Undergraduate Stock Trading Society WINTER – 1ST MEETING RECAP OF FALL
Announcements 1. Chicago Mercantile Exchange Trading Competition Products Traded: Crude Oil and Gold Futures Practice Round: February 14-16, 2011 Preliminary Round: February 16 - March 3, 2011 National Finals: March 6-18, 2011 Five members per team, two teams possible if there is enough interest 2. Team Competition Bringing it online! Virtual Stock Exchange Game name: UISUCLA; Password: Stocks Each team should sign up on one member’s email address – will complete after Roy’s talk
Recap - Introduction What you can easily invest in: stocks, options,
commodities, bonds, etc. Some styles: Short term Technical Long Term: Value vs. Growth
Long Term – Growth: Above average growth New Tech. Domination of niche market
Recap - Introduction Long term – growth Sustainable growth (at 20~25%) P/E ~ growth rate PEG: lower than ~0.75 Competitive advantage: barrier to entry, competition eats into profit margin Long term – Value High dividend yield Low P/E ratio, P/B ratio At discounts to book value Conservatism Concentrated portfolio Long term – BOTH Intrinsic Value “Growth and Value Investing are joined at the hip” - Buffet
Recap – Financial Statements & Ratios
Assets = Liabilities + Equity
Recap – Financial Statements & Ratios
Sample Balance Sheet
Sample Income Statement
Assets Cash A/R Inventory 150 PPE (Less) Acc. Dep. Total
100 50 500 100 900
Liabilities A/P Expenses Payable N/P Bonds Total
100 50 200 300 650
Owner’s Equity Common Stock Retained Earnings 50 Total
200 250
Sample Statement of Cashflow
Recap – Financial Statements & Ratios Horizontal Analysis: time series (trend) Vertical Analysis: common size (ex. Sales = 100k,
operating exp. = 80k, or 80% of sales) Liquidity ratios: Current Ratio <CR= Current assets / current liabilities> Quick Ratio <QR = Quick Assets / Current Liabilities>
Profitability Ratio Net Profit Margin <Net Income / Net Revenue> Gross Profit Margin <(Net Sales – COGS)/ Net Sales> Operating Profit margin <Operating profit / Net Sales>
Recap – Financial Statements & Ratios More Profitability Ratio
Effective Tax Rate: Income Tax Expense / Pretax Income ROA: Net Income / Avg. Total Assets ROE: Net Income / Avg. Stock holder’s equity EPS: (Net income – preferred dividends) / Avg. number of common shares P/E: Stock price / EPS
Solvency Ratio
Debt to Assets: Tot. Liabilities / Tot. Assets Free Cash Flow: Net Cash flow from operating activities – purchase of PPE – Dividends paid Times interest earned: (net income + interest expense + income tax expense) / Interest expense
Recap – Ratios Establish a comparable group Operational characteristics Industry Products/services Markets Distribution Channels Customers Seasonality/cyclicality Financial Characteristics Size Leverage Margins Growth prospects Liquidity
Recap - Ratio Some things to consider Size
Market share and sector dominance Market value
Risk
Operational efficiency and productivity (margins) Financial risk
Growth
Cashflow increase? EBIDTA, etc. EPS Revenue Profit
Attach a story! Read the notes!
Ex. This year, BP’s annual statement will be a huge mess. The reason for the mess will be explained in the notes
Recap â&#x20AC;&#x201C; Discounted Cash Flow Valuation
Present Value of Free Cash Flow (Discounted @ WACC)
PV of Terminal Value (Discounted @ WACC)
Enterprise Value
Recap – Discounted Cash Flow Valuation 1. WACC: Weighted Average Cost of Capital WACC = Ke * (E/D+E) + Kd * (1-T) * (D/D+E)
Ke = Cost of equity (using Capital Asset Pricing Model) Ke
= Rf + (β * (Rm – Rf) Rf = Risk free rate (T-bill 10 yr. most commonly used) Β = Volatility of the stock compared to the market (can be found in Yahoo! Finance, etc.) Rm = Rate of Return in the market. This is SUBJECTIVE. May use S&P 500 average return.
E = market value of equity = share price * diluted shares outstanding D = Market value of Debt = May use book value (caution!) or if debt is publicly traded, that price may be used. T = marginal tax rate
Recap – Discounted Cash Flow Valuation More notes on WACC Kd = Cost of Debt
The company’s debt footnote in its 10-k or annual report. If there was a recent debt issuance, use that rate If the debt is publicly traded, get a quote from there All else fail, look for a comparable company with a similar risk/credit profile
Discount it to present Value: PV = CF1/(1+r)^1 + CF2/(1+r)^2 + … 2. Select forecast period & period of steady state condition 3. Calculate/project the firms’ Unlevered Free Cash Flow (UFCF)
from EBIDTA (just look up Morning star)
4. Discount each UFCF by WACC to the present value and add them
up.
5. Terminal Value & Discount it Perpetuity Growth Rate method: goes on forever TV = (FCF n * (1+g)) / (r-g) FCFn
= predicted UFCF of future year n g = steady growth rate (SUBJECTIVE!) r = WACC
Week 2 will beâ&#x20AC;Ś
Commodities Trading Fundamentals
Group time! Time to discuss with your groups the investments
you want to pick for the Winter Commodities Challenge Also, time to get acquainted with each other!