VIX – Provides Guidance Only at Extremes

Published on December 28, 2011 in Uncategorized. 0 Comments

The CBOE’s Volatility Index (VIX), despite its popularity, is generally a poor indicator of market turns. In the chart below, featured in Bloomberg’s Dec 6th Chart of the Day, the performance of the VIX and the S&P 500 are highlighted since the equity market bottom in March 2009.

As seen in the chart below the VIX, unless at high levels, is typically a poor indicator of market direction for equity investors. As the article points out when the VIX is above 40 the S&P 500 gains on average 14 percent over the next 6 months and 29 percent over the next 12 months. In the contrary, when the VIX is less than 20 the S&P 500 only gains 2.9 percent over the next 6 months, a statistically insignificant amount.

Given the stagnant state of the global economy, with continued uncertainty across a range of issues from the European debt crisis to Chinese growth, there are a couple ways in which investors can use the VIX. Until further clarity is obtained on these issues long-term investors can do the following:

1) For investors interested to add to their equity holdings an elevated VIX levels, above 40, can act as an entry point instead of standard dollar cost averaging.
2) For investors looking to shift fixed-income holdings into the equity market, due to record low yields in bonds and attractive valuations in equities, a VIX above 40 can also be used as an attractive point to shift holdings. This strategy can take advantage of lower equity and higher bond prices at these inflection points, maximizing portfolio values.

Sell-Side Valuation Methodologies

Published on October 28, 2011 in Finance. 0 Comments

After recently attending a presentation by James Valentine, a former Morgan Stanley Research Analyst, I decided to give his new book, “Best Practices for Equity Research Analysts”, a try. Of the many interesting strategies and facts the book outlines I found the street’s attitude towards valuation techniques to be quite interesting.

The book quotes a study by Gleason et al (2008) which cites that analysts who use more rigorous multiperiod valuation methodologies (e.g. DCF) rather than simple multiples such as the basic P/E ratio tend to demonstrate substantial improvements in the accuracy of their price targets.

However, in spite of the better track record afforded to price targets set using the DCF approach, another study by Imam Barker & Clubb (2008) shows that the technique is not the most popular amongst sell-side analysts. According to the study here are the valuation methodologies that sell-side analysts rank as the most important (ranked in order of importance):

  • P/E
  • DCF
  • Enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA)
  • P/CF

The study goes on to mention that even though sell-side analyst use DCF in their research reports when discussing valuations, they rarely use the DCF to justify a price target.

Reflecting on his many years of experience in the industry, Valentine concurs, stating that even the most intelligent money managers want to keep things simple. Valentine attributes the popularity of multiples-based methodologies amongst portfolio managers to their simplicity.

Although not earth shattering, these studies are nevertheless insightful. They confirm academia’s long held stance that the Discounted Cash Flow technique is a better  methodology  to estimate the firm’s value, being independent sector wide over/under pricing. However, these studies also make it clear that the transparency, simplicity and ease of calculation of multiples make them a very practical tool for practitioners.

DragonWave : Equity Valuation

Published on March 4, 2011 in Finance. 1 Comment

Recently I’ve had the opportunity to participate in the CFA Ottawa Equity Research Challenge. The objective of the competition was to conduct a valuation for DragonWave Inc by undertaking research on the economy, the sector, the firm, its financials and its environment. As one of the top three contestants from the University of Ottawa I was invited, alongside the top three contestants from Carleton University, to make a presentation to an expert panel at the ARC Hotel in Ottawa. Alongside another contestant from Carleton University I successfully tied for First Place!

Find attached both the PowerPoint file of the presentation and the PDF version of the full report. The presentation gives a broad overview of DragonWave Inc and presents an estimate for its fair value.

To learn more about the CFA Ottawa Equity Research Challenge visit:

http://www.telfer.uottawa.ca/en/latest-news/1820-cfa-ottawa-equity-research-challenge

(Click the Picture to Access either the PowerPoint Presentation or the PDF of the Report)


Canadian Oil Sands Trust : Equity Valuation

Published on October 20, 2010 in Uncategorized. 0 Comments

Find attached the PowerPoint file of a presentation I have recently given to the University of Ottawa Investment Club. The presentation gives a broad overview of Canadian Oil Sands Trust and presents an estimate for fair value. The presentation was intended to provide members an introductory overview of equity valuation techniques by demonstrating how various valuation techniques (i.e. comparables, discounted cash flow and precedent transactions) can be used to value companies.

