Discounted Earnings Model

We had covered the topic of the Discounted Cash Flow Model last time, today we will focus on the next valuation calculation method, Discounted Earnings Model.

Also known as Discounted Future Earnings, this model is to forecast the earnings value of a firm and firm’s estimated terminal value at a future date. Terminal value represents all future cash flows that will reflect the returns occurred in future which they are nearly impossible to forecast.

The future earnings and then will be used to discount it back to the present value by using the appropriate discount rate. The sum of the discounted future earnings will be equal to the estimated value of the firm. By using this model, investors must make sure that the earning of the company is always positive. If it is negative, this model cannot be applied.

Note: We can use Adjusted Earnings per Share or Historical Earnings per Share of the company based on investor’s perspective and determination.

Let us look at How to fill Up the Figures in ShareInvestor WebPro to get the intrinsic value for Nestlé Berhad by using Discounted Earnings Model as an example.

1.Earnings per Share (RM)

Earnings per Share (EPS) is a financial ratio that used to measure or indicate the profitability of a company. To get Earnings per share, the total earnings of a company available to common shareholders will divide by the total number of common shares outstanding. In other words, this is the amount of money each of the shares will receive if all of the profits distributed to the outstanding shares at the end of the year.

ShareInvestor WebPro does provide an automatic calculation of Earnings Per Share for you as shown as the picture below:

Based on the photo above, insert 2.75392 to the Earnings per Share column.

Note: You have to right-click the stock and choose financial, then you can found Earnings Per Share in the part of Per Share Data (Adjusted).

2. EPS Growth Rate (%)

For EPS Growth Rate, we can use the industry average EPS growth rate of the company in the model provided, or we can use the average EPS growth rate for the company based on selected years.

We will use Nestlé Berhad as an example this time; we will choose the industry EPS average growth rate which has been providing as shown below:-

3. Years Of Growth

A company CEO may project the years of growth and announce it to the investors during AGM ( Annual General Meeting). Sometimes, we also can saw some news from the newspaper regarding the years of growth for a particular company. The other ways are looking into the past industry growth cycle. If the industry cycle usually tends to continue to grow for 10 years, you can take this number as a reference.

Let us assume that the years of growth for Nestlé Berhad is 10 years.

Therefore, insert 10 years into years of growth column

4. Discount Rate (%)

As we have discussed in the previous Article of “Understanding Discounted Cash Flow Model (DCF)to find intrinsic value”,  we know that Discount rate is the required rate of return for investors. The rate of return would be applied to the future earnings or cash flow to discount it back to the present value. It could be the risk-free rate of yields such as government treasury bonds or the expected rate of return.

We will use the Capital Asset Pricing Model (CAPM) as below to find the Discount rate for Nestlé Berhad based on its own risks level.

 

The formula of Capital Asset Pricing Model is as follow:-

Risk Free Rate (Rf) = 0.041

We will obtain the risk-free rate from 10 years of Malaysia Government Bond by Google it which is 4.10% equivalent to 0.041 as shown as the picture below:-Beta (β) = 0.40

Beta is a measure of stock’s volatility which will use to analyse how much returns will fluctuate about the overall market return. Beta equal to 1 indicates that the stock price moves together with the market. The beta of less than 1 means the stock is less volatile than the market. A beta which is greater than one means the stock price is more volatile than the market.

We will obtain the beta for Nestlé Berhad from the Factsheet of ShareInvestor WebPro which is 0.40 on 16Jan2019 as the picture below. The beta that I have selected is beta (500days). There is no right or wrong choosing beta (75days) or beta (500days).

Note: Select particular stock and select FactSheet, and you will found Beta (500days) at the vital statistic part.

Expected Market Return E(Rm) = 0.067

To find the expected market return of the stock, we can use the Compound Annual Growth Rate (CAGR).

Compound Annual Growth Rate is a useful tool which uses to determine the annual growth rate of an investment which the values have fluctuated widely from one period to another.

The Formula of Compound Annual Growth Rate (CAGR) as follow:-

I will take 10 years of the stock to measure the expected market return from the Year 2009 to the Year 2019 for FBMKLCI.

Beginning Value for FBMKLCI in the Year 2009 = 878.30

Ending Value for FBMKLCI in the Year 2019 = 1673.08 (On 16 Jan 2019)

The period from the Year 2009 to the Year 2019 = 10 years

We calculate the CAGR after we have all the beginning value, ending value and number of years in the FBMKLCI. The expected market return that we have is 0.06657. After we got all the figures as above, we can use it to calculate Capital Asset Pricing Model to get the Discount Rate. The discount rate we will get is 5.14%. Therefore, I will round off and insert it as 5% into the Discount Rate column.

