Articles on Graham-Rao Method

1. Picking value stocks

http://docs.google.com/Doc?id=dg3h8m78_3hq8pkpc6

Fallibility of Super Analysts

27 October 2006 Economic Times page 10

It carried a news item - Greenspan said that most of the negatives of housing sector are probably behind us.

What is the status now in December 2007? Housing prices are going to fall further is the comment of analysts now.

Company Intentions - Toyota

Et 27-sep 2006

Toyota is aiming to sell 9.8 m vehicles globally in 08, the company's president katsaki Watanabe said on 20th Sep 2006.

toyota sold 8.13 m vehicles worldwide in 05.
is set to sell 8.85 m vehicles in 2006.

Gen motors sold 9.2 m vehicles in 05.

Watanabe declined to give a production target for 08 but said the number may be slightly higher than the sales figure.

Projected fiscal sales for 06 is 5.5 trillion yen.

RANDOM WALK Model and EFFICIENT MARKETS HYPOTHESIS

Dow through editorials in Wall Street Journal (1885-1900)encouraged speculation publicly.

Counterview: Stock prices follow random walk in short periods of time.Short period returns are random variables.

Evidence: Serial Correlation Tests, Runs tests, Filter rule tests


Serial Correlation: For the same scrip, Correlation between price change of today and price change of yesterday or more generally Correlation between price change of today and price change of some previous day.

If serial correlation is close to zero, there is no relationship between previous period's price change and today's price change. In this case estimating future price changes using past price changes is not possible.

serial correlations were found to be close to zero in a number of studies.

Weak Form Efficiency: Stock prices reflect all the information present in the historical price series. There is no benefit in examining the price series any more.

Semi-strong Form of EMH: The stock prices reflect all publicly available information.
Trading using fundamental analysis will not give profits above the returns from buy and hold strategy.

Indirect approach: Concerned with the user of information, and how he performs over time against some yardstick such as the market average. One obvious method is to compare the performance of professionally managed funds against a simple passive strategy of buy-and-hold-the-market. Celebrated test - study by Jensen,M.
Performance of 115 mutual funds over the period 1945-64 was examined.
He found that the funds on average were unable to outperform a passive strategy and that no individual fund was able to perform better than could be expected from random chance.

Counter Evidence through Cross sectional Studies:
Low P/E stocks
Low P/B stocks

Anomalies

Strong form of EMH(According to Black): The market price generally reflects all avai- lable information and the most ignorant investor buying at current prices gets the benefit of everyone else’s thinking.
It is not that stock prices are insensitive to changes in the prospects for a company or for the economy.Rather it is that prices are very sensitive to these changes.
The price changes so fast that no one has time to make money on the information.The strong form of the EMH claims that no one can consistently earn a profit higher than what could be earned with a naive buy and hold strategy by short-term trading.

The strong form of EMH is not found to be quite acceptable.
A few cases of monopolistic profit making are found which violate this hypothesis.
- Specialists on the exchanges
- Insider trading.
Comprehensive Reference: Stock Market Efficiency : Theory, Evidence and Implications, Simon M.Keane, Philip Allan Publishers Limited, Oxford, 1983

Modern Portfolio Theory - Practical Application

Modern portfolio theory either Markowitz method or sharpe method or any other simplified method can be applied to real life data provided you have target prices for all the scrips that you want to consider for inclusion in the portfolio are available.

Papers on Target Price Accuracy

[PDF] Target Price Accuracy in Equity Research


www.crsp.com/forum/papers/international/Target%20Price%20Accuracy%20Equity%20Research.pdf

My Publications

A nine-step route to picking value stocks

www.rediff.com/money/2003/aug/25guest.htm

The merit of value investing

http://inhome.rediff.com/money/2006/nov/27invest.htm

In search of value

Narayana Rao / New Delhi January 8, 2007

http://www.business-standard.com/general/storypage.php?&autono=270553

Costly stock still a bargain: analysts

Mint 24 July 2007, pages 1 and 3

This is an interesting report/item by Nesil Staney nesil.s@livemint.com.

More than 30 stocks have a PEG multiple of well below one, whihc means that they are not still overvalued.

Analysts/portfolio managers quoted in the article.

Sameer Narayanan, Head Portfolio Management Services of ABN Amro Asset Management (India) Ltd.

