My portfolio as of Sept 4, 2007. I am strictly trading on paper and will discuss some of my other positions in consequent blogs. I started sometime in June with 100K. Over the last 2 months, I have always kept atleast 15-20K in cash, so the effective returns have been on 80-85K, translating into 40-32 % rate of return in around 3 months. I have generated around 800 $ in brokerage transaction costs so far. I will regularly update my portfolio.
By Kunal Jaggi
Keeping track of quarterly Earnings Per Share figures and the percentage changes, along with P/E ratio (multiple) is often the bread and butter of stock evaluation. It is important to know the different types of EPS that companies report and how to put them in the correct context. By definition, EPS is net income divided by the number of shares outstanding. However, both the numerator and denominator can change depending on how you define "earnings" and "shares outstanding".
1. Primary EPS is calculated using the number of shares that have been issued and held by investors. These are the shares that are currently in the market and can be traded.
2. Calculation of the Diluted EPS accounts for the shares that are currently in the market plus the extra shares that would enter the market is all exercisable warrants, options were converted into shares, hence diluting the ownership of current shareholders.
3. Reported EPS or GAAP EPS, which are derived using the Generally Accepted Accounting Principles. This value can be distorted if corporate management wants to make the EPS look high. For instance, a one-time gain from the sale of machinery or a subsidiary could be considered as operating income under GAAP and cause EPS to spike. Alternatively, a company could classify a large lump of normal operating expenses as an "unusual charge" which can boost EPS because the "unusual charge" is excluded from calculations. In both these scenarios, the EPS value is being artificially boosted by non-recurring benefits, just to make the stock look particularly attractive this quarter (or year).
4. Ongoing / Pro-Forma EPS
Calculated by using the normalized income, i.e finding the earnings stream from core operations that are recurring and excluding unusual, potentially one-time income / expenses. For example, while evaluating Apple the investor should focus on income from the core operations, i.e their products and services. If Apple had an additional $600 Million income through a litigation in their favor, it should not be considered as recurring income. Similarly, the investor should be cautious of companies dismissing some expenses as "one time" or "unusual"
5. Headline EPS
The EPS number that is highlighted in the company's press release and picked up in the media. Sometimes it is the pro forma number, but it could also be an EPS number that has been calculated by the analyst/pundit that is discussing the company. Generally, soundbites do not provide enough information to determine which EPS number is being used and often times it is simply the highest one that is stated publicly.
Caveats / Points to Remember
The Intelligent Investor by Benjamin Graham (Warren Buffet's mentor) has some good warning signals
By Kunal Jaggi (References from Business Week)
Attached below is my research on this stock that I have been watching and trading (on paper i.e fake money) for the past 2 months.
Contents
1. Detailed analysis of annual financial statements for past 5 years & past 5 quarters.
2. Price & volume history for past 6 years.
VDSI - Year to Date up 193.08%, past 6 mths up 118%, past 3 months up 48.93%.
Vasco Data Security International, NASDAQ (VDSI) designs, develops, markets and supports patented user authentication products for major financial institutions, enterprise security (for secure remote access), e-business and e-commerce. Their user authentication software is delivered via its Digipass line of hardware and software security products. They operate in a niche that is increasingly being considered essential to business operations rather than luxury - ensuring security through networks and online commerce. In simple words, according to Business Week - "To safeguard Internet transactions, banks in the U.S. often ask customers a "life question," such as the name of a favorite pet or the street they grew up on. In Europe, though, many financial institutions rely on Vasco's Digipass, a handheld gizmo that uses a microprocessor to generate a random number every time a customer types in his name and password. The sequence in that mobile-phone-sized device matches a number that's synchronously generated by the bank's computer. No match, no transaction"
1. Management & Industry
The company was founded with a specific focus on the banking industry, which is still one of their strongest footholds. In 1989, after being fired at age 40, Ken T. Hunt (current CEO) heard about a startup that had been selling security devices to ABN Amro for its new dial-up banking option. He started out as chief executive, took out a second mortgage on his home and bought out the company from VC's who were previously looking to liquidate. Today, VDSI has had 17 consecutive profitable quarters and adds a new bank client every day. Read more here
2. Fundamentals - Grow baby, grow
Annual Story (2002-2006) (Please refer to my Research Package attached above for complete details)
Quarterly Story (2006 Q2 - 2007 Q2)
For further ratio analysis, click here (Reuters)
3.Current Valuation
It is currently trading at a multiple of 65.37 (as of Sept 6, market close) and could seem already too expensive. But the key here is too look at the growth - when stocks grow this fast, there is always a high premium people are willing to pay for the growth. If you refer to my Research Report, you will find that it has previously traded at much higher price multiples (for example at 66.45 times earnings when price was only around 6 bucks in 2004). Alternatively, the stock is still quite cheap from the Price to Book & Price to Tangible Book ratios.