5. Terminal Growth Rate (%)

Terminal Growth Rate will be used to estimate the company’s growth beyond the projection period to calculate the terminal value of a company that will expand its future income beyond the initial few years’ projections.

Note: the terminal growth rate used must always be lower than the discount rate. There is no right or wrong to use Real Gross Domestic Product (GDP) or Global Gross Domestic Product (GDP).

I will use Growth Rate of Global Gross Domestic Product (GDP) for this year 2019 which is 3% equivalent to 0.03.

 

After we have all the info, we can key into our ShareInvestor WebPro to get the intrinsic value of Nestlé Berhad. The intrinsic value for Nestlé Berhad is RM 169.37

Now we know that Nestlé Berhad has an intrinsic value of RM169.37. The current market value of Nestlé Berhad is RM147.30 (Based 16 January 2019). Based on the Discounted Earnings Model, it shows that Nestlé Berhad currently is in fair value due to the margin value of the stock is not much.

Written by Stella Goh | 23rd January 2019.

How do interest rates work?

The interest rate is a percentage charged as compensation on the cost of borrowing by a lender to a borrower. A central bank is responsible for formulating a country’s monetary policy and regulation. One of the ways is by controlling the benchmark of interest rate. They can adjust the interest rate to balance the economic status of the nation. But why a simple action on the rate adjusting can make a massive effect on the country economy and even the impact of US’s rate adjustment can swing the world?

US increased their interest rate several times in these few years in preparation for higher inflation, indicating the economy in fast recovery mode and worldwide investors turn their money to the US market to avoid missing the train.

How does the interest rates work?

When the economy is in recession, the central bank will lower the borrowing cost by reducing the interest rates. Hence, consumers are willing to make big purchases, such as houses and cars. For a businessman, this is perfect timing to borrow money in expanding their business and buying more equipment. Therefore, the output and productivity of an economy increased, and the stock market will also show a bullish sign as most industries will be expected to grow.

When the rate is deemed high, the cost of borrowing will become more expensive. Economist suggests that this is a time that the consumer spending will be moderate due to higher borrowing cost, so it is a way to slow down an overheated economy. But it will send a signal that the economy will start to normalise, translate to business will no longer growing exponentially in the foreseeable future. The investor will begin to pull back the money from the market and put it in a bond for a more stable return.

Economy takes place in a cycle. When the economy was in a downturn, economists suggested lowering the interest rate to stimulate a sluggish economy. The interest rate is a catalyst for the economy because it affects people’s decision whether to save more or spend more, which helps to achieve the overall economic situation. Therefore, economists pay a vital role at this moment; they need to observe the economy and identify the timing of raising interest rates.

However, an economic cycle cannot depend only the monetary policy; consumers behaviour is the core contributor to an economy. The subprime crisis is the exact example, the ratio of household debt to disposable personal income in the US rose from 77% in 1990 to 127% by the end of 2007. The situation has shown the market was overheated. Federal Reserve had raised the interest rate from 2.25% to 5.25% in the year 2004 to 2006. But, the situation has failed to calm down and then the bubble burst. In the Dot-com bubble in 2000, Hong Kong’s interest rate had declared up to 13.35% to entice an investor to stay invested in the economy. Sadly, the action deems too late and not enough to stop the crisis happened.

What will happen when the interest rate adjusted?

Capital Flows

When a country announced an adjustment on the interest rate, there is indeed a level of hot money flows occur. Hot money refers to the short-term capital which will flow to countries with higher interest rates. The higher the level of hot money within a state, the more severe the effect will suffer for the economy when hot money flows out. For example, companies and investors are more likely to park their capital into U.S. banks as the Federal Reserve engages in a series of interest rate hikes in 2018. When the foreign investment went out from Malaysia, our market will suffer a drop and value depreciated as low demand.

The value of a currency

An increase in interest rates may lead to a currency appreciation due the economy is on an upward path and Investor tends to invest in good economy. Hence, the currency will appreciate when the money outflow lesser than inflow in the country. However, currency appreciating is not that welcoming by export-domain country. When the currency increased, the exports become less competitive, and purchaser side will incur higher cost. Hence, the purchaser may try to change their supplier from another lower currency country to get cheaper cost.

Inflation rate.

An adjustment in interest rate can indirectly affect the inflation rate. As a higher interest rate can slow down economic spending growth to take some of the edges off of rising inflation. Vice versa, when the interest rates in a low period, more people tend to spend more and aggregate demand increased. Hence, causing the economy grows, follow with the increase of inflation.

Housing Industry

Adjustment in interest rates will have significant impact on property buying. Due to the house mortgage loan is a long term loan, a small increase in the interest rate can result in a substantial amount differing in total payment.

