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Transcript
“A GPS in the Stock Market Jungle” www.stockpointer.ca “Investment Modeling” Developing an Investment Model using StockPointer© and the EVA approach Summary Our objective today StockPointer© : the kernel to our model Investment objectives Investment strategy Investment rules On-going portfolio management Appendices – Canadian filter – American filter – Stocks in the current Model Copyright © 2001 StockPointer© For Internal Use Only 2 2 Our Objective today Present the methodology used to develop a typical Investment Model allowing Investment Advisors to present a highly professional approach in portfolio development and investment management: Comprehensive and well structured Easy to explain and understand Demonstrates value for fee-based accounts Highly productive for IA’s Building a trust relationship with your clients and prospects For Internal Use Only 3 3 StockPointer StockPointer’s EVA-based lists of topranked stocks have significantly outperformed the TSX over the past 6+ years SPiX – Top 40 Buy/Hold – 12 Months StockPointer Index Produce economic portraits of over 6,500 Canadian and American stocks with data updated daily 20,3% / yr S&P/TSX Index Trusted and exploited by over 250 Investment Professionals across Canada 7,8% / yr Over 6 years 10 months Strategic partnership with Nov99 2000 User credentials can be found on www.stockpointer.ca The EVA© (“Economic Value Added”) model: Recognized concepts Emphasis on wealth creation for shareholders Highly structured and disciplined Professional image Easy to understand and appreciate by clients and prospects 2001 2002 2003 2004 2005 Aug06 StockPointer© is based on the EVA© (“Economic Value Added”) economic performance approach “EVA analysis is at the heart of understanding how companies create shareholder wealth. Most importantly, it helps investors measure and understand those factors that create or destroy value.” Steven Einhorn, Global Investment Research, Goldman Sachs & Co. EVA© is a registered trademark of Stern Stewart & Co. For Internal Use Only 4 4 Investment objectives Objective Specific target Targeted ROI To outperform the S&P/TSX over a mid-term investment period. Consider Dividends even though not calculated in ROI. Consider Transaction Costs even though not calculated in ROI. Investment Term Objective is to adopt a Buy / Hold strategy over 12+ months unless strong indications to do otherwise To encourage stability. To create confidence. « La Bourse reflète la perception des investisseurs, et non la réalité. La réalité, c’est quelque chose qui se matérialise à long terme. » « The stock market reflects investors’ perception and not reality. Reality is something that happens longer term. » Stephen Jarislowsky, Affaires Plus, Mars 2006 For Internal Use Only 5 5 Investment strategy (1 of 2) To invest only in companies that create wealth for the shareholders and are not overvalued by the market Economic Performance Stock Price Evaluation Identify the companies that properly manage their capital in the best interest of their shareholders and generate a return that is higher than expected for a similar level of risk Wealth Creation (or EVA) becomes criteria #1 Insure that stock is not over-priced compared to the company’s Intrinsic Value EVA-$ = NOPAT-$ – Cost of Capital-$ = ROC-$ – COC-$ = (ROC-%-COC-%) x Capital > 0 if and only if ROC > COC Performance Index = ROC / COC Intrinsic Value = NPV of future EVA’s Performance Index > 1 0.4 < P\IV < 2.5 « Better to invest in an economically sound company at the reasonable price than invest in a poor company at a cheap price » For Internal Use Only 6 6 Investment strategy (2 of 2) To align the risk associated with a portfolio with the degree of tolerance that the end-customer is comfortable with Level of risk associated with a stock Adjust the desired level of risk of the overall portfolio using the Future Growth Value (FGV) calculation for each of its stocks FGV = Market Value of Company – Current Operations Value = MV – NPV of future Profits = or < 0 for minimum risk FGV < Acceptable Risk level Other risk factors include: - Sector over-weighting compared to Top-80 - P/IV too good to be true - Profit and EVA going in different directions For Internal Use Only 7 7 Investment guidelines Objective Basic Guidelines Reduce volatility of the portfolio Adopt a good diversification strategy along four pillars: +/- 25 stocks, size of companies, sector weighting and a good Canada/USA split Choose companies with a demonstrated economic performance over many years Avoid paying a premium associated with expected growth Respect a minimum sales volume ($250M in Canada and $2.5B in the US) Analyze many convergent sources of information (fundamental vs technical, tradepress, newspapers, etc Avoid the 4 major levels of risks: over-pricing, sector weighting, “to good to be true”, EPS vs EVA trends Growing Dividend over the years is always a good sign of prosperity Free Cash Flow generation is a good indication of wealth creation For Internal Use Only 8 8 Investment guide/rules Objective Guide/Rules Use a filter to get initial list Sales over $250M in Canada and over $2.5 Billion in the USA Performance Index > 2 Return on Capital > 10% Price / Intrinsic Value < 1.5 but > 0.4 FGV < 30% Price Change (12 months) > -20% but < 25% Buying/Selling Rules Get rid of any stock that is not paying dividends Get rid of any stock for which IV < Adjusted IV Try to match the SPiX 80 sector weighting; get rid of the least performant stocks that are over weighting a sector Use american stocks (or ADR’s) to compensate for weak presence of canadian economy in some sectors No stock should weight for more than 7.5% of the portfolio Objective of 10% cash should be kept in portfolio For Internal Use Only 9 9 Investment management Objective Keep Value Guide/Rules A more important annual review will put emphasis on replacing old investments that could have performed well but are now at a point where some new comers are better. The annual review is also good to make appropriate sector weighting Choose the right time to replace individual investments; not necessarily all at the same time Follow-up closely tendency changes in major StockPointer indicators such as EVA For Internal Use Only 10 10 Building a portfolio StockPointer US stocks Canadian stocks US filter Canadian filter Recommended stocks Recommended stocks Investment Model Other sources of information SPiX – Top 80 Sector weighting Minor Monthly reviews Major Annual reviews Final selection Investment Model For Internal Use Only 11 11 Canadian filter For Internal Use Only 12 12 USA filter For Internal Use Only 13 13 The resulting Model For Internal Use Only 14 14 The resulting Model For Internal Use Only 15 15