4. Technicals & Timing (Setting up the big institutions)
I believe this stock is coming into the radar of the big boys (mutual funds, hedge funds, institutional investors) very soon, and that my friends is what can propel a stock upwards very fast.
By Kunal Jaggi
Financial ratios can easily be taken out of context to give an inaccurate representation of a company. Also, for every company and sector, there are certain ratios that are more relevant than others. Here, I present commonly used ratios categorized as
Let me know if you would like me to send you an Excel version (to add your own notes). I originally made the table in excel but Wordpress wouldnt let upload .xls format.
By Kunal Jaggi
Click here for his entire biography, available in pdf format.
Born in Budapest, Hungary he escaped the Nazi occupation, studied at the London School of Economics and immigrated to New York City in 1956. Since then he founded Soros Fund Management and the Quantum Fund, which returned 3,365 % during its ten years (42.5% annually). Soros's investing style was led by his belief in the concept of reflexivity, where the biases of individuals are seen as entering into market transactions, potentially changing the fundamentals of the economy. Soros argued that such transitions in the fundamentals of the economy are typically marked by disequilibrium rather than equilibrium in the economy, and that the conventional economic theory of the market (the 'efficient market hypothesis') does not apply in these situations.
His biggest fame came when he sold short more than $10 Billion worth of pounds on September 16, 1992, earning an estimated US $ 1.1 billion in the process. Aptly, he was dubbed "the man who broke the Bank of England".
He now devotes most of his energy and resources as a philanthropist and political activist - providing funding to democratic, liberal and open market groups the world over. He founded the Open Society Institute (OSI), which spend around $400 Million annually in recent years towards projects in Central & Eastern Europe (democratizing and establishing capital markets) and Africa (poverty).
- By Kunal Jaggi (References: A Quiet Revolution in China's Capital Markets - The McKinsey Quarterly, IPO Indicator - PRnewswire.com)
Everyone's been ranting about the 11% Chinese GDP growth rate, there's one angle much of Western media missed out on.
In the 1990's China first began privatizing its state-owned enterprises, in an attempt to use capital market economics to force them to become more commercially focussed. However, China being China, the government wanted to retain substantial shareholdings and influence, which led to a two-tier ownership structure. The original equity remained legally distinct from the new equity to form a separate class of shares held by existing state-linked owners. This class had the same theoretical rights to profits and votes, but could not be sold on public markets.
Two years ago, the government instituted new policies requiring companies to merge the two classes of shareholding to make the nontradable shares liquid. As of this spring, more than 90 percent of state-owned enterprises had already completed plans to that effect; shareholders at the last few companies are expected to finalize their reform plans this year. According to the James Ahn (partner in McKinsey's HKG office) and David Cogman (associate principal in the Shanghai office) , 20 percent of the non-tradable equity is in sectors viewed by the government as strategic. Around 55 percent is held by strategic investors with long -term interest in the companies. The remaining 25 percent represents shareholdings by state-owned financial investors. Out of that, more than 75 percent of the equity (by value) is in sectors open to foreign investment. The following figures give a deeper perspective on the kind of numbers we are talking about here
Non tradable shares as % of total sector capitalization (At present)
Coal mining - 67%
Food Mfg - 61%
Clothing, textile maufacturing - 52%
Real estate - 47%
IT - 37%
Pharma - 255
The two-tier structure dismantling road map estimates that by 2007 end tradable equities will account for 30% of net market cap, 55% by 2009 end, 90% by 2010 end and eventually 100%. Click here for the entire graph.
