JSE Investor Forum Shaun van den Berg

Transcription

1 JSE Investor Forum Shaun van den Berg Head of Client Education Tuesday, 10 th June 2014

2 Agenda Introduction to Value Investing Criticism of Value Investing Introduction to Value based Research Astral Foods Ltd (ARL) Master Drilling Group Ltd (MDI) Comp Clearing Outsourcing Ltd (CCL) PSG Group (PSG) Summary Conclusion

3 Introduction to Value Investing

4 Introduction to Value Investing Investment ideas of two professors at Columbia Business School in 1928 Ben Graham & David Dodd. Legendary author & money manager Father of value investing Most famous student: Warren Buffett, chairman of Berkshire Hathaway Essence of value investing: To buy stocks at less than their intrinsic value Graham called this the "margin of safety" Buy shares that appear under priced or cheap based on fundamentals High dividend yields (DY) Low price to earning (P/E) multiples Low price to book (P/NAV) ratios Source: investing/

5 Introduction to Value Investing Actively seek shares the market has undervalued Find shares the market has not priced correctly Share is worth more than is reflected in the current price Market overreacts to good & bad news Share price movements do not correspond with long term fundamentals Opportunity to profit by buying when the price is deflated More concerned with the business & its fundamentals Other influences on price Be patient for the rest of the market to recognize & correct pricing issue Value investors are buy & hold investors With a company for the long term Focus on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price (Bargain hunting) Buffett credited Charlie Munger with encouraging him to focus on long term sustainable growth rather than on simply the valuation of current cash flows or assets Source: investing/

6 "Value investing is just standard economics. Think logically about what you are doing. Think about it without emotion. And think about what makes sense." Andrew Weiss

7 Criticism of Value Investing Potential to mislead small value investors Low priced share or a share that has seen a sharp drop in its price Could be due to a fundamental change in the company's financial health Method of calculating the "intrinsic value" Two investors can analyse same information & reach different conclusions No systematic or standard way to value a share No ambiguity in the calculated value in value investing Share selection procedures are very specific Intended to avoid subjectivity Focus on documented & objective past numbers Subjective & predicted future ones Source: investing/

8 It s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Warren Buffett

9 Introduction to Value based Research

10 Top 40 Index Large Caps Chart as at Friday, 6 th June 2014 EY% = 5.51% DY% = 2.69% PE ratio = 18.13

11 Mid Cap Index Chart as at Friday, 6 th June 2014 EY% = 5.47% DY% = 3.00% PE ratio = 18.29

12 Small Cap Index Chart as at Friday, 6 th June 2014 EY% = 7.44% PE ratio = DY% = 3.62%

13 The stock market transfers money from the active to the patient. Warren Buffett

14 Value based Research: Selection Criteria Do not pay more that 60% to 70% of share s intrinsic value Low normalised PE ratio relative to sustainable growth rate Not low PE but low PE relative to growth Unsuitable for companies with volatile EPS trends Profitability EPS growth ROE

15 The vital thing in connection with a security is earning power. Two properties with the same reproduction value, book value or outstanding capital may differ widely in earning power. Phil L Carret

16 PEG Valuation Name Share Price EPS Growth P/E PEG Stock 1 100c 30% 15 50% Stock 2 200c 10% % Average 20% 15 75% Both shares are trading at a P/E of 15 Forecast growth rate is 30% for stock 1 versus 10% for stock 2. Stock 1 trades at a PEG of 50% (15/30) = Considered very cheap Stock 2 at 150% (15/10) is expensive. On average the sector is on a PEG of 75% (15/20) = Value

17 Watchlist Value View

18 Intrinsic value is a number that is impossible to pinpoint, but essential to estimate. Warren Buffett

19 Watchlist Quality View

20 Quality based research criteria Consistent above average ROE or RONTAV High operating margin potential Low financial risk Interest cover Good historic cash conversion Quality of earnings Pays a dividend Long track record / Economic cycles

21 Quality based research criteria Quantitative tools not to be used in isolation Tool to enhance investment process Investigate sustainability of values/ ratings Not guaranteed to result in outperformance Below average risk Fundamentally undervalued Potential for positive investment returns

22 Company Selection

23 Astral Foods Ltd (ARL)

24 Astral Foods Ltd (ARL) Chart as at Friday, 6 th June 2014

25 Master Drilling Group Ltd (MDI)

26 Master Drilling Group Ltd (MDI) Chart as at Friday, 6 th June 2014

27 Comp Clearing Outsourcing Ltd (CCL)

28 Comp Clearing Outsourcing Ltd (CCL) Chart as at Friday, 6 th June 2014

29 PSG Group (PSG)

30 PSG Group (PSG) Chart as at Friday, 6 th June 2014

31 Summary & Conclusion Many people have made fortunes using a value based approach to investing. Value based approach suggests a philosophy that works over time If you buy carefully Hold for the long term Register for 30 day FREE trial Research Platform Value & Quality Filter / Company Analysis / Watch Lists Trading Platform One Login/ One Platform Equities/ ETF/ Unit Trusts / CFD/ SSF/ Currency Futures & Offshore Good Luck & Happy Trading!

32 Contact Us Thank You Questions?

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