Ketan Iarani, Vice President of research, Kotak Securities Ltd.

shortcomings of the report/item

1. The list of undervalued companies should have been given.
2. The period for which the growth is determined to compare with the P/e ratio needs to be explicitly specified.

I shall write to Mr. Nesil about it.

NTN 15-6-2007

Mint

14-6-2007 Bse sensex - 14003.03 -0.91%
15-6-2007 14203.72 +1.43%


Mint 15-6-2007

Page 4

Crisil downgraded Hindalco Ltd. bonds by one notch from AAA to AA over debt for Novelis deal. Crisil also downgraded Tata Steel to AA+ from AAA following Corus acquisition.


ET 14-6-2007 Page 20

Global liquidity worries weight heavily on market

China and India have seen net $4.5 billion (China $3.1 billion and India 1.3 $Bi) outflow so far this year. This is in contrast to inflow of $3.67 billion into China and $1.38 billion into India ytd of 2006. What is its impact going to be?

Et 15-6-2007 Page 4

GM India eyes 20% of small car market by '10
Enthused by the encouraging response to its recently small car Chevrolet Spark, GM ndia on thursday said it has set a target to capture 15-20% of the domestic small car market by 2010. The small car segment accounts for nearly two-third of passenger vehicle sales in India with about 7-8 lakh units old in thes egment each year. It is growing at a rate of 15-18% per annum.


ET 15-6-2007 Page 5

Ernst & Young's latest report on telecom says India's telecom sector will see investments up to $25 billion over the next five years. (A recent study by telecom regulator TRAI has estimated that the country will need about 350,000 telecom towers by 2010, when compared to 125,000 at present).

Ashok Leyland unveils strategy to grow bus segment

Economic Times 9-6-2007 Page 6

New strategy: to offer customers a new range of buses, including fully built vehicles and double the capacigty of luxury liner Irizar a JV with TVS. It is also giving push t designing buses and branding models like Viking, Irizar, Luxura9intercity), Panther and Tarmac (Airport bus). they want to supply fully built buses up to two thirds of their sale against on 10% now. COO Vinod K Dasari told ET.

we want to increase our share by increasing profit of operators. It will focus on designing the buses, colouring, improving passenger comforts plus branding. Depending on models, it will own IPR. It will forge tie-ups with leasding coach builders for capacity expansion. In case of ST buses it will work with TATA Motors for standardizing the results.

Irizar, present capacity of 500 luxury coaches will be doubled by increasing capacity at Viralamalai and Pudukottai plants.ALL has also proposed to scale up capacities at Alwar and Ennore plants.

NTN(Sa) 8-6-2007 ET Biotech

ET 8-6-07 Page 5

Indian Biotech industry has crossed the $2 billion mark in revenues by clocking Rs. 8,300 in 2006-07. With over 30% growth vis-a-vis 2005-06 figure of $1.45 billion, the sunshine industry looks on track to achieve the $5 billion target set for 2010.

Source cited: ABLE (Associaton of Biotechnlogy-Led Entrepreneurs) - Biospectrum survey

NTN(SI) ET 5-6-2007

The Economic Times 5-6-2007 Page 30

Economies on a roll; set to beat forecasts for a sixth year

Worldwide growth looks set to outstrip forecasts for a sixth straight year in a row.

JP Morgan Chase's global interest-rate indicator, stands at 4.67%, below the 7.02% peak in November 2000,before worldwide growth slowed by almost half.

Sinai (who is Sinai not mentioned in the news item) expects worldwide growth above 5% this year, faster than the IMF's 4.9% April projection. If Sinai is right, 2007 would be the sixth straight year that the IMF's spring forecast proved too conservative.

News to Note (NTN) 4th June 2007

Mint Page 15

Goldman Sachs India Financial Conditions Index

I asked a question on this in the final examination paper.

According to the Goldman Sachs India Financial conditions Index (GS India - FCI) which was launched in April, financial conditions in the country "tightened" by 40 basis points or 0.4% in April 07.