Now, the most immediate thought that comes to mind is that this entire process of converting huge amount of previously un-tradable equity to tradable, flooding the market with more supply than it could absorb, depressing price and diluting shareholder value. In 2005, China's State Council, the country's chief administrative authority, asked SASAC (State-Owned Assets Supervision and Administration Commission of the State Council - government department created to oversee and supervise listed and unlisted state-owned enterprises) and China Securities Regulatory Commission (CSRC - the Chinese equivalent of SEC) to come up with a definitive plan to end the two-tier equity structure. Although the companies themselves could determine the specific implementation of the merging of their equity, every plan had to include two key elements.
1. No more than 5 percent of the previously non-tradable shares could be sold in the first year following the integration and no more than 10 percent in the next year. Thereafter, companies had the power to specify longer voluntary lockup periods but there were no more regulatory restrictions. The first wave of companies to pass a reform plan will see their shares become tradable only in late 2007 and early 2008.
2. Plans had to involve some compensation paid by the holders of non-tradable shares to the owners of tradable ones. Many companies approved a proposal of bonus worth 20 percent of the equity stake, possibly combined with cash and options.
3. Each plan had to gain the support of a two thirds majority of the non-tradable shares and in a separate vote, a two-thirds majority of the tradable shares.
These clauses were put in place to ensure that the initiative would attract enough liquidity to make the price worthwhile.
Now, lets examine some of the potential benefits.
Of course, there are some caveats.
China is still way behind Western standards of accounting, legal and regulatory framework needed to profitable and sustainable equity markets. There are not enough Chinese-speaking accountants to meet the needs of every listed state-oned enterprise; accounting firms cannot hire and train people fast enough. Similarly, there are not enough courts, arbitration procedures, experienced lawyers of high quality. Lastly, effective market regulation requires independence and objectivity, but in today's China no government department truely enjoys them.
By Kunal Jaggi (References: The Economist, BusinessWeek, Investors Business Daily and personal web research)
If you have been following the news at all, you have probably at least once come across a news item on 'the credit crunch due to subprime meltdown and how it's going to cause a major economic recession'. After having followed it for about a month, here's my take.
First of all, a subprime loan is one that is offered to individuals who under the usual circumstances of bank scrutiny, don't qualify as good candidates for loans due to poor credit, lack of collateral or a stable source of income. In other words if mommy and daddy are bailing you out every time your credit card bill arrives, better pull up your socks. In the last couple of years, due to robust economic conditions and availability of capital, some banks issued plenty of subprime loans. In order to entice consumers, many of these loans were offered at zero percent financing deals for the first year or two and then variable (typically high) interest rates. Now this is the killer - I saw an interview with a woman who lost her second home after Countrwide Financial informed her after the first 2 years that her interest rate was going to be 11 %.
Mortgages can be thought of as a stream of future cash flows that are bought, sold, stripped, tranched and securitized in the secondary mortgage market. There are four main participants in this market - the mortgage originator (banks, mortgage banks and mortgage brokers), the aggregator, the securities dealer and the investor. In this scenario, big brokerage firms and banks bought these mortgage loans from the mortgage issues and used them to form Mortgaged Backed Securities (an asset that uses the mortgage loans as collateral). In the last couple of years, banks and Wall Street firms have then used MBS's to structure collateralized debt obligations (CDO) and collateralized mortgage obligations (CMO), those sexy words you've been hearing on CNBC all day .