Conclusion

There is no specific answer whether it is good or bad in adjusting interest rate as there is no one size fits all. However, interest rate adjusting is still significant and is a MUST-do action to approach a normal economic cycle. Balancing is essential to achieve long-term sustainability. As a consumer, we need to control our spending in every phase; as an investor, we must adjust our portfolio in every period to maximise our profit and minimise our loss.

Written by Evelyn Yong | 16 January 2019.

Understanding Discounted Cash Flow Model (DCF) to Calculate Intrinsic Value

Investing in the stock market could be much more accessible nowadays as there are many resources and useful tools that help investors making an investment decision. In ShareInvestor WebPro and ShareInvestor Station, there are three new developed models which are Gordon Growth Model, Discounted Cash Flow Model and Discounted Earnings Model. Among all these models, they could help investors to find the intrinsic value of the particular stock — many complicated calculations and formulas to find the intrinsic value. ShareInvestor WebPro has simplified the process. It allows users to plug in the relevant figures and it automatically calculates the valuation of the company.

Today, we will talk about the Discounted Cash Flow Model to helps an investor assess the viability of a project or investment by calculates the Total Free Cash Flow based on the projected growth rate and discounts back to the present value. If the company value derived through Discounted Cash Flow Model is higher than the current market price per share, the investor shall start to monitor this type of company.

This model requires a positive free cash flow to derive the intrinsic value of a stock. If the free cash flow of the capital is a negative figure, this model cannot be applied. Let us look at “How to fill up the figures in ShareInvestor WebPro to get the intrinsic value for Air Asia Berhad” by using Discounted Cash Flow Model as an example.

1. Free Cash Flow Per Share (RM)

Free cash flow = Operating Cash Flow (CFO) – Capital Expenditures
Free Cash flow is the actual cash that would be available to the company’s investors after accounting for reinvestment in non-current capital assets by the company. The Free Cash Flow can be derived from the income statement and balance sheet of the company. On the other side, free cash flow also can be calculated by using the following formulas:-

By looking through this formula, it may sound complicated but ShareInvestor WebPro do provide automatic calculated of Free Cash Flow for you as shown as the picture below:


Based on the photo above, insert 0.0227 to the free cash flow per share column.
Note: You need to right-click the stock and choose financial, then you can found the free cash flow per share in the part of Per Share Data (Historical).

2. Cash Flow Growth Rate (%)

For the cash flow growth rate, we can use the industry average growth rate of the company in the model provided or we also can use the average growth rate for the company based on selected years. There is no right or wrong on which to be used. For Air Asia Berhad, I will use the industry average growth rate which will be automatically calculated as shown as the photo below: –

3. Years of Growth

A company CEO may project the years of growth and announce it to the investor during AGM (Annual General Meeting).
The other ways to are looking at the past industry growth cycle. If the industry sector usually tends to continue to grow for 5 years, you can take that numbers as a reference.
Let us assume that the year of growth is 5 years. Therefore, insert 5 years into years of growth column.

4. Discount Rate (%)

The discount rate is the required rate of return for investors. If he/she perceives the investment relatively risky, he may want to put a higher discount rate. For the public companies, there’s an assumption that the business was to continue to operate for longer compared to smaller private companies which may have a shorter life span.

To find the Discount Rate, we will use the Capital Asset Pricing Model (CAPM) formula as stated below.
Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for the assets. This model is also widely used for securities to generate the expected return for the stock. The risk-free rate in the CAPM will account for the time value of money.

The formula for Capital Asset Pricing Model is as follow:-

Risk Free Rate (Rf) = 0.041

We will obtain the risk-free rate from 10 years of Malaysia Government Bond by Google it which is 4.14% equivalent to 0.041 as shown as the picture below:-

Beta (β) = 1.112
Beta is used to measure volatility or systematic risk of a security. A beta of 1 indicates that the security price is moving together with the market. A beta of less than 1 means the security will be less volatile than the market. A beta which is greater than 1 indicates that the security’s price will be more volatile than the market.
For Beta of Air Asia Berhad, we will obtain it at the Factsheet from our ShareInvestor WebPro or ShareInvestor Station which is 1.112. I will choose the beta of (500days) which is 1.112 as common. There is no right or wrong choosing beta (75days) or beta (500days).


Note: Select particular stock and select FactSheet, and you will found Beta (500days) at the key statistic part.

Expected Market Return E(RM) = 0.066
We need to use Compound Annual Growth Rate to find the expected market return of the stock. Compound Annual Growth Rate is a useful tool which used to determine the annual growth rate on an investment which the values have fluctuated widely from one period to the next.
The formula for Compound Annual Growth Rate (CAGR) as follow:-

I will take 10 years of the stock to measure the expected market return from the Year 2009 to the Year 2019 for FBMKLCI.
Beginning Value for FBMKLCI in the Year 2009 = 878.30.
Ending Value for FBMKLCI in the Year 2019 is 1674.12 (On 10 Jan 2019)
Period from the Year 2009 to the Year 2019 = 10 years.