To learn more about the investment club and to view the performance of the OSIC Global Equity Fund visit: www.OSIC.ca

(Click the Picture to Access the PowerPoint File)

Opening the Toronto Stock Exchange !

Published on January 10, 2010 in Uncategorized. 0 Comments

As a member of the winning team at QFAC 2009 I opened the TSX on January 5th 2009; thereby, ringing in not only a new year but, a new decade. Queen’s University Finance Association Conference (QFAC) is a student run conference focusing on finance and capital markets. For more information visit www.qfac.ca.

Picture of Me (Below)

Picture of the Team (Below)

Research Report: Combining Fundamental and Technical Data to Generate Portfolio Weighting Strategies

Published on December 3, 2009 in Uncategorized. 3 Comments

Recently I’ve completed the following research report. The goal of this project was to find a way to successfully combine fundemental and technical data to generate portfolio weighting strategies that can allow investors to experience a higher level of return with less volatility than the index. Find attached a PowerPoint presentation, the Excel source file and the PDF written report. Find below an excerpt from the executive summary:

According to Standard & Poor’s “Index Versus Active Funds Scorecard” only 12.43% of actively managed US Equity funds have outperformed the S&P 500 Index over the 5 years ending June 30, 2008.

I took this fact as an ultimatum. My goal was to create a portfolio, which would be able outperform the major market indices over a 10 year period.  In this spirit I set out to design an investment strategy, which seeks to generate significant alpha through the creation of a portfolio that can generate above average return while experiencing lower levels of volatility.

To achieve this objective I set out to design a unique investment strategy. I created a portfolio that can outperform the major market indices while experiencing lower levels of volatility by combining both technical and fundamental analysis. Fundamental analysis was used to create the “Risk Asset Portfolio” by identifying the most promising investments by analyzing the corporate health of the companies within the investment universe. On the other hand, technical analysis was used to perform market timing, resulting in smoother portfolio returns across the business cycle by dynamically allocating capital between the risky portfolio and cash.

The data for this project was aggregated from the Research Insight database . The data from the database was organized within Microsoft Excel wherein the analysis took place. Performance statistics relating to the performance of various market indices was compiled with data provided by Barron’s and Standard and Poor’s. The performance history of 3 months US Treasury securities was compiled with data provided by the Federal Reserve.

I have eliminated survivorship bias through the use of a sound, non-biased, stock selection strategy. I  selected the 30 DJIA components at the end of 1998 as my investment universe. The portfolio was back tested from the beginning of Q1 1999 until the end of Q2 2009, making a total of 42 quarters (10.5 years). The model assumes that transaction costs and taxes are non-existent.

Analysis demonstrates that the portfolio is highly mean-variance efficient. The portfolio has demonstrated a 4.42% annualized rate of return while experiencing a standard deviation of only 3.58%. In contrast the S&P 500 experienced a negative annualized rate of return in this period of -2.72% while experiencing a much higher standard deviation of 8.65%. When observing the fundamental analysis in isolation from the technical analysis we can observe an efficiently constructed portfolio, which outperform the market benchmarks with less volatility. The risky asset portfolio experienced an annualized rate of return of 2.30% with a standard deviation 7.35%.

(Click the Picture to Access the PowerPoint File)

(Click the Picture to Access the Excel File)

(Click the Picture to Access the PDF Written Report File)

Tarik.ca Capped Global Renewable Power Generation Index™

Published on November 27, 2009 in Finance. 0 Comments

The Tarik.ca Capped Global Renewable Power Generation Index™, is a capitalization-weighted equity benchmark. The index tracks the performance of Global Utilities and Independent Power Producers (IPP) who generate greater than 50% of their electricity production from Hydro-Electric, Wind, Geothermal and Solar Power. Component companies are not adjusted for available float. Index components are capped at a maximum of 20% of the index.

The Tarik.ca Capped Global Renewable Power Generation Index™ is unique and the first of it’s kind.

Unlike all of the new wind, solar and clean energy ETFs. The index does not hold industrial companies involved in the construction of solar wafer, wind turbines and gear boxes. The Tarik.ca Capped Global Renewable Power Generation in contrast is a pure play on a secular growth in renewable power generation.

Strong Coal and Natural Gas costs will continue to put upward pressure on spot electricity prices globally as fossil fuels continue to generate 65% of global electricity supplies. Because Wind and Hydro electricity have high fixed costs and very low variable costs the index is also poised to benefit from a secular increase in electricity prices as margins expand while most Utilities will experience flat or declining margins.

