Lafayette Investment Club Oct 14, 2011
Agenda • Club News • Education – Valuation Ratios • Renewable Energy – overview • How to invest in renewable energy?
Club News • Morgan Stanley – Fri, Oct 28th Sebastian Crapanzano, MD, Risk Management • Barclays – Wed, Nov 2nd Jim Glascott, MD, Investment Banking • Rabobank – November Andrew Cooper
Ratios and Stock Valuation Understanding How Stocks Are Compared And Valued
Types of Valuation Fundamental Analysis – “A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.” – Investopedia In other words you have to look at the big picture when fundamentally looking at a company. You have to consider things like; Industry (Competitors, Market), Earnings, Income, Cash Flow etc. Essentially you need to find out the Companies DNA.
How do we do this? • 1) Balance Sheet - A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time. (Loans/ Short term/long term Debt) • 2) Income Statement - a financial statement that gives operating results for a specific period. (expenses/ COG’s) • 3) Cash Flow - The total amount of money being transferred into and out of a business, esp. as affecting liquidity. (solvency, the cash health) • All three things can publically be viewed online, these statements are released Quarterly, and Annually.
What's Next? • Once you have considered “The Big Picture”, you have an understanding of the companies fiscal figures, the next question I always ask myself, is where the hell is this stock going and how does it compare to its market and competitors? • A great tool to use are ratios that you can use to valuate these companies and see how they match up. • Most of these ratios point out if the stock is “cheap” or “expensive” or “undervalued” or overvalued”. • Once you understand where the company stands in comparison to the market, you can see if these are the right “levels” to get in.
Ratio’s • Here are some of the Ratio’s used to valuate companies. • P/E – Price Earnings • PEG – Price Earnings Growth • EBITDA - Earnings before interest, taxes, depreciation, and amorization • EV/EBITDA – Enterprise Value to EBITDA
Price/Earnings • This valuation ratio compares the company's current share price to its per-share earnings. • This can be a valuable tool in valuating companies within the same industry. • P/E is often used as a multiple when noting how much an investor/trader is willing to pay per dollar of earnings. • You will often hear analysts or traders say, “Its trading 10 times earnings” or “At a multiple of 14 the stock seems cheap”. • Formula: Market Value per Share / Earnings per Share (EPS)
PEG (Price Earnings Growth) Ratio • A huge valuation tool for estimating potential earnings growth. • A company with a low PEG ratio closer to 0 is most likely undervalued. • However, just like P/E it has its limits. • These are projected numbers, so of course are subject to change. • This is still a great tool to see how it compares to industry leaders, also a huge tool used by Growth Investors. • Formula: Price/Earnings / Annual EPS growth
EBITDA • A measurement of a company's operating profitability. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. • In essence you have a look at the company’s total profitability outlook.
Enterprise Value/ EBITDA • First Enterprise Value is not to be mistaken with market cap. • Market Cap only deals with is limited to common equity. • Enterprise Value sums up everything and gives you the market value of the whole business. • EV/EBITDA is important because it can compare any company to another. • It ignores tax structures of other countries, and it also can be a great tool for potential takeover targets. • A company with a low ev/ebitda multiple is considered by some as undervauled.
DCF – Discounted Cash Flow • This valuation tool, seemingly complicated, but if your good at math. • This a great method for valuating what your investment may be down the road. • In essence, THE DCF is = the money you would receive from an investment and adjusts for the time value of money.
More Renewable Energy Greg Allis
Global Wind Energy Production • Source: GWEC, Global Wind Report Annual Market Update 2010
Other forms • Biofuels • Biomass • Hydroelectric • Tidal
“I’m Going to Work on Wall Street, Why Do I Care?” • New and developing technologies • Huge political, social, and economic impacts • Money to be made
Success Indicators • Government/financial support • Energy potential • Social attitude towards green energy
Alternate Energy Stocks • First Solar Inc. (NASDAQ: FSLR) -solar • Tesla Motors Inc. (NASDAQ: TSLA) -electrical(vehicles) • FuelCell Energy Inc. (NASDAQ: FCEL) -electrical Renixx –Renewable Energy Industrial Index
Green ETF’s • A green ETF is ultimately a basket of alternative energy stocks or stocks of green companies • Bought and sold on the stock market • Not subject to the same fees as an alternate investment fund(lower expense ratio) • Buying ETF’s is less risky than individual stocks
Alternate Energy ETF’s • Market Vectors Global Alternative Energy ETF (NYSE: GEX) • PowerShares Clean Energy ETF (NYSE:PBW) • Market Vectors Solar Energy ETF (NYSE: KWT). Funds • iShares S&P Global Clean Energy Index Fund (ICLN) • New Alternatives Fund(NALFX)
Risks of Clean Energy • Rapidly developing technologies • Industries prospects rely on Government help(subsidies) • Alternative-energy stocks tend to fall in and out of favor depending on the price of crude • So many clean energy companies emerging its hard to pick which one will stand the test of time • (Investor emotional Involvement for the wrong reasons)