As the stock market's rally passed the one-year mark this week, the debate raged: After a 60-per-cent rally from the lows, are equities now overvalued?
Based on one increasingly popular measure, the answer appears to be yes.
Yale economist Robert Shiller's normalized price-to-earnings ratio which looks at 10-year average earnings, in order to smooth out shorter-term hiccups within the economic cycle shows the S&P 500's P/E running at about 20 times, well above its historical norm (in other words, its typical fair value) of 15 times.
But maybe the historical norms no longer apply, says David Bianco. The Bank of America-Merrill Lynch chief U.S. equity strategist argues that higher P/Es can be justified, given that investors now face some of the lowest costs of investing in history.
Implicit in stock valuations are the returns investors expect from their investments. But while equity returns are typically looked at in gross terms, the net returns investors can expect have actually been improving for decades.
That's because the key costs of investing have all been in decline. Mutual fund fees and expenses are half of what they were 20 years ago. Inflation and interest rates are a fraction of what they were 30 years ago. Investment tax rates have been cut in half since 1980.
If investors face lower costs, Mr. Bianco reasons, the market should be willing to pay more for the same amount of gross growth potential. So, higher P/Es may be entirely justified.
GNVC posted earnings yesterday:
http://biz.yahoo.com/prnews/100311/ph69128.html?.v=1
Nothing spectacular, the results were as expected. It seems they have enough cash to see the PACT through to it's completion.
What do you guys think?
But maybe the historical norms no longer apply, says David Bianco. The Bank of America-Merrill Lynch chief U.S. equity strategist argues that higher P/Es can be justified, given that investors now face some of the lowest costs of investing in history.
That was my take as well. Unless I misread something, they should have enough money to get through next year. They ended the year with 11 million in cash + investments, and they are projecting 14 to 16 million in revenue for 2010. Their project cash burn was 22 to 24 for all of 2010. So worst case they end the year with 1 million in cash. Now we just need to see some good results in the coming weeks.
Anyone listening to the conference call?
Oh noooossss. I totally screwed up this thread of discussion. Not sure why I typed 2010. I meant 2012. Ya, those jan 2010s are indeed worthless.
I meant that the idea of picking up the 2012 Jan 90s for 20-25 cents is not a bad idea. I won't get into a fuill blown DCF, but JNJ's FCF is at $14 billion and total equity is $50 billion. If you give FCF a 15 multiple and add on that $50 billion you are at an IV of $195B + $50B ot $245B. There are 2.7 billion shares. That puts JNJ at about $90/share today. In 2 years time, it should be worth more. The 15 multiple might be slightly aggressive but JNJ is still worth $85/share today.
I always assume that it takes 5 years for a correction to occur to IV (in 5 years JNJ might have FCF of $18 billion) so this 2 year horizon on the LEAPS is a gamble in my opnion. A ??% chance of winning though. I figure that there is a much more greater chance than 10% of winning 10 times more money. Long JNJ, JNJ calls and that net net I mentioned earlier.
15x FCF is a bit rich/aggressive no? Unless you expecting it to grow at a pretty good rate.
15x FCF is a bit rich/aggressive no? Unless you expecting it to grow at a pretty good rate.
How are you guys valuing RMBS? I'm wondering.
The company total asset is $555 mil. The market value is trading at $2 bil - according to Yahoo Finance.
The most Free Cash Flow it squeezes is $40 mil a year.
So I'm guessing the patent and royalties they are going to make from it is going to worth north of $2 billions? Or else, the company is worth $400-500 mils at best.
(numbers are rounded for argument sake.)
Still looking for an answer. Azurik? anyone?
FCFF is also a bit aggressive at 14B, FCFF closer to 11B and FCFE closer to 13.3B
Let's be honest here is what you do with options.
Buy $.20-.25, post on message board, increase to $.35-$.40 as you get a few more contracts written.
Sell your contracts for a 50-100% profit with no intent of ever holding them until maturity.
Leaps and extreme out of money options are the easiest pump and dump you can do in the industry.
Look at it now. This is how things are going in court:
Expert witness: Microsoft infringed VirnetX patents, and knew it
http://blog.seattlepi.com/microsoft/archives/197593.asp
FCF over the past 12 months is $14B for JNJ. Is FCFE, FCF to equity? Not sure what that has to do with value.
You don't really think that I am trying to pump JNJ stock and make it more volatile somehow do you? It's a $180B market cap. The only way you get those JNJ options to be worth more is to have the share price go up and/or have the premiums improve due to more volatility. Something posting here has no impact on. besides, if I were to do that, it would be easier to write an article about it:
http://www.gurufocus.com/news.php?id=85701
Actually, my idea is to hold the options till they hit about $1. Then sell off about 1/4 or 1/5 of them. That gets me to break even. Then the rest is going to ride for a while. If they are worth $5 within a year, sure I'll cash some out. But my the theory is to hold till they are at $10
All I am doing is taking advantage of one of the flaws in Black Scholes. It assumes that markets are efficient. That assumption is how it can use volatility as a way to determine the premium half of the options equation.
This is a conservative estimate projection and my prediction on how things will play out.
Rambus, because of the Samsung settlement, has a guaranteed cash per share of $4.86. Conservatively, I took out tremble damages in the AT case ($12 billion damage figure). My logic of thinking if Hynix/Micron will settle or worse case, Rambus only gets awarded base damages.