The maturing of large conventional oil fields will continue to pose a challenge to the world’s liquid fuel needs. In light of recent breakthroughs in battery and electric engine technologies, Electric Vehicles and Compressed Natural Gas Vehicles (CNG) will grow to become an ever larger portion of the global vehicle fleet. This will put even more pressure on electricity prices in the future as costs of convention electricity increases, while the demand for electricity grows significantly.

Index Constituents (% Weighting) : Click below to Enlarge

Canadian Energy Sector : Overview (PowerPoint)

Published on November 26, 2009 in Uncategorized. 0 Comments

Find attached the PowerPoint file of the presentation I have recently given to the University of Ottawa Investment Club. The presentation gives a broad overview of the Canadian Energy Sector from Upstream, Midstream, Downstream and Utilities. The presentation elaborates on investment opportunities, geology, global and Canadian statistics and the nature of the energy infrastructure in Canada.

(Click the Picture to Access the PowerPoint File)

The World’s only Publicly Traded Central Bank

Published on October 18, 2009 in Finance. 0 Comments

Recently I was doing research regarding publicly traded companies in Switzerland. In the process I discovered that the Swiss National Bank (SNB), which is the central bank of Switzerland is a publicly traded corporation. This fact took me by surprise as most central banks are closely held by the federal government in most counties. However, due to Switzerland’s history as a collection of independent Cantons the Swiss National Banks is owned by a wide variety of independent owners.

Shares of the Swiss National Bank are majority held (61.6%) by the various Swiss Cantons with the Canton of Berne being the largest shareholder with 6.63% of the outstanding stock. The remaining 38.4% of the outstanding shares are free floating on the public market. The wide dispersion in ownership of the Swiss National Bank has probably contributed to the historically conservative nature of the bank. This fact has historically allowed Switzerland to keep inflation rates low and keep the Swiss Franc relatively strong.

The share capital of the Swiss National Bank amounts to CHF 25 million. It is divided into 100,000 registered shares with a nominal value of CHF 250 each. The current market cap of the shares of the Swiss National Bank is CHF 100 million. A dividend not exceeding 6% of the share capital is paid from the net profit. At a current market price of CHF 1000 per share, the shares have a dividend yield of 1.5%. Movements in the price of the SNB share resembles those of risk-free long-term bonds rather than shares (as the dividend is limited to 6% of the share capital by law).

Share Price Performance Chart

SNB Share Graph

Breakdown of Shareholders

SNB Shares

Q&A @ Tarik.ca : Preferred Shares Interest Rate Risk

Published on October 31, 2008 in Finance. 0 Comments

Question

I would be interested in what you think of preferred shares currently – the yields are very high! My concern is about inflation in the longer term and higher interest rates. In your article you mentioned the “large risk” of the shares never being redeemed. I would be interested in your opinion on that risk today?

Thanks,
Sharron

Answer

Hello,

Because preferred shares (most of the time) are structured as perpetuals there is no obligation for the corporation issuing preferred shares to redeem them in the future.

If we ever enter a secular bull market in interest rates, preferred shares will be hit the hardest out of all debt-based instruments, due to the fact that they have an infinite maturity date (Hence they have to be re-discounted to infinity).

Consider the following example: From the highs in the late 1960′s to the lows in January 1980, long term corporate bonds fell by over 60% as interest rates rose from 3% to 18%. As the prices and yields of preferred shares closely follow long-term corporate bonds, we should expect preferred shares to perform similarly to long-term corporate bonds in the future.

In such a scenario, preferred shares would be hit even harder than long-term corporate bonds because there would be no intensive for firms to redeem preferred shares, as they would have to roll over the debt to higher interest rates.  This will cause the Present Value of principal amount of the share to go to zero, unlike bonds.

If your goal is to protect your money while investing in preferred shares, you should look into floating cumulative preferred shares of Investment Grade companies, these preferred shares will move with interest rates, hence protecting your initial principal of your investment.  While you might be getting a smaller yield, your principal is better protected whether we enter a deflationary of inflationary environment.

Go to http://www.prefinfo.com/
Search for “Floating” Preferred shares which and you will find a couple dozens of them. Note most listed floating preferred shares are currently not floating but have dates in the future where they will start floating.

Cheers,
Tarik