Target Price Model - Lecture

Importance of this topic

The context is application of Modern Portfolio theory (MPT).
MPT – Harry Markowitz proposed it in 1952.
The model requires expected return and standard deviation estimates for each security to be considered for inclusion in portfolio.
It also requires estimation of correlation coefficients for each possible pair of securities.
Each possible pair means, for three securities a, b, and c; ab, bc and ca are three possible pairs.
For four securities a, b, c and d; ab, bc, cd, da, ac,bd are six possible pairs

How to get expected return of a security

Target price models help us to determine the expected return.

Exp. Return =100* [Target price – Current Mkt Price]/Cur. Mkt Price

Target Price

A target price for a stock is a figure published by a securities industry person, usually an analyst.
The idea is that the target price is a prediction, a guess about where the stock is headed.
Target prices usually are associated with a date by which the stock is expected to hit the target. (normal practice 12 months)

http://invest-faq.com/articles/adv-target-price.html

The projected price level as stated by an investment analyst or advisor.
A stock trading at $60 might have a one year price target of $90.


http://www.investopedia.com/terms/p/pricetarget.asp

Target price model is a fundamental analysis technique.


Fundamental Analysis

Based on operating and financial performance of companies
Value based
Target price based
Quantitative judgment
Qualitative judgment


Past performance Basis
Projected performance basis
Judgment on positive or negative effect on future performance of news event.

Why Target Prices Are Better for Investors than a Rating?

Rick Wayman, CFA (ResearchStock.com)
http://www.investopedia.com/printable.asp?a=/articles/analyst/03/022603.asp

Because they provide additional information that an investor can use to determine if a stock is right for him or her, target prices are better than ratings.

Good Research Report

A target price is an estimate of a stock's future price based upon an earnings forecast and assumed valuation multiples.
A good research report will present its case for a target price by presenting detailed information.

Four key aspects

Investors need to evaluate the following four key aspects for determining the "legitimacy" of a target price:
1. the EPS forecast,
2. the assumptions underlying the EPS forecast,
3. the valuation multiples used, and
4. the rationale for using those valuation multiples.

How investors can judge these factors?

1. EPS Forecast

This is the foundation of the target price, and the report should contain a detailed earnings forecast model.

(full income statement with a discussion of operating cash flows) for the time frame covered by the target price (preferably two years).

A quarterly forecast for the next 12 months is useful for tracking the accuracy of the analyst and for keeping an eye on whether or not the company is performing as anticipated.

2. EPS Forecast Assumptions

The report should also discuss the assumptions used to make the forecast so that the reader can evaluate their reasonableness.
A report's lack of both a detailed earnings model and list of assumptions should be a warning sign to investors.
It is important that the assumptions be reasonable.
For example, in the current economic environment it is highly unlikely that a micro-cap company whose sales have grown at a 1-2% pace during the last two years will be able to accelerate sales growth to a double digit pace in the coming two years.

A good research report will provide the reasons why the analyst expects a big jump in sales growth
(for instance, the company may have acquired a new product or patent).
A detailed earnings model is provided so that the reader can adjust the assumptions (e.g., reduce sales growth expectations) to calculate the impact on EPS and valuations.

3. Valuation Multiples Used to Calculate the Target Price

The next building blocks of target prices are valuation multiples, such as price/earnings (P/E), price/book (P/B), and price to sales (P/S).
You need to make sure that the type of valuation multiples used are applicable to the stock you are researching.
For example, the market places more emphasis on P/E multiples for industrial companies and a P/B multiple for banks.
In addition to using the right multiples, the valuation model should be based on more than just one variable.

A valuation model based on one multiple is like a one-legged stool: not very sturdy or reliable.
While the market may place more emphasis on one multiple over another, a good model consists of at least three variables.
Three good multiples for industrial companies are P/E, P/B, and P/S.
Bank prices, on the other hand, are
typically based on P/B, to a lesser extent on P/E, and on price/total income

4. Assumptions Used to Justify the Valuation Multiples Used
Assumptions, whether they are used to support an earnings forecast or valuation target, need to be reasonable.
This can be determined by looking at the assumptions and comparing them to historical trends, a relevant peer group (i.e. companies, possibly competitors, that are in the same business), and current economic expectations.
Don't worry; this is not as hard as it sounds.
In order to make a good case for a target price, the analyst should include a discussion of the historic trends and an analysis of these trends through a comparison to a relevant peer group.
If a stock has consistently traded below its peer group average (has been a “discount”) and the forecast expects the multiples to be larger than the peers (to be a “premium”), you need to evaluate the reasons why the market is expected suddenly to “discover” the stock.

