Tuesday, February 14, 2017

Case Study - Backward Valuation (Time to Sell?)

An unstoppable bull. Market has been making highs every other day. Needless to say, my portfolio has been hitting record valuation every other day as well. It’s only February and my Net Worth has went up 11% YTD. Portfolio value has ran up 20% YTD. This is crazy.

When everything is jolly, I am quite cautious in this market looking at opportunity to reduce my holdings whenever market provides me with the incentive to. Well, buying is easy, the difficult part is to do a clean divorce with your holdings. Maybe the problem is when I liquidate, I may lose out on future gain (if any). Also it does not feel good to hold less in a bull market.  Emotion aside, I guess I will need to stick to my resolve if the numbers tell me the stock is now not a price which is attractive in fact it could be a premium its about time I say goodbye to this company no matter how good it is.

The company in question is PICO Far East. I have been holding this company since 2013, providing me with a dividend of 6% annually for the past few years (who says only REITS) provide yield that high. This is a stock providing me the best of both worlds. Growth and Yield.

Bought at a price of $2. This has move up substantially these 2 months to 2.9 today. Thoughts start to run in my mind the past week. Is the price right to bid farewell? I shall try to find out calculating backwards

EPS Model

Using a 5 Year horizon, a discount rate of 15% and a growth rate of 7% based on the arguments stated below. By reversing the calculation, I will be calculating how much EPS will have to be this year to satisfy a price of 2.9.

Current price (P) = HKD 2.9

P = FP/(1+R)^N
FP=P x (1+R)^N
   = 2.9(1.15)^5
   = 5.8

Current PE is trading at 11x earnings not seen since 2012. One of the highest since 2009. Average PE stands at 10.99 (Period 2009-2016)

The missing value here is Future EPS

5.8 = EPS x 10.99
EPS = 0.5276

F = EPS(1+R)^N
0.5276 = EPS (1.07)^5
EPS = 0.5276/(1.07)^5
       = 0.37

Using the following assumption, earnings per share for FY16 is 24.57. EPS will need to be 37cents to justify a price of HKD2.9. This indicates that EPS will need to grow close to 50% for FY17. To do that, revenue will need to grow substantially to justify share an EPS.

I have an emotional attachment to this company and love the way the management carry out their business. However the numbers tell me the price has gone ahead of what the company is actually worth.

I will need to trust the numbers that I have calculated and come back to this company when prices are more reasonable. Given a choice now I will never add on to this company at this price. So if i will not but it also means it could be time to sell. Probably its time to say goodbye and hopefully hello in future PICO.

Case Study - Backward Valuation (Time to Sell?)

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