Guys, After so much of hammering in MBA and CFA L1, I can’t think beyond the cash flow based DCF. Can anyone advise me what other shorcuts one can use to do quick analysis say for a pharma stock or a auto stock. Many thanks for your time and advice. S
Are you asking for alternatives to fundamental analysis or quick and dirty fundamental analysis? I say just use darts.
Xsellside, I meant quick and dirty fundamental analysis. Many thanks S
Technical Analysis
Valuation (p/e, p/b, p/s) relative to competitors or absolute valuation compared to the stocks historic averages.
I would rely on analyst estimates for quick & dirty. At least they are looking forward a little bit.
PEG ratio.
saurya_s Wrote: ------------------------------------------------------- > Guys, > After so much of hammering in MBA and CFA L1, I > can’t think beyond the cash flow based DCF. Can > anyone advise me what other shorcuts one can use > to do quick analysis say for a pharma stock or a > auto stock. > Many thanks for your time and advice. > S Pharma or auto? Not sure about any quick and easy approach to Pharma… You’re really making bets on whether or not new drugs will work; and if they do, will they be popular. I really don’t think there are any shortcuts here. Maybe there are for autos, but you’ll have to ask someone else…
So, if i ask you to look at comp X, you will look at key ratios (P/E, PEG, P/S) etc of the company and its peers? And one will buy stock based on that? Where do you get these ratios from? Do you calculate your own or rely on google fin or yahoo fin kind of stuff. Do we get some more ratios like P/CFO, ROIC/WACC or EV/IC to ROIC/WACC or CFROI kind of things or do I have to calculate that myself. Thanks S
Well, I wouldn’t buy any stock on a quick and dirty. You can use quick and dirty type methods as a stock screen of sorts or just a jumping off point, but not a decision maker. Think about it. Hundreds of market participants work long hours each day to sort out fundamentals. Do you think you can outguess them by simply looking at relative p/e ratios provided by Yahoo! finance?
More than that - if those ratios contain particularly valuable information by themselves, the stat arb machines would own the world. They don’t. Why should it be easy to pick stocks? It’s one of the hardest things in the world to do…
Here are my two cents. The more time I have spent working in finance, the more faith I have put in the fundamental qualities of a business, i.e. doing an assessment of market opportunity and size, competitive dynamics, barriers to entry, supplier and customer concentration, leadership position, quality of management team, and so forth. The financials (margins, growth rates, balance sheet ratios, and cash flow values) should essentially reflect all the fundamental elements of a company or industry, if you have done your due diligence correctly. Valuation ratios are just a numerical representation of how much you should be willing to pay for a company or asset, but your determination as to whether a business is fundamentally good should come primarily through a qualitative assessment. At the end of the day, good investments are defined by their underlying leadership characteristics and growth drivers, and the model is simply a quantitative representation of those factors; it’s not the model or the ratios that drive the business. I used to think naively that having a good model would tell you most of what you needed to know, but after spending more time on the sell-side, I started to realize that a model is only as good as its assumptions, I can say this with total confidence because our private equity models can be thousands of rows long, especially when you take into account all the different sensitivities, scenarios, and financing considerations; however, as investors, our diligence and a review of financial results tells us whether a stock or company is a good one well before we even build the model or look at valuation trends (and most of the time, since we’re in the business of buying private companies, we don’t even trading comp history for such companies). Any thoughts?
do you really think this is something that you should be taking shortcuts with? just a thought…
Nope, If someone ask you to do come up with a buy/sell reco on say comp X and you don’t have any data other than available on web, the company has 30 -40 products for which one has to forecast revenue, what will you do? Doing a fundamental analysis will be unrealistic to be honest. Won’t you use your common sense and judgement as to what is appropriate and practical in this regard? This is what I am trying to gather. S
You just shrug and say “I dunno. What else do you have in your portfolio and why are you interested in this particular stock?”
