Thursday, September 25, 2014

P/E ratio VS Enterprise Multiple

At first glance, the enterprise multiple (enterprise value/EBITDA) would seem to be the better valuation metric as it looks more complicated and isn’t as common as the P/E ratio. But style points aside, both the enterprise multiple and the P/E ratio are inadequate at gauging the value of a company (at least without some adjustments). Both of these ratios use accounting earnings (EBITDA and earnings per share) as inputs; accounting earnings may overstate or understate the company’s true earnings power. To make the two ratios more useful, accounting earnings should be replaced by your estimate of the company’s true earnings. I know some of you may be thinking “fuck you Greedy Dragon, I saw you use the P/E ratio in some of your stock analysis.” Well, I did. But I use the P/E ratio only when reported earnings per share aren’t too far off my estimate of true earnings. To calculate true earnings, I start with net income and subtract or add back one-time items that are not likely to recur such as restructuring costs or gain on sale of subsidiary. I then add back depreciation/amortization/depletion and subtract capital expenditure needed to maintain the business (not for growth). I also average out certain items to ensure that they’re not overly optimistic; for example, I might average out a bank’s loan charge-off rate over 6 years to make sure that this year’s charge-off rate isn’t particularly low. To calculate true EBITDA, I would start with reported EBITDA and subtract or add back one-time items, subtract maintenance capex and average out certain items.  

Updates on the Greedy Dragon portfolio: I recently increased my stake in Biostime International. I also sold my stake in Kasikornbank recently.

Now that we’re done replacing accounting earnings with true earnings, let’s find out which ratio is better at telling us whether a company is undervalued or overvalued. As a shareholder, all I care about are profits. The enterprise multiple doesn’t give a shit how much profits are coming the shareholders’ way. EBITDA represents cash flow attributable to both debt holders and shareholders. What if the company has a ton of debt in its capital structure and most of its EBITDA is used to make interest payments? The enterprise multiple won’t be very useful for retail investors in such situations. The enterprise multiple is effective if you’re a large, strong company looking for takeover targets. If too much of the EBITDA is going to debt holders, a strong company can raise cheaper debt to retire the more expensive debt of its acquisition target. I guess retail investors can use the Enterprise multiple to see whether a loss making company is stupidly undervalued and could therefore be a target for other companies or private equity firms. But most of the time, I think that retail investors would be best served by investing in companies that consistently generate good profits (that yummy, delicious stuff that can be paid out as dividends, repurchase shares or reinvested in the business to create more shareholder value). With that in mind, I will have to say that the P/E ratio is a better tool for retail investors.  

Of course, I think that a NPV analysis is a much better valuation tool than both the P/E ratio and enterprise multiple. But when presenting my analysis, it’s much easier to use a P/E ratio than explain a NPV analysis. That’s why you see the P/E ratio in a number of my stock analysis. I don’t get paid for doing stock analysis; I do it because I fucking like it and also because I hope to get exposure for my investing ability (which is currently unproven). But as much as I like writing about stocks, I like actually researching stocks (and sometimes playing video games and binge watching TV shows) even more. That’s why I don’t write long, professional articles as it takes my time away from the things I really love. Thank you for reading. Take care and stay rational.    

Monday, September 15, 2014

Annual performance report for the year ended September 15, 2014

Disclaimer: The purpose of this article is to present the performance of my portfolio. This article does not represent advice to buy or sell any stocks. I may, at any time, sell some or all of the stocks that were presented or appeared in this article. There may be errors in my calculations.

I finally managed to put together the annual (or more accurately, the annual plus 2 weeks) performance report of the Greedy Dragon Portfolio. It took longer than I expected to restructure my portfolio to raise some cash for some unexpected expenses. So, I achieved a return of 18.55% for the year which is below the S&P 500 return of 21.46% (excluding dividends!). The measurement period was from August 29, 2013 (the date of the first contract note I received for the purchase of shares for the Greedy Dragon Portfolio) to September 15, 2014. However, I won’t beat myself up for underperforming the S&P 500 as it is long-term performance that matter. I know it sounds like an excuse, but I would say the same fucking thing if the tables were reversed.