After we have the beginning value, ending value and number of years based on particular years in the FBMKLCI into the CAGR formula, the expected market return we get is 0.066. After we got all the figures, we can calculate the Capital Asset Pricing Model to get the Discount Rate.The discount rate we get is 6.89%. Therefore, I will round off and insert it as 7% into the Discount Rate column.

5. Terminal Growth Rate (%)

Terminal Growth Rate will be used to estimate the company’s growth beyond the projection period and will be used to calculate the terminal value of a company which will be expanding its future income beyond the initial few years’ projections.
Note: the terminal growth rate must always lower than the discount rate.

We will use Growth Rate of The Country Real Gross Domestic Product (GDP) for this year 2019 which is 4.6% equivalent to 0.046.
After we have all the info, we can key into our ShareInvestor WebPro or ShareInvestor Station platform and select calculate to get the intrinsic value of Air Asia Berhad. The intrinsic value for Air Asia Berhad is RM 1.01.

Now we know that Air Asia Berhad has an intrinsic value of RM1.01. The current market value of Air Asia Berhad is RM2.95. (based on 10 January 2019). Therefore, it indicates that Air Asia Berhad currently is overvalued since the current market value is larger than the intrinsic value of the company.

Written by Stella Goh | 11 Jan 2019.

Understanding on Stock Split Exercise

A stock split is common in nowadays stock market and some of the successful companies will exercise stock split multiple times throughout a decade. But, what does stock split means for the company and the shareholders? If you are holdings a stock which is going to split, don’t worry. We will discuss this topic for you to have a better understanding.

It is a corporate action declared by the board of the company with the purpose to increase their number of total share of a company by splitting each of the shares. When it happens, the share price drops proportionally due to the result that each of the shareholders will own more shares with the same proportion of ownership in the company.

How Does It Impact The Share Values?

Let us look at 1 of the example. If the company has 10,000,000 issued share priced at RM50 per share before share split, it will have a market capitalisation of RM 500,000,000 (10,000,000 x RM50). If the share split occurred at 2-for-1, the total company number of shares would double to 20,000,000 shares. The price for each of the share to be adjusted to RM25. (RM50,000,000 / 20,000,000). For example,  a shareholder with 1000 shares finally will have 2000 shares in total, but the value remains the same.

Based on the example above, it is also clearly indicated that there is no change in the total value of shares. The cost of a single stock will become cheaper, and only the total number of stock in the market will increase.

Why does Stock Split happen?

Stock splits occurred when the company management wishes to add liquidity of their stock by diluting it to reduce the cost per share to the reasonable price level. When the stock price has become less expensive, it may attract more new investors to invest in their company even though the underlying values of the company do not change.

Besides, a company that is practising a share split also can indicate a good signal that the company is doing well enough and investors will assume that the company will lead the share price to go higher in future.

Are Share Split Good For Investors?

When there is stock split occurred, it does not mean that the company will continue to do well in the future. The company split its stock when the share price has risen enough, but it does not indicate that the share price of a company will continue to grow in the future. Investors must always remember that when they owned more shares for the stock split, the overall value of their holdings will remain the same.

Some of the investors may say that stock split is a company doing well in their business and it may consider as a buy signal. It is not correct in this statement. Investors should always look at the whole picture of the company before making an investment decision. Investors can use stock split as an indicator, but further market evaluation is needed.

Should You Buy A Stock Before or After Stock Split?             

For the investors who will invest for long-term, it does not matter whether he/she buys the stock before or after the stock split. Let’s us look at scenarios as an example.  Let’s say I could purchase 1000 shares of a company which is trading at RM0.50 today, or I could purchase 2000 shares of the company at RM0.25 tomorrow after a split, the outcome will be identical. The only thing that can vary from the day before or after the split is the actual price of the shares.

Conclusion

Investors need to be methodical when they are trying to purchase the stocks before or after the split announcement. The stock split is a good thing for small investors who seek good company within their affordability. However, investors are not advisable to directly buy the shares before or after the split without doing further research.

Written by Stella Goh | 12th December 2018.

Importance of quarterly report to an investor

The quarterly report is a financial update by the public listed company on a quarterly basis to the public investors. Financial analysts put lots of focus in this report because it can affect the price movements of the stocks in the short term. There are several criteria cannot be ignored in the quarterly report as below.

EPS

Earnings per share (EPS) serve as an indicator of the profitability for a company. This measurement shows the indication of the company’s ability to generate, sustain and grow its profits. The higher the net profit, the higher the EPS (unless bonus issue or right issue occurred). The quarterly adjusted EPS can reveal the latest financial profitability and have a better understanding of business performance. The performance can be measured based on whether the EPS meets, misses or beats analysts’ predictions and will have a substantial impact on the short-term share price.