Elpida WILL sign with Rambus. I wouldn't be surprised if its soon since Rambus + Elpida were waiting for some events to unfold before renewing their license and figuring out how much Elpida owes for the past. Since their buddy buddy with Rambus, I highly doubt they will pay anything more than the EU rates, if not less.
I placed a modest 20 P/E ratio for argument's sake, but you can pick and choose what number you want to place here. It can be argued that could command a 30 or 40 P/E.
Rambus also has $400 million in tax breaks, which I have applied already.
So these are my numbers, reduced from earlier given the friendly settlement with Samsung (read: Samsung didn't get punished and Rambus got the biggest memory manufacturer to sign-on board - win/win situation) that obviously reduced the AT damages total. This also doesn't include any other products they are working on or other markets they will receive revenue from.
Options that are thinly traded are priced more supply and demand than via black scholes (gamma, theta, delta, roe ...). It helps to understand what you are buying before recommending them. As they come closer into becoming the forward contract they will price more on intrinsic value and the greeks, however being thinly traded you can pump and dump all you want at the current time.
If you are pulling a BS/IS/CF statement in 1 minute you aren't doing a good job. JNJ has 75 pages of footnotes. Committed lease payments, OBS financing, convertible securities, other disclosures. Analysts get five-eight companies and spend a year on them and you can pull it out in one minute, pretty impressive.
Again FCFF is 11B, FCFE is 13.3B. 15x is a huge multiple. COE at 7% because of a low beta implies a 22% ROE into perpetuity to get that multiple after the 45% div payout.
From the standpoint of an equity investor, FCFE would give a baseline value discounted at the growth rate - cost of equity. FCFE is larger than FCFF but the discount rate is also larger.
FCFF is discounted at the growth rate - WACC and gives a firm value. Subtracting debt values give you a baseline of equity value. Both numbers will usually result in different valuations hence why they are only two variables in an analyst tool kit that has 30-40 DCF/Spreadsheet/Intrinsic Value/Business Valuation models.
It helps to understand the point. Options are made up of two components. Market value and risk premium. The risk premium is driven by Black Scholes or by other models that are driven by a desire to come to a rational conclusion (not possible) as to what the risk premium should be.
I like your usage of intrinsic value. I think you meant market value.
Regarding pump/dump, Shaking my head in sadness (for you). I'll assume you are a college student because of this and for the following:
Thank you. Actually, when I spend time determining IV, it takes about 15 minutes. The 1 minute number is a rough estimate. It took me a while to realize how Buffett can do IV in his head so quickly. The thing is, a value investor never pays fair price. Preferring to pay 50 cents for a dollar. To an investor, being off by 25% doesn't matter. The case for the analyst might not be the same.
My estimate for JNJ is in line with Buffett, who also paid $60 for JNJ. That means he sees JNJ as being worth well over $100 2-3 yeas ago. Since then, FCF has gone up along with every most every other measure.
How much time have you spent studying the likes of Graham, Buffett and Munger and how they invest (or invested)? 30-40 models! How impressive. I view it as asinine.
WOW! If I could do 30-40 models, I could charge Bank of America to value Merrill Lynch to the tune of over $10 million dollars. I would use models and terminology that sound impressive yet are not understandable. In order for the CEO to not sound foolish, he will remain silent and simply agree with my conclusions. He'll shake my hand and I get $10 million. Saying this is not the case is also saying that Munger is wrong. Thus you are saying that you know more than Munger about how it actually works if you disagree. And heck, it would only take me 48 hours! Or, I could take Buffett's approach. Wait two days for it to go under and buy it for $1. The analysts were only off by what, $20 billion? $40 billion?
See, these models are useful to some people because they get paid to play with them. But I am an investor. A value investor. I only need common sense and a rough estimate of intrinsic value. I don't require 30-40 models because they would serve no utility. I prefer Warren Buffet's one model approach that most closely mimics the discounting of future FCF numbers. He's pretty much said that he does a DCF.
Your use of discount rate is confusing. Discounting at the growth rate makes no sense at all. Using different discount rates for different companies also makes no sense. Actually, maybe you are not talking about discounted cash flow valuation. Is that the case?
If schools taught students what they need to know about investing, business schools would not have anything to teach. Complicated models are just that. They are tought simply because they exist, not because they are useful.
I kinda laugh with all my value investor friends. We all figured that BNI is worth in the $80-$100 per share range. Ya, all 5 minutes spent realizing it. BNI hired an analyst to see if Buffett's offer at $100 per share was good. The analysts came back and said that Buffett is paying a fair price. A big yawn from the audience of value investors.
In all of Berskhire Hathaway's days, it has never paid an analyst or economist. That is a big lesson to learn from who is one of the top if not the top investor of the past 100 years.
Want to learn how to invest, read Graham, read Phisher and read every Berkshire annual report. Stop trying to learn 40 models. Atelast you don't care about EPS. That's a start.
You think that is scary, I spent 5 minutes valuing WFC when it was selling for $14. 5 minutes later, my limit order at market price) was in. I figured it was worth north of $35. And that was using Earnings numbers! HAAHAHAHAHAHAHAH. EPS! Well, it was safe to do so because I used the 5 year average from 1998-2002 (inclusive) as my baseline. I figure I paid 5 times normalized earnings. No brainer!
Any details?
Trade halt for VHC. One way, or the other