCE descending.
A number of other assumptions were needed. I used a risk-free rate RF=2.95% and an equity risk premiun ERP=4.96%. I don’t have unlevered betas for the companies, so I assumed all the betas were 1. The hurdle rate is therefore 7.91% in all cases, and the perpetual growth rate is RF. I also did not adjust the cost of capital for debt. These assumptions may be disliked by some, but there’s really other no way of producing bulk computations for intrinsic value.
So you should think of the computations as a starting-off point, from which you can do further work. Note, also, that the OPs are taken “as-is”. Some of them will be distorted by exceptional items, and some of them are in USD, which throws off the calculations. There are also no adjustments for operating leases and pension deficits. Like I say, cavaet emptor.
Here is a table of results:
# EPIC Upside P/E Name --- ------ --------- ----- ------------------------------- 1 GKN 1.54671 10.4 GKN 2 ITV 1.58682 20.8 ITV 3 XPP 1.5979 13.2 XP Power 4 IPO 1.6034 8.33 IP 5 DLAR 1.64208 6.95 De La Rue 6 ATK 1.65468 14.6 WS Atkins 7 SPD 1.65998 19.3 Sports Direct International 8 HAS 1.66271 18.3 Hays 9 CRST 1.66439 9.82 Crest Nicholson Holdings 10 HL. 1.6858 25.5 Hargreaves Lansdown 11 RDW 1.70098 9.46 Redrow 12 HFG 1.74224 14.5 Hilton Food 13 AVV 1.74855 17.2 AVEVA 14 PFC 1.8086 10.0 Petrofac 15 FOXT 1.87711 12.8 Foxtons 16 DNLM 1.91909 18.2 Dunelm 17 LOOK 1.97206 10.9 Lookers 18 UKCM 2.01667 6.03 UK Commercial Property Trust 19 HWDN 2.0205 18.3 Howden Joinery 20 VZC 2.10285 15.2 Verizon Communications Inc 21 LSL 2.15945 11.4 LSL Property Services 22 IBM 2.17893 11.2 International Business Machineâ€¦ 23 PDG 2.30425 8.09 Pendragon 24 HIK 2.34738 17.3 Hikma Pharmaceuticals 25 FDM 2.40176 34.6 FDM (Holdings) 26 GMS 2.43112 10.5 Gulf Marine Services 27 BLT 2.46258 10.0 BHP Billiton 28 888 2.47652 14.9 888 Holdings 29 TT. 2.48817 7.37 TUI Travel 30 TTA 2.52339 9.88 Total SA 31 EDCL 2.97754 8.05 Eurasia Drilling 32 HLCL 2.98072 4.42 Helical Bar 33 SMWH 3.15547 15.1 WH Smith 34 GPOR 3.17671 5.10 Great Portland Estates 35 DLN 3.28182 5.08 Derwent London 36 ITE 3.36212 9.45 ITE 37 NBPE 3.36623 4.91 NB Private Equity Partners 38 NOG 3.39358 9.05 Nostrum Oil & Gas LP 39 NXT 3.44832 17.0 Next 40 DMC 3.46037 14.3 DAMAC Real Estate Development 41 REL 3.5027 12.8 Reed Elsevier 42 AA. 3.67377 13.9 AA 43 GLTR 3.70754 8.58 Globaltrans Investment 44 SIA 4.21821 21.3 SOCO International 45 XCH 4.3057 25.3 Xchanging 46 OPHR 4.46711 13.3 Ophir Energy 47 DGO 4.85896 7.02 Dragon Oil 48 GMD 4.96425 - Game Digital 49 WKP 5.49217 3.74 Workspace 50 BNK 5.90446 11.5 Bankers Petroleum 51 AFR 6.74221 8.15 Afren 52 FXPO 7.15282 2.96 Ferrexpo 53 AEP 12.7208 17.5 Anglo-Eastern Plantations 54 OKEY 15.5672 15.0 O'Key SA 55 RMG 17.968 8.19 Royal Mail 56 SEPL 27.3966 2.21 Seplat Petroleum Development 57 SSA 28.8468 27.0 Aktsionernaya Finansovaya Korpâ€¦ 58 MFON 28.9517 11.3 Megafon OAO 59 FIVE 35.8363 3.59 X5 Retail NV 60 CNCT 38.9168 8.44 Connect 61 GCLA 45.4253 51.3 Grupo Clarin SA 62 TRCN 98.8475 0.84 TransContainer OAO 63 NVTK 104.81 94.9 Novatek OAO 64 ETLN 134.848 5.86 Etalon 65 MCRO 195.078 19.4 Micro Focus International 66 PIK 202.902 8.08 Gruppa Kompaniy PIK OAO 67 ATAD 203.908 32.7 Tatneft' OAO 68 GAZ 208.782 18.6 Gazprom neft' OAO 69 KCEL 363.146 7.14 Kcell AO 70 OGDC 377.114 85.4 Oil and Gas Development Co 71 PHST 900.156 1.18 Farmstandart OAO
There is obviously going to be suspicious ones amongst them. Clearly, companies are not likely to have an upside of 10X+.By way of example, GKN has an upside of 55%. It currently trades on a PE of 10.4. Note that my computations make no use of PEs. PEs are a pricing statistic, not an intrinsic valuation metric.
You will see that some companies have high P/Es, yet are ostensibly undervalued. This is possible if companies have high re-investment rates and high returns on capital.