While there are occasions when valuations “pop” (such as when a company gets an FDA approval to market a drug), they are high risk/reward situations and only investors with that type of risk tolerance should accept those assumptions and invest in this type of situation.
There are situations, however, where a stock is legitimately undervalued because the market is not aware of its fundamentals—the company is literally waiting to be “discovered.”
This is a lower risk situation, but it may take a long time before the market adjusts the stock's valuation.

The Bottom Line

Investors will make better decisions if they focus on target prices, which convey more information for evaluating the potential risk/reward profile of a stock.
A good target price is based upon a reasonable set of four factors that provide the reader with information to determine the accuracy of the target price.
The absence of any of these four factors should be a red flag that the so-called report could really be a "pump and dump" marketing ploy

UBS Practices

Genzyme General
Biotechnology
United States

Our one-year price target is $32, 23 times our 2003 EPS estimate of $1.40

Daishin Securities
Securities Brokers
Korea

The target price is the average of implied fair value calculated at a 5% discount to target sector multiple.
The multiples are estimated for Trailing P/BV, 12 month Prospective P/BPCS, 12M Prosp P/CIPS, 12M Prosp. P/NORPS, FY03 P/E, and FY03 P/PpoP.

People’s Food
Food Products
Singapore

Target Price is our DCF estimate for the stock.


Aeroflot
Transport
Russia
For valuing airlines, we prefer the EV/OpFCF multiple over the more traditional P/E and EV/EBITDA ratios, as it accounts for the various balance sheet structures and depreciation methods used by different companies.
However, we believe EV/OpFCF shows only part of the picture.
We believe a more reliable valuation metric is implied franchise value of an airline, measured by comparing its enterprise value with the substitution cost of its fleet.
Hence EV/FSC is to be used.
We expect that by 2002E Aeroflot will trade at an average emerging market EV/FSC of 0.75.
Applying this to the 2002E fleet substitution cost of $2,615 m and 2002E net debt of $778 e arrive at an implied forward market capitalization of $845 m.

Sarna Chemicals,
Commodity
Europe
At our target price, Sarna would trade on 5.2x EV/EBITDA.
This represents 15% discount to the European auto parts sector.
Our valuation is supported by our DCF calculation, which derives a price of CHF2,523 per share.
We have applied a 23% discount to get our target price of 1,950 owing to (1) lack of liquidity; and (2) the relatively low capitalisation of the stock.

Sum of parts valuation

30th May 2000
Computer & Tech
Technology Software,
Hongkong
We base our 12 month price target for C&T on 20x 2002E China earnings for China Business and
50x 2002E e-commerce enabling (or GeBE) earnings.
Added to this is our valuation of the ASP division (or GeBS), which we value on 50x our 2002E revenue projections of HK$16m

P/E multiple

July 25, 2002
CNH Global N.V.(CNH)
Machinery
USA, July 25, 2002
Our 12 month target price assumes that CNH trades to roughly 10 times potential 2004 earnings of roughly $0.70 per share.


Premium over market multiple

December 4, 2002
Network Appliance (NTAP)
PC Hardware, Application software, Enterprise Hardware
United States,
We believe a normalized P/E for the market is somewhere in the low 20X range.
If we apply a 100% multiple premium (which is at the low end of NetApp’s historical range) to our estimate of NetApp’s normalized earnings of $0.40, we arrive at our price target of $18/share.

Reduction in DCF value

14 Mar 2002
The Gribbles Group (GGL.AX)
Healthcare Providers
Australia
As a result of the reduced earnings forecast, our DCF has declined to $1.00 (from $1.17), Price target $1.00 (from $1.17)

Discount to sector multiple

17 July 2002
Tamedia
Publishing
Switzerland
Our new price target of CHF 100 would value Tamedia at 6.5x 2003E EV/EBITDA, implying a discount of c20% to the European media sector.

Price/Book value multiple

10th January 2003
ESEC
Semiconductors
Switzerland
Our price target of CHF72 implies a price/book of 1.1x.
The current price at 1.6x 2002E remains well above the historical average (1998-2001) of 1.2x

Premium to sector multiple – International market

September 27, 2002
Nokia
Wireless Equipment
United States
Our price target of EUR 20 (US$20) is based on a 2003P/E of 23x, compared to European Tech at 17x.
We believe the premium is justified in view of Nokia’s superior margin, cash generation and growth outlook.