Sales and Earnings growth

Invest in a business is a long-term activity, so Investors tend to invest in good prospects company. Hence, stocks that can consistently grow their sales and earnings are expected to perform well in the long term. However, it is difficult for companies to outperform analyst expectation every quarter due to the short time unstable economic situation or political news. Therefore, for stocks that perform well in each quarter, they are usually the industry-leading stocks due to their ability to boost sales while controlling costs and expenses to ensure the earnings growth.

Cyclical Trend

For some industries like food and beverages industry, it has cyclical sales performance due to peak seasons like festive season and low season. Comparisons quarter by quarter may not accurately determine an overall business performance, so investor shall include past few years quarterly results into their analysis to understand the peak and off-season conditions. Then, they may get more ideas at the timing of entering or exiting the market.

Cash Flow

Stable cash flow is essential for a company to ensure its financial liquidity. When a company can generate high positive cash flows, this will create more value for shareholders and enables the company to expand their business, pay a special dividend for shareholders, repay debts and cushion future financial challenges. A profitable company can fail if the operating activities do not generate enough cash to maintain liquidity. If the company fails to convert sales into cash on time, their cash liquidity will lead to a cash flow shortage and affecting day to day operations.

Company’s Planning and Actions

The management always interprets the quarterly performance and discloses further plans in the quarterly result or in a press release. This is generally the moment investors will form their perception towards how effective and efficient the company overcome current obstacles and future challenges. More often than not, sharing related previous success stories of how issues and crisis were managed are able to display the company’s commitments towards the interests of its shareholders. On top of that, it also provides investors with clarity and to a certain extent, assurance, on the direction and dynamism of the company they have invested in.

Conclusion

Although the quarterly report is not audited, it is still essential for investors to make any decisions, as the annual report is only published once a year and many variables may occur within 12 months. To keep their investment safe, investors should not skip the company’s financial reports and protect your assets. Investors should not judge a company by just looking at one of the criteria because a good company will not be only good in one aspect. Instead, they should consider more aspects before making a decision.

Written by Evelyn Yong | 7th December 2018.

Understanding on Bonus Issue Vs Right Issue

By investing in the stock market, the investors are becoming a shareholder of a particular company through buying the specific stock. As a shareholder, investors will be updated from time to time about the company’s new direction including announcements of “Bonus Issue” and “Right shares Issue”. Both seem alike, but there are a different so all shareholders should understand what differentiates between Bonus Issue and Right Issue and react accordingly.

Bonus Issue

Bonus Issue defined as free new shares issued to the existing shareholders based on the specified proportion of shares they are holdings which will be at free of cost. Bonus Shares is a conversion of the company’s accumulated earnings which are not given out in the form of dividends but converted into free shares.

When the bonus share distribution happens, it will increase the total number of shares owned by the firm. The Bonus shares do not inject fresh working capital into the company, as there are to distribute among the shareholders without any conditions. The net worth of the company will remain the same. Usually, bonus shares will pay up in full, and the shareholders are also allowed to sell those bonus shares to make a quick profit or save it for future gain.

Let us look at the example of bonus issue. If the company declares 3:2 of bonus issues, it means that every 2 shares held by shareholders, 3 Bonus share will be allotted to them. A shareholder with 1,000 shares will be received 1,500 bonus shares which calculated as (1000 x 3/2 = 1500).

Why Issue Bonus Shares?

The purpose of the company issue bonus shares is to increase the active trading by increasing the number of outstanding shares in the market through a reduction in market price per share to a reasonable range.

The companies can increase their stock liquidity and promote more active trading of the shares. It also incentivizes the new investors to purchase the company shares that are performing well within an attractive price range. It will also help the company to avoid the outflows of cash in the form of dividends.

Right Issue

Right share is for the existing shareholders who have the privilege but not obligation to purchase the specified number of shares directly from the company based on the proportion of existing holdings at a discounted price within the specified period. The rights are transferable. Therefore, the shareholders can decide on himself whether or not to buy or even sell off his rights in the open market to other investors by wholly or partially.

The right shares issued to the shareholders have values that used to compensate the current shareholders for future dilution of their existing share’s value. Dilution will occur when a rights offering spreads a company’s net profit over a more extensive number of shares. Thus, the company’s earnings per share (EPS) will decreases as the allocated earnings result in share dilution.

Let us look at the example of the right issue. If the company give out a 1:4 right issue means that an existing investor can purchase 1 extra share for every 4 shares which already held by him. The issued price usually will be lower than the prevailing market price of the stock, which means that the share is to offer at a discount to the current market price.

