## Tuesday, January 29, 2013

### Financial Infographic - Understanding Financial Growth Concepts

## Monday, January 28, 2013

### Analyzing US Bank Stocks..or Not

I decided not to look at the banks...it appears as though the sector is kind of expensive.

I feel I got a bit ahead of myself; I like to look at things from a top-down perspective and I've been too keen to get right into the financial analysis part.

I want to look at all of the sectors first and find one that is out of favour. I was hoping to get to that this weekend, but some other things took precedence. As it appears now, I should be able to start that next week, February 4th.

I feel I got a bit ahead of myself; I like to look at things from a top-down perspective and I've been too keen to get right into the financial analysis part.

I want to look at all of the sectors first and find one that is out of favour. I was hoping to get to that this weekend, but some other things took precedence. As it appears now, I should be able to start that next week, February 4th.

## Wednesday, January 23, 2013

### Theoretical Price on the Bank Stocks

I did the Ohlson Calculation on the 19 bank stocks. We're interested in two things:

1) Does the sector on the whole look undervalued? and

2) Which stocks are trading at a discount?

Here is the graph of the premiums and discounts:

Obviously WBK is an aberration - but we aren't interested in the premium ones, we're interested in the discount ones. Of the five stocks trading at a discount, one of them, MS, isn't showing a correct Ohlson calculation because it had a loss and a weird dividend payout ratio.

So there are four out of 19 stocks at a theoretical discount. There are some non-US domiciled stocks - four Canadian, one UK and one Swiss that make up the next highest premiums after WBK. So if we took those five plus WBK and MS, there are four out of 11 trading at a discount, still under half. I wouldn't consider the sector undervalued.

Given the sector is moderately expensive, I am lukewarm about going further. I am however, curious about one in particular. For the record, the stocks that are trading at a discount are C, BAC, COF and IBN.

I'm going to sleep on it and decide tomorrow. It would be nice to find a really unfashionable sector with a lot of upside potential.

1) Does the sector on the whole look undervalued? and

2) Which stocks are trading at a discount?

Here is the graph of the premiums and discounts:

Obviously WBK is an aberration - but we aren't interested in the premium ones, we're interested in the discount ones. Of the five stocks trading at a discount, one of them, MS, isn't showing a correct Ohlson calculation because it had a loss and a weird dividend payout ratio.

So there are four out of 19 stocks at a theoretical discount. There are some non-US domiciled stocks - four Canadian, one UK and one Swiss that make up the next highest premiums after WBK. So if we took those five plus WBK and MS, there are four out of 11 trading at a discount, still under half. I wouldn't consider the sector undervalued.

Given the sector is moderately expensive, I am lukewarm about going further. I am however, curious about one in particular. For the record, the stocks that are trading at a discount are C, BAC, COF and IBN.

I'm going to sleep on it and decide tomorrow. It would be nice to find a really unfashionable sector with a lot of upside potential.

## Monday, January 21, 2013

### Banking Sector Financial Analysis

The next financial analysis will focus on the U.S. banking sector. I was wondering what to focus on next and I decided on banks because of this article.

It says that Warren Buffett is bullish and banks are cheap. Well, we'll see for ourselves.

This financial analysis will go a lot faster than the last one, as I don't need go into the mechanics of each step. I also thought I'd cut to the chase by taking a look at the theoretical prices using ohlson's clean surplus theory right out of the gate.

However, the first step is to build the portfolio of U.S. bank stocks in Verdasis financial analysis software.

I'm going to look at:

Goldman Sachs

State Street

JP Morgan

Citigroup

CIBC (USA)

First Republic

Toronto-Dominion Bank (USA)

Westpac Banking Corporation

Wells-Fargo

PNC Financial Services

Morgan Stanley

Royal Bank (USA)

Bank of America

Capital One

Credit Suisse Group

Royal Bank of Scotland

ICICI Bank

Bank of Montreal (USA)

LLoyd's Banking Group

Bank of Nova Scotia (USA)

The market cap of these companies is over $20 Billion, with the exception of First Republic (~$5B).

On Wednesday we'll look at theoretical price.

Thanks for reading.

## Monday, January 14, 2013

**Sum of the Value Indicators and Sum of Quality of Earnings Indicators**

We need to sum the Value Indicators. I did it in Excel as I was having trouble today making a spreadsheet in Google Docs that pulled information from several spreadsheets.

I also re-did the quality of earnings one as it was getting out of date.

As I mentioned in the last post, STO and cautiously PZE look good.

When I put all three pieces together, I don't like anything. CVX looks great from an indicator perspective, but it is over-valued according to the theoretical price.

STO is good in the value indicators, but its quality of earnings is poor, which gives me a lower level of confidence for the financials themselves.

PZE isn't a candidate for me because I can't get to the bottom of the discrepancy in the financials AND the website is in Spanish, so I would have trouble doing further research on their management.

So, for me, right now, there is no investment candidate in U.S. Integrated Oil & Gas. The good news, however, is that we've gone through all of the indicators in minute detail, which is kind of tedious, and from here on it we can look at things much faster using financial analysis software.

I'm also playing with another indicator, which might be useful.