NTN(SI) 22 may 2007

Mint 22 May 2007

M1
Sensex 14418.6 +0.81%
Nifty 4260.9 +1.10 It surpassed its high set on 7 February.

Page 1
Interesting Mint Indicator
Q4 results up to 21 May 2007
Results announced 1,753 cos out of 3,650
Aggregate net sales Rs.3,46,485 cr growth of +23.73%
Agg. Net profits Rs 41,143.39 cr

Page 6
GAIL to expand network, targets Rs 45,100 cr revenue by 2011.
the blueprint of the company aims at doubling Gail's pipeline network to 11,195km by 2011 by building new pipelines to connect the nation's LNG import erminals on the west coast and laying new lines to consumption centre in north and east. It also calls for tying up new gas supply sources to triple volumes to 291 million standard cubic metres per day by 2011.

Page 15
Chinese Government agreed to buy a $3 billion (Rs 12,300 cr) stake in New York bsed buyout firm Blackstone Group LP, the first step in a plan aimed at diversifying its overseas investments.

NTN(SI) 21 May 2007

The Economic Times
19 May 2007
Gold slips to 6-monthlow at Rs 8,755.

Sensex 14303.41 +3.70 points 3 year high low 14723.88/4613.94
Nifty 4214.50 -5.05 points 3 year hihg low 4245.30/1437.90

The Economic Times
21 May 2007

page 17
The $i trillion excess liquidity tide by Chetan Ahya, Morgan Stanley

page 23

Extreme invseting: Inside Colombia

Mint 21 May 2007

page Banks face big hit from pension costs, if the new accounting norm that mandates all indian firms must calculate the retirement benefits of their employees, in accordance with international practice come into effect.

News to Note (NTNSI)

Mint 16 May 2007

M1 Sensex 13929.33 -0.26%

page 9
Tarapore warns of economy overheating.He said: "If we allow a further accleration of growth, a sharp and deep recession is inevitable." He also said "the economy is presently close to the upper turning point of the cycle andit banks are overextended, thye will inevitably face large NPAs." He added "RBI should take mutually reinforcing measures to cool the economy."

Page 14
ICICI bank seeks Sebi approval to sell
rs.17,500 crore of shares. the offer may go up to Rs20,100 crore depending upon demand.

page 15
JP Morgan says investors should buy India's bonds because inflation will slow and rising bank deposits will mean more money will flow into debt securities due to SLR investments.

Mint 17 May 2007

M1
Sensex 14127.31 +1.42%
Nifty 4170.95 +1.23%

Page 5
5-year projection KPMG pegs investment needs of energy sector at $150 billion/Rs615,000 crore by 2012. With target growth rate of over 8% and an estimated energy elasticity of 0.80, the energy requirements of the country are expected to growth at over 6.4% per annum over the medium to long term.

Page 16
Rupee closes at nine-year high - Rs.40.8025

Page 19
Alan Greenspan has signed up Allianz Ag's Pacific Investment Managment Company as his first client.Bond king Bill Gross is with Pacific.

Mint 18 May 2007

Sensex 14299.71 +1.22% +172 points
Nifty 4219.55 +1.17%

Page 1
Bajaj Auto to split into three.

page 3
Tata Steel nets record Q4 profit on higher prices.

Page 14
quantitative research takes stock advice to a new level
MAPE ADMISI Securities, a part of MAPE group is the second brokerage firm t offer stock advice, based on quantitative research. Edelweiss securities is the other Mumbai based firm that has had a quantitative research team in place for last three years.

Mahesh Bhagwat, head of equities at MAPE ADMISI Securities. JV with London arm of a commodity brokerage, Archer Daniel Midland Investor Services Inc.

Sunil Jain, the analyst for alternative and quantitative research at Edelweiss.

The New Blog

I created this new blog today to carry on my writing on security investment. In my earlier blog, www.kvssnrao.blogspot.com I posted on marathon running, investments and now I am posting on industrial engineering. I want to keep separate blogs for these subjects and this blog is my attempt in this regard.