Here’s my code:
# -*- coding: latin-1 -*- import operator from pprint import pprint as prin import tabulate import aswath import mython.csvmc def floatm(x): x = x.replace(',', '') return float(x) def calc(d): #print(d['Name']) del d[''] dcov = d['Div Cover'] if dcov == '-': dcov = "inf" dcov = floatm(dcov) roce = floatm(d['ROCE %'])/100 op = floatm(d['Op Profit']) mkt = floatm(d['Mkt Cap £m']) ncash = mkt - floatm(d['EV'] ) vc = aswath.grow2b(op, dcov, roce, ncash) d['upside'] = vc/mkt return d def upside(d): return d['upside'] def main(): inp = mython.csvmc.read_dict('~/Downloads/stocko.csv') calcs = map(calc, inp) calcs = filter(lambda x: upside(x) > 1.5, calcs) calcs = list(calcs) calcs.sort(key = upside) prin(len(calcs)) prin(calcs) tab =[ [i+1, d['Ticker'], d['upside'], d['P/E'], d['Name']] for i, d in enumerate(calcs)] print(tabulate.tabulate(tab, headers= ['#', 'EPIC', 'Upside', 'P/E', 'Name'])) if __name__ == "__main__" : main()
All of the computations are in the aswath module, which can be obtained from github.
Happy investing to you all.
Gaming company NPT (NetPlay TV) issued its Q3 trading update yesterday, in which it said: “Despite the Group’s level of marketing spend, it has not achieved the targeted levels of new customers and net revenue expected from this spend. This situation combined with the current trading environment, and the initiation of POC means that the Board expects current market expectations to be materially lower than forecast.”
The shares closed down 17.7% to 8.12p. NPT was added to the Magic Hat portfolio in early August at 12.25p (http://is.gd/1XlNqw). I warned at the time that “my track record with gaming stocks is atrocious”. With the selection of NPT in the Magic Hat portfolio, my track record continues untarnished. My conclusion is that all gaming stocks are univestable. NPT only has a market cap of £24m, so it is probably more vulnerable than most to business setbacks.
I will keep NPT in the Magic Hat portfolio for its entire year, but I’m not a happy bunny. This was one stock that I should have overridden the mechanical pick, and I have paid the price. If I had to guess, I would say that the price when its year is up in the Magic Hat portfolio will be lower then than it is now. My hunch is that, despite the increases in revenue, the abundance of cash, and low P/FCF, this company is headed to the toilet. We shall see.
Paul Scott commented on the stock at Stockopedia yesterday (http://is.gd/5tsMvu): “the relatively small (£10k & £20k) Director buys in recent months now look to have been done more for PR reasons, to arrest the share price decline, than on fundamentals”. Exactly! That’s why I think we haven’t seen the end of this mess.
Private Punter (http://is.gd/1W9Jah) wrote about the company yesterday, and his full article can be seen on Cambridge News (http://is.gd/qE0og5): “While the growth label has effectively for now at least been cast aside, it is, on a value basis, where the shares may retain appeal, presenting a nice yield via the dividend.”
His post seems fair, and I don’t detect any rampiness in it. It certainly is a quandary. What I will say, though, is that the sentence I quoted sent a chill down my spine. To quote David Einhnorn: “We avoid ‘evolving hypotheses.’ If our investment rationale proves false, we exit the position rather than create a new justification to hold”. In other words, growth shares should not become value shares. If they do, then you are likely wrong twice.
Happy investing to you all.
Edit 20-Oct-2014: Removed stray text that appeared at the end of the post due to posting via email.
Edit 22-Oct-2014: Emboldened share price for ease of identification.
It finally happened: markets are down 10% from their high, which is regarded commonly as a “correction”. Both the Footsie and the All Share are now just a shade below 90% of the highs established in February/March. I don’t know if the markets will go on to make a full-on bear market, but I reckon we are due for a rebound. The FTSE100 is oversold, with a 14d RSI of 22.8%. FTSE250 is at a similar level. Both are selling at similar trailing PEs: 16-16.4.
The T1X (FTSE Techmark Focus), which is a measure of innovative companies, is on a trailing PE of 21.9. That’s racy to the eyes of value investors (they certainly look racy to me). As a relative valuation to the wider market, it is 1.35 (=21.9/16.2). I am fond of comparing this type of ratio with the one in Beating The Street on page 66. Values below 1.2 imply that growth shares are extraordinary cheap (relatively). Values over 2 imply that they are are extraordinary expensive. It’s difficult to say where the historical average is, but 1.5 seems a good guide. On this basis, growth shares are comparitively attractive compared to historical norms. They are not no-brainers, though.
The H1X (FTSE 350 Higher Yield Index) is on a PE of 13.5. The LIX (FTSE 350 Lower Yield Index) is on a PE of 16.7.
What I infer from all this is that value shares do not seem sufficiently cheap enough as a class, whilst growth shares look attractive compared to the broader market. On that basis, I would expect growth shares to do well in a rally, and not so bad in further downturns. My worry is that, if the market goes full-on bear, value shares as a class are going to get hammered.
I would be interested to hear the views of other investors. Are you value investors out there finding lots of opportunities, or do you think that are slim pickings? The same goes for the growth investors, or indeed, the technical analysts, small/large cap and momentum traders out there.