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
||Excess Returns Model|
|Stable EPS||Weighted future Return on Equity estimates from 16 analysts.|
= Stable Book Value * Return on Equity
= €183.66 * 0.1%
|Book Value of Equity per Share||Weighted future Book Value estimates from 10 analysts.||€183.66|
|Discount Rate (Cost of Equity)||See below||5.7%|
|Perpetual Growth Rate||10-Year DE Government Bond Rate||0.2%|
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 Point||Calculation/ Source||Result|
|Risk-Free Rate||10-Year DE Govt Bond Rate||0.2%|
|Equity Risk Premium||S&P Global||
|Insurance Unlevered Beta||Simply Wall St/ S&P Global||0.67|
|Re-levered Beta||= Unlevered beta (1 + (1- tax rate) (Debt/Equity))|
= 0.667 (1 + (1 – 30.0%) (43.19%))
|Levered Beta||Levered Beta limited to 0.8 to 2.0|
(practical range for a stable firm)
|Discount Rate/ Cost of Equity||= Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)|
= 0.23% + (0.912 * 5.96%)
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
|Excess Returns||= (Stable Return on equity – Cost of equity) x (Book Value of Equity per share)|
= (0.1% – 5.66%) x €183.66
|Terminal Value of Excess Returns||= Excess Returns / (Cost of Equity – Expected Growth Rate)|
= €12.93 / (5.66% – 0.23%)
|Value of Equity||
= Book Value per share + Terminal Value of Excess Returns|
EUR183.66 + €237.89
XTRA:ALV Discount to Share Price
|Value per share (EUR)||From above.||€421.55|
|Current discount||Discount to share price of €218.8|
= -1 x (€218.8 – €421.55) / €421.55
Seedocumentationto learn about this calculation.
After trading with crypto-currencies and obtaining some learns I have created a Robinhood account, which I want to use to continue learning but on a different environment.
Following the V2MOM model:
- Vision: built my own tactics and habits that enable me to trade in a way that I earn some money in a systematic way. The % of growth is not important, the important thing is to be consistent with the number.
Values: have fun, learn a lot, do practices and more practices.
- Method: learn about trading basis, focus on a set of companies, learn about the market environment, learn about new trading indicators.
- Obstacles: Time.
- Finish the year with at least a 6% growth of the 1000$.
- Read at least 3 trading books.
- Read quarterly reports of at least 12 companies.
Death line = December 2019
Here I have documented the results of this initiative.
The summary of the measures:
These 2 indexes have performed some changes the last 3 days that makes me think about the market momentum.
DIX has decreased from 43.5% to 38.2% in just 3 days.
GEX has done the opposite move
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.
- Buy at 17,26€
- Sell when RSI is over 70%
- wait for dividends
- Wait for a second short.
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.
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.
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.
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
This is the basic classification that Morningstar propose depending on the economic sensitivity.
This is important for my buy and hold portfolio.
Some notes related to General Mills (GIS)
1 – November – 2019
Positive things found
- Strong hand buying (Konkorde indicator)
- Cheap by fundamentals PE=16
- Stable volatility.
Negative things found
- Cyclical consumer business, now on the low side of cycle.
- 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.
Notes related to Texas Instruments (TXN)
12 – November -2019
Positive points founds
- Fundamentals are healthy
- Management team buys stocks at the end of year.
Negative points found
- High volatility due to China’s issue with customs duties.
Strong hand selling in the weekly chart (Konkorde indicator).