Stock Market Investment Partner has been recommending that you do your own detailed research when selecting stocks. While we still believe that this is a very good idea, we can't blindly pretend that every single investor does it. Some investors prefer looking at market multiples like the price earings ratio. Hence, using market multiples must not be rejected, and here are the two main reasons why:
- Price earnings (P/E), price to book (P/B), price to sales (P/S) and other market multiples are very simple and available. Using them as a part of stock analysis is less complicated and faster than doing a discounted cash flow model (DCF) for example. Market multiples provide a quick overview of the valuation of a stock and can quickly guide investment decisions.
- Market multiples often are self-fulfilling prophecies. Indeed, since they are so simple to find and to use, lots of investors use them. Since lots of people use them, others don't have a choice to use them also because they feel that multiples now explain (at least part of) market valuations. A chain reaction is created and the majority ends up using them.
For those two reasons, multiples become relevant for stock market investment analysis and should be combined with more complete research.
Best Stock Picks ׀ Stock Market Investment ׀ Personal Finance ׀ Money Management
Saturday, October 18, 2008
Sunday, October 12, 2008
Difficult times for arbitrage profit seekers
As you probably know, credit has really tightened and it is putting pressure on investors looking to make an arbitrage profit.
Let's revisit the BCE deal example. Let me first remind you that a deal has been signed to sell the company at C$ 42.75 in December 2008. However, the stock is now trading at C$ 33.00 on the Toronto Stock Exchange. The arbitrage profit looks very attractive, but with the credit crisis worsening, doubts about the financing of the transaction are getting bigger and bigger every day.
Still no news from Garda's review of strategic alternatives (and expected sale of its armoured car unit). Could tight credit conditions be the reason why a deal has yet to be signed?
Arbitrage profits aren't 100% "guaranteed" even if a deal is signed or highly expected. Merger and acquisition arbitrage is much "safer" when markets conditions are "normal" and there is a steady flow of M&A successfully completed.
Let's revisit the BCE deal example. Let me first remind you that a deal has been signed to sell the company at C$ 42.75 in December 2008. However, the stock is now trading at C$ 33.00 on the Toronto Stock Exchange. The arbitrage profit looks very attractive, but with the credit crisis worsening, doubts about the financing of the transaction are getting bigger and bigger every day.
Still no news from Garda's review of strategic alternatives (and expected sale of its armoured car unit). Could tight credit conditions be the reason why a deal has yet to be signed?
Arbitrage profits aren't 100% "guaranteed" even if a deal is signed or highly expected. Merger and acquisition arbitrage is much "safer" when markets conditions are "normal" and there is a steady flow of M&A successfully completed.
Tuesday, October 7, 2008
What can 1-year stock returns teach us?
In light of the current volatile times, Stock Market Investment Partner chose to look at some facts instead of making hypothesis about the fate of the stock market and the economy. The following is an arbitrary selection of stocks and their 1-year returns to see if any conclusion can be reached. Keep in mind that the following is a small sample intended to give a general idea.
Consumer Staples:
Procter & Gamble: -3.18%
Colgate Palmolive: +0.69%
Johnson & Johnson: -2.51%
Kraft Foods: -7.49%
General Mills: +19.05%
Kellogg: +1.58%
High-profile tech stocks:
Apple: -39.21%
Research in Motion: -47.38%
Dell: -46.64%
Amazon: -30.18%
Ebay: -53.83%
Former Darlings:
Crocs: -96.17%
Mosaic: -29.08%
Citigroup: -63.95%
As you can see, a good old (boring) safe portfolio with a good allocation in consumer staples would have outperformed the "fashionable hot stocks" portfolio in the last year. By the same token, your sleep would have outperformed your know-it-all neighbour's! It's an old message, but if you now realize that you can't handle high stock market volatility, allow a bigger portion of your portfolio to stable non-cyclical companies.
Consumer Staples:
Procter & Gamble: -3.18%
Colgate Palmolive: +0.69%
Johnson & Johnson: -2.51%
Kraft Foods: -7.49%
General Mills: +19.05%
Kellogg: +1.58%
High-profile tech stocks:
Apple: -39.21%
Research in Motion: -47.38%
Dell: -46.64%
Amazon: -30.18%
Ebay: -53.83%
Former Darlings:
Crocs: -96.17%
Mosaic: -29.08%
Citigroup: -63.95%
As you can see, a good old (boring) safe portfolio with a good allocation in consumer staples would have outperformed the "fashionable hot stocks" portfolio in the last year. By the same token, your sleep would have outperformed your know-it-all neighbour's! It's an old message, but if you now realize that you can't handle high stock market volatility, allow a bigger portion of your portfolio to stable non-cyclical companies.
Wednesday, October 1, 2008
Buffett goes shopping again
After spending $5 billion on Goldman Sachs last week, perhaps the world's best known investor found $3 billion for GE preferred shares. In doing this, Mr. Buffett is certainly strongly sending a very strong message about great value investments available in the market. Also, you need to add warrants enabling him to purchase for $3 billion of General Electric stock at $22.25.
On CNBC, Warren Buffett said: “Frankly, these markets are offering opportunities that weren't available six months or a year ago. So we're putting money to work.”
Considering Mr. Buffett's track record, maybe it's time to look at what the "experts" are doing (buying) and stop following the panicking herd (selling).
On CNBC, Warren Buffett said: “Frankly, these markets are offering opportunities that weren't available six months or a year ago. So we're putting money to work.”
Considering Mr. Buffett's track record, maybe it's time to look at what the "experts" are doing (buying) and stop following the panicking herd (selling).