In essence, they basically bundled together risky assets (which are ultimately dependent on consumers paying their mortgages) into financial structures that offer returns higher than corporate bonds through diversification to suit potential investors. The riskiest assets earn the highest return but take the first hit from any default in the underlying asset. These investments, like any other corporate bonds, have to be given a rating by the bond-rating agencies (Moody's, Fitch ratings, S&P) before they can be sold off to any investors. Without the agencies' stamp of approval, may big investors like pension funds and university endowments wouldn't be allowed to buy these CDO's and the market wouldn't exist. Now here's the biggest problem - these bond rating agencies are paid by the very same firms that issue these CDO's and not the investors who buy them.
Al Gore once said - "It's impossible for someone to understand something, if their very liveliehood depends on them not understanding it. " Rating agencies also help the issuing banks by telling them what they need to do to garner the highest AAA rating, which is a prerequisite for a Goldman hedge fund to touch the bond. The result has been that everyone has had a financial incentive to keep issuing these risky CDO's, without due diligence. It comes as no surprise that many of the 'AAA' rated bonds have defaulted. And when quantitative hedge funds made highly leveraged bets on these CDO's without incorporating the variable of greed and Wall Street shenanigans in their mathematical models, well they lost some money. Maybe a lot.
With that said, the S&P and Dow have lost a lot of money, markets have been heading south and many people are screaming about a recession. Suddenly the ridiculous private equity buyouts have vanished and people have realized that sometimes the complex financial derivatives that Wall Street dishes out are, well too complex. The truth is not even Alan Greenspan knows the entirety of the losses since the risk was spread amongst so many players. European banks have been said to be worse hit since many of them invested in American subprime CDO's due to slower domestic markets.
I think this is a great time to buy solid (good balance sheets and plenty of Free Cash Flow) high-growth stocks (tech, safe banks not exposed to subprime, pharma) since everyone is jumping the boat to steady stocks and US treasuries. Several leading economists have mentioned that most of the key performance indicator's of the economy are positive - Q2 GDP growth rate higher, a weaker US dollar increasing American exports and most sound businesses have financed their capital expenditures through retained earnings and cash flow. Just because a big investment bank fires workers doesnt mean overall unemployment is rising. The market often over-reacts and in my opinion there is going to be a jumbo boxing day sale soon. Walmart (WMT), Wachovia(WB), Bank of America (BAC) (2 banks not involved in subprime) are already trading close to their 52 week lows - more on that later.
By the way, notice that Countywide Financial (CFC), whose stock took a 51% hit is currently 95 % institution owned. Sniff sniff, anyone smell a big bad wolf ?
Opinion influenced by - The Economist (Banks in trouble, The Game is up, August 18th issue), Business Week (Let the blame begin), Bloomberg TV and my own head.
Through this blog I will attempt to present my personal equity research driven by fundamental and technical analysis, dissection of the macro economic trends, technological and Geo-political factors that shape the increasingly intertwined financial markets. Added to this will be a pinch of my personal take on market psychology, behavioral economics and how to always look for bull markets.
I will attempt to present my hypothesis in a simple and cogent manner, devoid of the elitism and shenanigans that deter potential investors from learning about the markets. As an amateur investor myself, I have no personal interest except for the dissemination of accurate information and knowledge (of course biased with my personal opinion) and to learn myself. Please feel free to post comments and any feedback / criticism (regarding my research, style or website design )is welcome !
I research and write all the material for this website myself, and all references are disclosed. Please contact me if you have any questions about my sources of information or credibility of my research. Investment, and even analysis style is unique for every person, our own perceptions often bias what we conceive as facts. That is what the markets thrive on. At the risk of sounding arrogant, this is an attempt to generate individualistic investment ideas, trying to avoid herd mentality. You might disagree with some (or most) of my views, and I would love constructive criticism and debate.
I look forward to interacting with you.
