Simplywall.st Share Price vs. Fair Value

SimplyWall.st have an indicator called: Share Price vs. Fair Value

I love it, it allows me to simplify so many things. It’s shown as (stock used Allianz (ALV)):

The important thing is how the Fair value is calculated.

Below are the data sources, inputs and calculation used to determine the intrinsic value for Allianz.

XTRA:ALV Discounted Cash Flow Data Sources
Data PointSourceValue
Valuation Model Excess Returns Model
Stable EPSWeighted future Return on Equity estimates from 16 analysts.
= Stable Book Value * Return on Equity
= €183.66 * 0.1%
€23.33
Book Value of Equity per ShareWeighted future Book Value estimates from 10 analysts.€183.66
Discount Rate (Cost of Equity)See below5.7%
Perpetual Growth Rate10-Year DE Government Bond Rate0.2%

An important part of a discounted cash flow is the discount rate, below we explain how it has been calculated.

Calculation of Discount Rate/ Cost of Equity for XTRA:ALV
Data PointCalculation/ SourceResult
Risk-Free Rate10-Year DE Govt Bond Rate0.2%
Equity Risk PremiumS&P Global 6.0%
Insurance Unlevered BetaSimply Wall St/ S&P Global0.67
Re-levered Beta= Unlevered beta (1 + (1- tax rate) (Debt/Equity))
= 0.667 (1 + (1 – 30.0%) (43.19%))
0.912
Levered BetaLevered Beta limited to 0.8 to 2.0
(practical range for a stable firm)
0.91
Discount Rate/ Cost of Equity= Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
= 0.23% + (0.912 * 5.96%)
5.66%

Discounted Cash Flow Calculation for XTRA:ALV using Excess Returns Model Model

The calculations below outline how an intrinsic value for Allianz is arrived at using the Excess Return Model. This approach is used for finance firms where free cash flow is difficult to estimate.

In the Excess Return Model the value of a firm can be written as the sum of capital invested currently in the firm and the present value of excess returns that the firm expects to make in the future.

The model is sensitive to the Return on Equity of the company versus the Cost of Equity, how these are calculated is detailed below the main calculation.

Note the calculations below are per share.

XTRA:ALV Value of Excess Returns
CalculationResult
Excess Returns= (Stable Return on equity – Cost of equity) x (Book Value of Equity per share)
= (0.1% – 5.66%) x €183.66
€12.93
Terminal Value of Excess Returns= Excess Returns / (Cost of Equity – Expected Growth Rate)
= €12.93 / (5.66% – 0.23%)
€237.89
Value of Equity = Book Value per share + Terminal Value of Excess Returns
EUR183.66 + €237.89
€421.55
XTRA:ALV Discount to Share Price
CalculationResult
Value per share (EUR)From above.€421.55
Current discountDiscount to share price of €218.8
= -1 x (€218.8 – €421.55) / €421.55
48.1%

 

Seedocumentationto learn about this calculation.

cPanel Price Increase

I just received an e-mail from a personal web hosting where they announce me that they are increasing 1$ a month the price as CPanel has changed their licensing structure.

Anyone is having the same issue? I mean, your webhosting is passing the price increase to you as end customer.

Dear Joaquin,

Recently, cPanel announced a new pricing and licensing structure that shifted from an unlimited usage to a usage-based structure. This change will result in pricing increases for all website hosting providers and consumers that use cPanel.

The recent pricing change has forced us to increase the base cost of our hosting products.

Beginning December 1, 2019, the price of all new hosting orders will increase by $1/month. Additionally, any hosting renewal occurring after January 31, 2020 will renew at an increased rate of $1/month.

As always, our Customer Service team is here 24/7 to answer any questions you may have. You can reply to this email with any questions regarding your account.

Thank you for your understanding and continued business.

Some links:

Red Electrica Española (REE)

Some notes related to Red Electrica Española (REE)

21 – November – 2019

Positive things found:

  • It’s a moat.
  • Protected by the government.
  • Defensive company with good fundamentals.
  • good dividend >5%, dividend growth 5Y 6,75%, so chowder rule >10%

Negative things found:

  • CEO is a politician that was minister and now they have given this role to him.
  • Hispasat acquisition is not in their core business. It looks like a protection move promoted by the Spanish government.

Actions:

  • Buy at 17,26€
  • Sell when RSI is over 70%
  • wait for dividends
  • Wait for a second short.

negative and positive skew tendency

One of the most interesting things that I read on Systematic trading by Robert Carver is the tendency that a trader can have when doing his transactions.

The concept

Basically when you are completing a long-short action (completed transaction), ideally you will have positive outcomes and negative outcomes. If you accumulate all these results and you order it, you will have a Gaussian bell. This bell will not be perfect, it will have different shapes.

The trader with negative skew, will have:

  • high number of transactions are completed positively, with small amounts of profit.
  • Few amount of transactions are completed in a negative way, but with high loses.

The trader with positive skew, will have the opposite situation.

It’s important to understand the way you make decisions, the results they return and identify the pattern of behavior you have.

Once done, you can identify the weaknesses of your behavior and then include some habits on your trades to be able to improve your trading in a systematic way.

I generally act as negative skew trader

For a negative skewed trader, there are ways to minimize the negative skew. The main ones are:

  • Use stop loss to cut the loses.
  • Use stop loss to not directly sell a stock but protect the minimum margin while you let it grow and grow.
  • Divide the longs in 2 moves, to decrease the average cost.

Other times I act as positive skew trader

And these times is when I use to manage better the capital that is involved in the trade.

 

 

 

Chowder rule

I have just realized about this guy named Chowder. He has a guidance method to guide your investments and create habits that enable you to increase the value of your equity.

It starts with basic rules and they increase their complexity with respect you go in deep.

Portfolio diversification

Use the Morning Star classification based on economic sensitivity and divide the equity as follows:

  • Defensive = 50%
  • Cyclical = 25%
  • Sensitive = 25%

High Total return

Chowder defines the concept of “high total return” that is calculated as follows:

High Quality Stock + High Current Yield + High Growth of Yield = High Total Return.

This total return you take the current yield, the minimum value of 3 years, 5 years or 10 years dividend growth and ideally the total return should be at least over 10%

Current Yield + Min(3 / 5 / 10) Year Dividend Growth = Total Return.

The 10% threshold is an initial threshold that can be increased depending on the market situation.

Compound Annual Growth Rate (CAGR) Calculator

He uses this calculator to define objectives: https://investinganswers.com/calculators/return/compound-annual-growth-rate-cagr-calculator-1262

 

General Mills (GIS)

Some notes related to General Mills (GIS)

1 – November – 2019

Positive things found

  1. Strong hand buying (Konkorde indicator)
  2. Cheap by fundamentals PE=16
  3. Stable volatility.

Negative things found

  1. Cyclical consumer business, now on the low side of cycle.

Actions:

  • Buy at 51,25$ (Done)
  • Take a look on the channel
  • Sell on 54$

15 – November – 2019

I have sold it at 52,36$. Why? because the McClellan indicator and the AD line was telling me that a bearish market was coming and I made the short decision.

Bad move. Why? Because I had a clear plan and I have changed it. I should have waited till the value evolved some weeks more as it was expected.

 

Texas Instruments

Notes related to Texas Instruments (TXN)

12 – November -2019

Positive points founds

  1. Fundamentals are healthy
  2. Management team buys stocks at the end of year.

Negative points found

  1. High volatility due to China’s issue with customs duties.
  2. Strong hand selling in the weekly chart (Konkorde indicator).