Sunday, October 01, 2006

PER As a Method of Determining a Company's Value

PER As a Method of Determining a Company's Value
By Michael Russell
One of the most common methods in determining the intrinsic value of a company for your investment is calculating the Price-to-Earnings Ratio (PER). You can obtain the PER by dividing the market price by the earnings per share (EPS).
The PER is widely used to determine whether a stock is overvalued or undervalued. If a company's PER is higher than the overall market's or the industry's, it can be considered as expensive and vice versa.
Other than market or industry comparisons, a company's historical PER range can be used as a guide in determining the value of a stock. This method works well only when the company is in a steady state of growth with no earnings surprises in store.
The power of the PER range is in its capability in giving us a benchmark to decide whether a stock is expensive or cheap. Say, a company's average past five year PER range is 10 times to 20 times. If the company's current PER is lower than 15 times, then the company is considered cheap at the current price. Conversely, if it's higher than 15 times, it will be considered expensive.
Every company has its own historical PER range. Some companies are always selling at the higher end of their PER range due to their potential future earning power. In the meantime, certain stocks can be consistently trading at the lower end of their PER range for years, which may be attributed to high financial gearing or pending litigation. However, stocks with low PERs may be misinterpreted as being undervalued.
A company's PER range can be derived from an average of its past five year PER range. It's calculated by dividing the lowest and highest prices for every financial year with the audited earnings per share (EPS). After that, we find the average of the lowest and the highest PER for each year over a five year period.
The general historical PER range used is based on a past five year average. If a stock has been listed for less than five years, we can still use the historical PER range. However, it may be less convincing as compared with the complete five year average PER range. If the data available to us is more than five years, it's still preferable to use the most recent five year average range, as earlier PERs may not be relevant any more due to the changes in the company's fundamentals.
There are two types of PERs, known as trailing and leading. The main difference is the denominator used; with a trailing PER, the immediate past financial year (FY)'s EPS is used, while for a leading PER, the forecasted EPS over the next 12 months is used.
Most analysts use leading PER as it reflects the stock's current valuation. For instance, you intend to invest in Company M, which has a financial year-end of December 31st and its current stock price is $10. To determine the Company M's PER, we can use the FY2005 EPS rather than the FY2004 EPS, as we're currently in FY2005.
The PER range method is based on the assumption that each stock will always trade within its own historical PER range, which is simple and quite powerful. However, retailers may find it hard to apply, as the past five year average PER range is not simply available to the public.

Wednesday, September 27, 2006

Does A Foreign Fund Cost More?

Does A Foreign Fund Cost More?

Local unit trust funds that invest in the global market are popular, due to the investors who want to diversify their overall investment portfolio by including exposure to a foreign equity market.
Sounds attractive, but do these investments come with higher prices? If yes, are the additional fees worth paying?
There is appears to be little difference between the charges imposed by foreign funds and their local counterparts when it comes to upfront or service charges. In some instances, local equity funds have a higher upfront fee. For instance, the upfront charges for foreign funds range from 5% to 7% of Net Asset Value (NAV) for equity funds and 3% to 5% for foreign fixed income funds, compared with local equity funds charge an upfront fee of 4% to 8% and local bond funds start from 0% to 1.5%.
As the bulk of the upfront fee goes to the marketing and distribution of the fund, there is seems to be little justification for unit trust companies to increase their upfront fees for foreign funds. According to several bankers, distributing these foreign funds doesn't need an extra effort.
However, on the other hand, the management fees for foreign funds are more likely to be higher than local funds. From unit trust companies' perspective, managing foreign funds is going to cost more than a local fund because of the effort required to assess the fund's investments. Sometimes, travel expenses are incurred as the fund manager goes abroad to monitor his investments.
The unit trust companies can choose to either absorb the additional expenses or increase the annual management fee. Companies can absorb the higher fees by squeezing their profit margin. It's all depends on their strategy and the approach they take in offering their foreign funds.
Some local unit trust companies may have sister companies in foreign markets that they can leverage to manage their foreign funds at a discounted rate. This allows the companies to maintain the same management charges for their foreign funds.
The foreign equity funds, which structured as feeder funds and fund of funds, tend to have higher annual management costs. The feeder funds are used by locally offered foreign funds that feed into a 'master fund' that is managed by the offshore fund company.
Investors are actually paying for a local manager to source a foreign fund and to provide a vehicle that gives them simple access to that fund. There are two layers of fees that must be paid:
1. The local fund manager 2. The master fund manager
The fund of funds, which are funds that invest in other funds, are designed to achieve greater diversification than traditional funds. These funds are also charge higher management fees as they include expenses charged by the underlying funds.
Moreover, the additional 30 basis points to invest in a foreign feeder fund or fund of funds is something of which most investors are not aware. The foreign fund also facing a currency risk and the return is affected by market up and downturn.