The following table presents my current portfolio:

Purchase price
Current share price
Capital gain/loss
Dividends per share (after taxes)
Total return
Current value of holding converted to RM
Citizens & Northern
US$ 20 (250 shares)
US$ 19.50
US$ 0.607
National Bankshares
US$ 35.8 (130 shares)
US$ 28.46
US$ 0.635
eBay Inc
US$ 50.32 (100 shares)
US$ 50.96

Tifa Finance
IDR 214.47 (150,000 shares)
IDR 227
IDR 8.1
Boardroom Limited
SGD 0.63 (7,000 shares)
SGD 0.57 (7,250 shares)
SGD 0.009
Kumpulan Fima
RM 2.00 (4,000 shares)
RM 2.25
RM 0.07
KLCC Property
RM 6.09 (2,000 shares)
RM 6.50
RM 0.16
Banco de Chile
US$ 72.82 (50 shares)
US$ 74.11
US$ 2.74
Average US$ 93.68 (50 shares)
US$ 112.36
US$ 0.03
First Republic Bank
US$ 46.19 (80 shares)
US$ 48.31

Uranium Participation
CAD 5.09 (1,200 shares)
CAD 5.24

National Bank of Greece
US$ 2.95 (700 shares)
US$ 3.26

RM 1.39 (9,000 shares)
RM 1.43
RM 0.048
HKD 33.85 (500 shares)
HKD 25.95



Notes to table:
I was not high when I made the entry for Boardroom Limited. While I initially purchased 7,000 shares, I had an option in one of the dividend payments to receive shares instead of cash. That’s why I currently have 7,250 shares in Boardroom Limited.

For Mercadolibre’s purchase price, I wrote an average purchase price as I bought the stock twice. Once when it was around US$ 97 and another time at around US$ 89.  

Total return excludes transaction cost & forex gains/losses

I just Googled the exchange rates. I have no idea if they’re bid, ask or mid rates. I generally adjust the exchange rates down a little to take into account the spread difference when converting a foreign currency back into Ringgit Malaysia (there’s always the chance that my downward adjustment to the exchange rates is inadequate to reflect my stockbroker’s spread).

If you continue reading the article, you might notice that Tifa Finance also appears in the table for the stocks that I sold during the year. This is the case as I sold Tifa Finance after it rose significantly from my initial purchase price. The stock eventually crashed and I took a new position in the stock.

The following table presents my portfolio’s return for the year:

Current value of portfolio (less borrowings)
RM 237099.17
Initial investment capital
RM 200000
Portfolio return

The following table presents the stocks I sold during the year:

Purchase price
Price sold
Dividends per share (after taxes)
Total return
Bank Rakyat Indonesia
IDR 6,750 (7,000 shares)
IDR 10,800
IDR  231.59
Tifa Finance
IDR 210 (200,000 shares)
IDR 538.535

Monster Beverage
US$ 52.09 (80 shares)
US$ 69.25

JPY 2,127 (200 shares)
JPY 2,223

Kawan Food
RM 1.328 (6,000 shares)
RM 1.93
RM 0.054
RM 2.8 (2,000 shares)
RM 3.93
RM 0.03
Overseas Education
SGD 0.82 (5,000 shares)
SGD 0.98
SGD 0.024
THB 166 (800 shares)
THB 227
THB 2.7
Average US$ 93.68 (40 shares)
US$ 106.12
US$ 0.03

Moving forward, RM 50,000 will be withdrawn from this portfolio (I hope to pump it back in as soon as I can). This will leave the portfolio with significantly less liquidity. It would be a challenge to keep tweaking this portfolio to raise a healthy amount of cash for my war chest, but I will certainly give my all to try and build a resilient portfolio. Thank you for reading. Take care and stay rational.