Anyway, I'll be writing again shortly. Thanks, Jen

## Monday, January 7, 2013

### Review of Theoretical Price in the Oil and Gas Sector

We are interested in securities trading at a discount relative to the theoretical price generated by Ohlson's Clean Surplus Theory. You'll notice that most of them are trading at a premium. This could mean that the entire sector is over-valued, in which case it would be imprudent to make a purchase at all. We'll look more carefully at that in a later post.

As I mentioned previously, you have to use a bit of common sense when you interpret the results using financial analysis software.

Let's look at PSTR (Post Rock Energy Corporation) for example. You can see it is trading at a 100% discount to the theoretical price. Does that make sense?

The future theoretical book value grows rapidly because of its very high return on equity rate. You'll notice that the ROE is significantly higher than every other security; at 256%, it seems rather fishy. It is high in part because preferred shares reduce the denominator but there is no preferred dividends reducing the net income in the numerator. Most preferred shares are cumulative

So the very high, uncharacteristic ROE alerted us to a problem. If we had just jumped on this security as being undervalued without evaluating whether it makes sense, we would have made an error.

There are three other securities trading at an apparent discount: PZE, STO, and VOC.

PZE has a reasonable cost of equity, a reasonable ROE. However, I noticed that Net Income After Tax was positive, but the EPS was negative. I investigated the financials in Google and noted that NI after tax was positive, but NI was negative. Normally that would be the result of a low persistence item like an accounting change or discontinued operations or an extraordinary result, but the financials in google were non-illuminating. I tried to pull it up on the company's website but it is an Argentinian company and the website was in Spanish. I was able to find the quarterly results but not the annual ones. I also tried the SEC and annualreports.com but I had no luck.

Just for fun, I added another column for net income on the data sheet and recalculated ROE using that number. ROE becomes -8% and the discount becomes a premium (75%).

It's my opinion that Net Income After Tax is the right line item to use in this calculation because we want to get close to the true, actual operating results. We want to remove superfluous transactions or events that won't repeat. (Just as an aside, frequently it is just the transactions that have a negative effect on the income statement that are pulled out to go below the Net Income After Tax number. This is unfortunate as it hints toward earnings manipulation and ultimately degrades the capital system.) I feel a little uneasy about PZE because I can't get to the bottom of the discrepency So, I'm going to be cautious.

After reviewing STO, nothing jumped out at me as being cause for concern.

I did notice that VOC is a very small company - it's market cap is only $243 Million and that I don't have a beta for it. Therefore the clean surplus calculation is incorrect...we have to take VOC off the list.

So we have as candidates STO, and cautiously PZE.

Next post we'll start putting all the financial analyses together.

Thanks for reading.

Jen

As I mentioned previously, you have to use a bit of common sense when you interpret the results using financial analysis software.

Let's look at PSTR (Post Rock Energy Corporation) for example. You can see it is trading at a 100% discount to the theoretical price. Does that make sense?

The future theoretical book value grows rapidly because of its very high return on equity rate. You'll notice that the ROE is significantly higher than every other security; at 256%, it seems rather fishy. It is high in part because preferred shares reduce the denominator but there is no preferred dividends reducing the net income in the numerator. Most preferred shares are cumulative

__so I researched the financial statements at source. They are cumulative and__**,***have*been declared and paid. Therefore, the numerator is incorrect. Upon further research, I realize the denominator is incorrect as well. When preferred shares are subtracted from shareholders equity, the value is negative. Therefore we do not have a meaningful ROE; without which we cannot calculate the clean surplus.So the very high, uncharacteristic ROE alerted us to a problem. If we had just jumped on this security as being undervalued without evaluating whether it makes sense, we would have made an error.

There are three other securities trading at an apparent discount: PZE, STO, and VOC.

PZE has a reasonable cost of equity, a reasonable ROE. However, I noticed that Net Income After Tax was positive, but the EPS was negative. I investigated the financials in Google and noted that NI after tax was positive, but NI was negative. Normally that would be the result of a low persistence item like an accounting change or discontinued operations or an extraordinary result, but the financials in google were non-illuminating. I tried to pull it up on the company's website but it is an Argentinian company and the website was in Spanish. I was able to find the quarterly results but not the annual ones. I also tried the SEC and annualreports.com but I had no luck.

Just for fun, I added another column for net income on the data sheet and recalculated ROE using that number. ROE becomes -8% and the discount becomes a premium (75%).

It's my opinion that Net Income After Tax is the right line item to use in this calculation because we want to get close to the true, actual operating results. We want to remove superfluous transactions or events that won't repeat. (Just as an aside, frequently it is just the transactions that have a negative effect on the income statement that are pulled out to go below the Net Income After Tax number. This is unfortunate as it hints toward earnings manipulation and ultimately degrades the capital system.) I feel a little uneasy about PZE because I can't get to the bottom of the discrepency So, I'm going to be cautious.

After reviewing STO, nothing jumped out at me as being cause for concern.

I did notice that VOC is a very small company - it's market cap is only $243 Million and that I don't have a beta for it. Therefore the clean surplus calculation is incorrect...we have to take VOC off the list.

So we have as candidates STO, and cautiously PZE.

Next post we'll start putting all the financial analyses together.

Thanks for reading.

Jen

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