Why Issue Right Shares?

A Right Issues is carried out by a company to raise additional capital. Companies will use the cash to acquired assets, takeover, corporate expansion or repays their debts. However, the company also can raise money by other ways, such as obtain a loan from a bank. There will be times when the banks are reluctant to lend, the rights issue will be an option. Besides, there will be a high interest incurred by the loans, which may force the company to raise the capital through the right issue of offerings to clear the credit. Therefore, investors need to make investment decision whether or not they want to take up the right issue.

Bonus Issue Vs Right Issue

 

Basis Comparison Bonus Shares Right Shares
Meaning Shares issued in the proportion of their existing holdings Issued to existing shareholders at a discounted price within a specified period

 

Price Issued at free of cost Issued at a discounted price

 

Objective Issued as an alternative to the dividend payment. Also used to bring the market price per share, within the lower price range Raise fresh capital from the market

 

Paid Up Value Always fully paid up Either fully or partially paid up

 

Share Price Shares dilution will bring down the share price in a short period and investors most of the time will not gain nor lose anything. Shares price may plunge due to shareholders will sell the rights to the open market which in discounted price. It also sends the signal to the market that the company may be in trouble so need to find new capital.
Minimum Subscription Not Required Mandatory

Conclusion

Both Right Shares and Bonus Shares have few similarities which offered to the existing shareholders as a tactic that company use to increase the number of their shares in the market.

Written by Stella Goh | 28 November 2018.

Artificial Intelligent versus Algo Trading

Recently I had attended few seminars promoting investment strategy using artificial intelligence. Due to curiosity, I have done some research about Algo trading vs AI and would like to share it here. For readers info, I’m not a computer genius nor super trader so the reader can give feedback or correct me if I am wrong in whatever info provided here.

Algo Trading

This method of trading is referred to as a method of preset action of execution by a trader or a computer repeatedly over a period set. It starts with a set of rules and condition, which developed by experienced traders where it will be tested first in simulation to gauge the effectiveness of the program to make a profit in the market.

The experiment can be started as simple as below:

  • Buy when the stock price is close above 50 moving average
  • Sell when the stock price is close below 50 moving average

This simple instruction can code into a computer program using the past data movement of the stock price and put in the test simulation that we called as ‘backtest’. The test shall generate more than 100 trade or even 10,000 trades provided the stock price data history is long enough from the past to the present. With the generated test simulation, the traders will know how much profit/lost, risk/reward ratio, recovery factor and much other info that generate using this trading method in the past. The trader will assume that the program will create a similar performance in future and will use it to trade in real account if it is profitable and within the comfortable risk.

Artificial Intelligent

So far until now, I haven’t seen anyone using artificial intelligence to trade. Yes, I know some of the investment gurus, investment fund house or brokers claim that they already use it to trade the market, but I had a doubt on that. Let’s understand what A.I. is and how it works.

The AI starts with a programming system which mimics the human intellectual and they called it ‘neural network’. By the layman terms, everything starts with few points and the computer will start the first step to learn to identify ‘correct’ and ‘not correct’.

Example like a human child, if you want to teach an AI to learn how to differentiate a cat picture with rest of the image, show it a set few random pictures then you select the one with the cat to tell the computer that is a cat. The process can run many times until the machine can identify more accurately which image has a cat in it. The learning process can be unlimited hence the more complex the situation, the more it needs the support of super fast multi servers to store and to run it. That is how an AI learn, from experience.

The Different between AI & Algo Trading

 

Artificial Intelligent Algo Trading
It will set own rules and conditions based on learning experience. Rules and conditions need to set by a human
Rules and conditions will change by the machine based on objective Human will need to change the rules and requirement from time to time, to tune it to current market behaviour
Outcome shall be better in future due to the machine will learn and correct itself each time. The result is often predictable and similar to past. But it will change when market behaviour change.

 

Conclusion

To trade market using artificial intelligence, I think it will need some massive tech company and funding to support it like Goldman Sachs already start the AI project.

You will need an AI that can learn from multi and diverse info like what US President will speak about, when he will be talking, How his tone will impact the market, when is the storm coming and how it will change the market, etc..etc.. The cost will be huge; it will be like combining many AI into one super AI to trade the market successfully.

 

Written by Jeff Kum | 21 November 2018

ShareInvestor Station & Webpro New Function

In conjunction with Invest fair Singapore 2018, ShareInvestor had added two new awesome features into ShareInvestor Station and Webpro to enhance the available functions to the subscribers further. The best thing is new and old subscribers does not net to pay any extra to get this additional value!