Sunday, September 24, 2006

Property Investments

Property Investments
Peter Arkwright
With the UK property market cooling off and rate hikes looking certain, property investors are now looking outside the UK for their investments.
Bulgaria is set to join the EU next year, this combined with cheap resources have turned it into an attractive proposition for International property investors. Bansko is one of the favourite locations, once a small rural community it now resembles a large building site; it has even been given the nickname ‘Little England’. It all started in Bansko with the introduction of the ski gondola in 2002, from then it has not looked back. With Bulgaria’s fortunes set to change and property value 5 times cheaper than France, there is little wonder that property investors worldwide are now taking an interest.
The amount of developments planned at Bansko is now viewed as excessive, this has led to a suspension of planning permission for any future developments in the area. This and the sheer demand have over inflated the property prices in the area, currently a 1 bedroom apartment is selling for approx £50,000. Still this is viewed as cheap compared to property at other European ski resorts.
A good rental income from these properties is possible due to the cheap cost of living in Bulgaria, an example is, a pint of beer currently costs in the region of 40p. The only downside to renting an apartment would be the competition form the other 1000’s of apartments. The amount of apartments could also prove problematic for any investor looking to sell in the future.
My own research has made me look away from Bansko, recently I came across a ski-golf development at the foot of the Rila Mountains, just a few miles away from the ski resort of Borovets. The development due for completion in 2008 is being constructed around a Nicklaus golf course. The Private gated complex will have restricted access to property owners and their tenants.
As this development combines golf and skiing it is viewed as a great potential for any property investor. There is no wonder the off-plan villas are being snapped up.

Investing Technique: Cut-loss Triggers

Investing Technique: Cut-loss Triggers
Michael Russell
Has your share lost 20% of its value since you acquired it? Has your unit trust investment been steadily falling since the day you bought it?
Selling a losing position and reinvesting the money in a more profitable security is probably the most logical tactic to apply in order to enhance the overall value of your portfolio.
This technique can be one of the most difficult to execute. You have to ask yourself if you had made a mistake with your investment in the first place and you must also decide whether to sell or hold on to the depreciating asset. When you can easily find recommendations on what to buy, it's harder to get advice on when to cut your losses.
To minimize the odds of ending up with worthless share certificates or depreciating unit trusts, you should establish a sell strategy. This is when you can think most clearly about why and when to sell. You could be too upset to think rationally if you start to analyze your investment when its value drops to a level that you can't tolerate.
So, a sell strategy helps you to avoid an emotional decision making that usually leads to costly mistakes, like the knee-jerk reaction of getting out fast when the stock market drops.
A well-defined sell strategy has cut-loss triggers to prompt certain actions, which must include an evaluation of the condition of your investment and its future potential, before you sell your losing investment.
Cut-loss triggers act like an insurance policy, which is protecting your portfolio against catastrophic losses as they remind you to assess your investment or to sell it. These triggers are used to make sure that mistakes are not more costly than they could be.
Some investors have different investing profiles and strategies, thus determine your cut-loss triggers based on your personal risk tolerance and investing time frame. To do so, first, consider the risk level that you're able to tolerate when selecting the asset. Say, for instance, you decided to tolerate a loss of 15% to 20%. Then, from here, you can determine your selling point. If your investment falls in this range, hold on to it.
However, investors with a short investment period may prefer a smaller percentage decline of perhaps 3%, because it avoids big losses. On the other hand, investors with a three to five year time frame can tolerate a higher percentage decline as a losing investment has time to recover its position.
Action triggers are also part of a sell strategy. For instance, you decide to sell your investment if it drops 8% below your purchase price. Set a warning point at 5% to prompt you to take action by looking for information that can be used to evaluate the future potential of your investment. You should also consider the next asset to invest in before your existing investment continues to depreciate to its cut-loss level.Some investors convert these triggers to stop-loss orders, which are instructions to the brokers to sell their shares at a predetermined price. These instructions are useful when you're unable to monitor your stocks and evaluate your investments over a period of time