Valuation Methods- Y H & C Investments uses fundamental analysis to value securities.  Most traditional methods of security analysis are centered around the concept of discounted cash flows.  Essentially, the worth of an asset is the amount of cash it can generate discounted to arrive at a present value.

Definition of 'Discounted Cash Flow - DCF'

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

Calculated as:

The following are Investment Styles Y H & C Investments has used to help analyze securities:

 

Growth Investing-  Buying equities of companies which are believed to be growing very quickly, typically in excess of a market multiple.  With the proliferation of digital technologies, many recent public companies have growth rates far in excess of 20-30% per year, and in some cases, 50%-100% per year.  Growth can be thought of using a variety of different metrics, including revenues, operating profits, operating cash flow, net income, free cash flow, etc. 


Value Investing-  An approach where an analysis of a security leads the investor to believe they are buying a dollar of assets for far less than $1.00, the lower the price the better.  Many investors use the concept of 'book value' as a standard to compare how much of a discount they are getting for the assets they are purchasing.

 

Sum of the Parts Analysis-  Involves looking at the market price of an entire company and comparing it to the various operational segments and assets which comprise the company. 

 

GARP Investing- (Growth at a Reasonable Price).   A method where the investor analyzes the growth rate of metrics like revenues, operating profits, net income, operating cash flow, free cash flow, EBITDA, EBITA, or EBIT versus the forward or trailing Price/Earnings Ratio, market capitalization, enterprise value or net asset value. 

 

Relative Value- An investor will look at metrics comparable companies in the same or similar industries to determine the attractiveness of a specific stock.  This approach usually revolves around price to earnings ratios or multiples of cash flow.

 

Event Driven- A practice involving looking for some hidden event which could move a stock, including a takeover or merger attempt, a buyback, a recapitalization, spinoff, or tender offer. 

 

Merger Arbitrage- Buying the stock of a company which has been publicly offered for, usually accompanies a short position in the acquirer.

 

Structural Advantage-  Buying company which has logistical advantages in the industry or ownership of tax assets which are favorable.

 

Investment Process

The following is the step by step procedure I use when looking at investment opportunities, in particular, individual equities in the public markets:

1.  Sourcing & Leads:

Current Holdings & Competitors

Tangential Companies- Movement of Management to Head a New Opportunity

Screening

Available Public Information (Investments sites, articles, publications)

Web Site Metrics

2.  Asset Analysis

Financial Condition

  1. Debt Levels, Maturities, Restrictions
  2. Capital Structure

Business Situation, Operations, Performance

Industry

Competitive Positioning

Management 

  1. Past History
  2. Compensation, Ownership, Options, RSU's
  3. Normalized Operations 
  4. Value Creation (Cash Deployment, Organic vs M&A, Spinoffs, Buybacks)
  5. Future Growth Plans
  6. SEC Filings (Annual Report, 10-Q's,  8, Headlines, Proxy Statement, Insider Trading)

3.  Macroeconomic Environment

Monetary Policy

Fiscal Policy

Capital Markets Status

Global Factors

Sector Dynamics

4.  Security Selection & Allocation

Valuation- Appropriate Metrics

Relative Value, Sum of the Parts, Discounted Cash Flows, 

What Are We Getting vs What Are We Paying

Fair Price or Better

Stock Universe-30-100 Names

Appropriateness based on Client

Concentration vs Diversification (based on client- usually 10-30 holdings per account)

Trading & Execution (Via TD Ameritrade & Interactive Brokers)

5.  Performance Monitoring

Company Quarter Reports

News Releases

Conference Calls & Investment Presentations

Results vs Projections

Accounting and Portfolio Management Attribution (advisorsoftware)