1. Intrinsic Value Analysis

Intrinsic value refers to the value of a stock determined through fundamental analysis including tangible and intangible factors, without reference to its market value and it’s the concept always been champion by value investors around the world.
There are three valuation models currently available in Shareinvestor Station & Webpro:

a. Discounted Earnings Model
b. Discounted Cashflow Model
c. Gordon Growth Model

Few useful sub-functions also included like the comparison of local and global companies in the same industry (peer analysis) and the addition of another important metric: Piotroski F score to highlight fundamentally strong companies.
Piotroski F Score is a score between 0-9 which reflects the financial strength of a company in term of its fundamental value, based on 9 accounting-based parameters. The parameters are related to the company’s profitability, leverage, liquidity & source of funds and operating efficiency.

i) Profitability: Measures the company’s profitability and ability to generate positive earnings or cash flows.

ii) Leverage, Liquidity and Source of Funds: Measures the changes in capital structure and the company’s ability to meet its debt service obligations.

iii) Operating Efficiency: Measures the efficiency of the company’s operations and the uses of its assets.
Companies with a high score of 8-9, considered fundamentally good whereas companies with a low score of 0-2 are considered weak.

2. Share Ownership

If you are planning to own shares of the company in the stock market, you may want to know who is the major shareholders in that company. A good company usually will be invested by big fund houses like KWSP, Khazanah or even international Fund like Vanguard, Berkshire Hattaway and Fidelity Fund.

Now with this new functions will enable you to access the info who is the top shareholders for each company and analyse their ownership details across the world.

If you wish to know more about ShareInvestor Station and Webpro, do contact us via email accounts.my@shareinvestor.com or call during office hour 9.00am to 6.00pm.

Stock Market: Growth Yield versus Dividend Yield

Long-term investors always look at passive returns for their investment asset and most will opt for a fixed deposit to gain interest rates. But why most of the fund managers across the world invest in the stock market instead?

To answer the question above, we need to explore why a stock market is an attraction for them to invest. Most of the public listed company lead by a CEO (Chief Executive Officer) where his performance is driven by giving a good investment return to his bosses, which is the chairman and the shareholders. By doing that, most of the company will provide a dividend return rates that better than FD rates or will buy back shares from time to time to elevate the stock price to make it worth to hold the shares for future gain or do both.

Growth Yield Company

A company that focuses on growth yield usually will buyback company shares using profit generated from the company business or other investment profit/dividend gain. This practice will limit the shares quantity traded in the market, hence reduce the volatility and make it worth to hold by creating a scarcity of the stock.

Some growth company will give out dividend but most of the time will be lower than fixed deposit rates. The reason is the company will need the cash to be invested back into the company by expanding the business or increase the investment asset holding like property, other company stock etc. By doing this exercise, it will improve the company value, hence attracting long-term investors.

Most stock price in growth yield company will be in a long-term uptrend and tend to be more resilient to the short-term market volatility. The stock price also tends to be much more expensive compared with the dividend yield company. In the longer term, the growth yield company mostly will surpass dividend yield company regarding yield returns. Example, the company A stock price that worth RM10 only give dividend 1% yield and if you buy now will get RM0.1 dividend year later. But after ten years, when the stock price increase to RM100, 1% dividend equal to RM1 which mean your dividend returns from your initial RM10 had increased from 1% to 10%!

Dividend Yield Company

Dividend yield company almost an opposite from growth yield company, where most of it tends to have limited cash for investment growth in future, stock price either in sideways or downtrend and they always give dividend higher than fixed deposit rates and more succumbed to short-term market volatility.

Investors who invest in dividend yield company will hold the company stock in a shorter-term timeframe. This type of company normally will need to be able to generate consistent cash flow like the gaming industry. Future revenue and profitability will be less important here as compared to the growth yield company.

Some companies had exceptional where there are more resilient to the stock market price volatility, especially REITs holding. REIT income generated by rental yield from the property and property price tend to rise in future, which brings up the REIT value, hence tend to trend higher but at a slower pace.

Conclusion

While further study and more in-depth analysis needed to find a good shares company to invest for long-term, above guideline can serve as basic knowledge for a start. The investor is advised to understand his/her investment timeframe as well as the desired profit target in the foreseeable future.

Written by Jeff Kum | 7 November 2018.

Understanding of Initial Public Offerings (IPOs)

Initial Public Offering (IPOs) is a type a process happened when the private company issued new or existing shares to be sold to the general public in the primary market to raise funds. The capital gains from the sale of the shares will be used to buy machinery, land or repay for the loans/debts of a company. Most of the companies that offering IPOs are young companies, or the companies that have been operating for many years and finally decided to go for the stock exchange. Through the IPOs, the companies get its name on the stock exchange. IPOs is one of the ways for the young company to gain more access to market capital.

The Approval Process of IPOs in Malaysia

Adviser submits an IPOs application to Securities Commission

The company must apply for IPOs and must be complete for SC to meet its timeline charter of 3 months for consideration of the IPOs application. Incomplete application’s details may cause delays in review and the submission. Advisers may have a pre-submission consultation with SC to discuss the issues on IPO application.

Securities Commission evaluates IPOs application

Assessments will is make in accord with the provisions of Guidelines to review to ensure it complies with SC’s guidelines on Asset Valuation. Corporate governance will have record checks, and queries will be sent to advisers to seek clarification on issues identified to have a clarification meeting to discuss issues.

Securities Commission decides on IPOs application

The recommendation committee which includes senior management from different departments will convene challenges process to ensure the thoroughness and consistency in the recommendation of application tabled with the Issue Committee. They will meet to deliberate and decide on IPO application.

Securities Commission informs adviser of SC’s decision

The advisers/applicants have six months from the date of SC’s decision letter to implement the listing proposal of Applicant. If any rejection occurred, SC would conduct a post-decision meeting with the applicant to convey and discuss. They have one month time to reveal the rejection.

Adviser submits registration IPOs prospectus

The prospectus must not contain false and misleading, and there is no material omission of statement/disclosures.

Securities Commission registers the IPOs prospectus

SC will review and departments will conduct checks on compliance on approval conditions. Once registered, applicants must lodge the prospectus with Companies Commission of Malaysia. The prospectus will start to issue to investors over a period of minimum 5 market days.

Listing by Bursa

It will take around 13 market days minimum from the issuance of the prospectus before listing into Bursa exchange. Relevant SC departments perform post-approval follow-up on the terms and conditions of the approval and post- vetting on the prospectus.

How to Apply IPOs online?

Investors who are interested in subscribing IPOs must have a bank’s online account. They can log in to their bank account and click the “eShare” for the Maybank’s user, and then it will show you the IPOs list. Then, investors can select the IPOs that he wants to apply. By the way, investors are required to read through the Terms and Conditions of the eShare Application and Declaration and also the prospectus of the IPOs before proceeding. Then, the investors needed filling up the application form and proceed to the submission. However, it may be difficult to purchase the IPOs because there will be a limitation of people can only subscribe to it. It was due to the balloting process to determine who will successfully obtain the rights to purchase the pre-listing of the company shares. The people who failed may buy the IPO stock during the first day of IPO stock listed in the stock market.

How to Determine the Initial Public Offerings is Good or Bad?

Background of The Company

Investors need to consider a lot of things before invest in a new public company. They need to do some researches on the prospectus of the company before deciding to subscribe the IPOs. The prospectus served as overall information related to the company such as Business Models of the company, financial health, prospects, risks may face and so on.

The business model of the company will determine the company future direction and projection. Investors can look into what the company’s primary business is? Can the business sustain in a recession? Can the company maximise their profit in an economic boom? Let’s say the company’s primary business is operating under the food industry. Food is essential for everyone to survive. From this, we knew that this company could survive in all weather market.

Financial Highlight

Company’s past performance is a clear indicator of how the company has performed over the years, and we can use it to project the company future financial performance. If the company’s growth chart is volatile, an investor should refrain from investing in this type of company. However, if the company’s growth rate has been stable and growing over the years, there is a high probability that the company will perform well in the future. However, the financial data is limited because the Securities and Exchange Commission (SEC) only requires the income statement shows the current year plus the past two previous fiscal years of the company. Therefore, investors may be only able to look through the financial highlights of the company so they must also see other details in the prospectus.

 Risks

Investors must understand their risk tolerance when subscribing to the Initial Public Offerings (IPOs). The risk involved is higher when compared to a fixed deposit due to FD provides consistent rates of returns until the maturity date; regardless of market conditions.

Initial Public Offerings stocks do not provide a guarantee of returns and will not guarantee they will make money in their business, or the will pay you dividends. Investors have to be comfortable with the risks that they might lose all their money when they are buying the stocks.

 The Lock-Up Period

Investors must be careful on the lock-up periods of the Initial Public Offering after it successfully listed on Bursa Malaysia. When the company goes public, Bursa Malaysia requires the promoters of all applicants for Main Market not to sell, transfer or assign their entire shareholdings in the applicants as at the date of listing, for six months from the date of admission to Bursa Malaysia based on the lock-up agreement between them. Upon expiry of 6 months, all the insiders or substantial shareholder will be freely selling their stocks. Therefore, there will quite some shares up for sale and creating an excess supply that can cause the stock price to drop drastically.

Conclusion

Among all investment tools, Initial Public Offerings (IPOs) is one of the choices that investors can consider. Investors shall study and analyse the pros and cons thoroughly before making their investment decisions.

Written by Stella Goh | 25th September 2018.

Site last updated August 19, 2019 @ 6:52 am