Joey, This a part of my interview! S
So you are going to give them some BS story about getting P/B ratios from Yahoo? They want to hear you think, not give a recommendation on Ford or Merck. They want something like numi’s post above. So if someone asked me about autos I would say a) Buying any auto stock is a macro bet. If the world goes into a recession and oil goes to $400/barrel, every auto stock will be worth squat. I may or may not have a macro view about that. b) For any particular auto stock, I would first get a handle on the debt and anything that looks like debt. For most US auto manufacturers there is significat question of long-term solvency and buying stock is an all-in bet that they remain solvent. c) Products - I was reading Car and Driver in the MD’s office the other day about the 425 hp Challenger and thinking about Kowalski as a nice metaphor for the whole industry. We have new CAFE requirements, global warming, runaway oil prices, at least one Middle Eastern war and somehow we are building cars to look like 1971 and do 12 sec 1/4’s? Huh? Detroit seems to be living in a different world than the rest of us. d) Design times - Why does it take so freaking long to design a car and get it built? The reason we are coming out with 2009 Challengers and 2010 Camaros is that the auto industry needs to rethink their design schedules to accommodate a world where oil doubles in price in a year and consumer tastes change constantly. They learned this once but they have forgotten it. Who has the shortest design schedule? e) Cerberus - OK even if its crap can I sell it to Cerberus?
I agree with JoeyDVivre. This is pretty much exactly what someone is looking for as I described in my earlier post – they want to hear your analysis and thought process. Anyone with a calculator can crunch the numbers, and remember that in an efficient market, valuations are driven by the strength of the business and its performance, and not the other way around. Granted, when you’re discussing a company, you should be well-versed in certain key valuation metrics, including capitalization or enterprise value, revenues, operating earnings/EBITDA, and so forth; however, your assessment of a company should begin exactly as JDV laid out, with a careful evaluation of company and industry trends as well as the management team behind the business. You also want to carefully consider a wide range of scenarios and possibilities in order to figure out what would happen to the value of the business if something went awry, and what the probability of such an event would be. Only then should you even start to think about what valuation ratios are telling you, whether they’re in a model, on Yahoo finance, or some other site. At the end of the day, a ratio is just one number divided by another, and is essentially meaningless in and of itself; however, your responsibility as an analyst is to explain how and why that number is what it is. Screening companies based on a trading or transaction multiple might be useful in identifying a certain treshold of potential investments – we do this all the time, because there is a limited range of companies we consider to be suitable candidates for a leveraged buyout (i.e. implied EV/EBITDA multiples usually ranging from 4x-10x). However, at the end of the day, there is no shortcut for doing careful diligence insofar as determining which of those investments is truly better than the other. Of course, you should be prepared to explain the key value propositions in the form of a few bullet points, since there is something to be said about brevity – but remember that ratios only reflect valuation, and you need to do your research to figure out whether that valuation is supported by the fundamentals (which usually take months or years of experience in the industry to truly understand). In conclusion, perhaps it’s worth considering the situation from the perspective of a control investor, such as a private equity group or consortium, that is responsible for buying an entire company. Why do you think they spend weeks or months diligencing any potential investment? Because when you’re in the business of buying companies that are worth hundreds of millions of dollars, you want to make sure you’ve considered all possible risks and you’ve left no stone unturned – and only when you feel comfortable with the industry and company trends do you begin to discuss matters of valuation. And that’s really when matters of P/E, P/B, EV/EBITDA, and other arbitrary valuation multiples come into play.
Joey, How would you response change if I say it is a drug company like Lilly. Among macro things, the manifesto of US presidential election might have impact on pharma revenue. Well, apart from that the investment in them depend on drugs coming out of pipeline. Now predicting what drug will be approved by FDA is not easy job. Just keen to know your thoughts. Thanks S
virginCFAhooker Wrote: ------------------------------------------------------- > I would rely on analyst estimates for quick & > dirty. At least they are looking forward a little > bit. werd, if you just want quick and dirty then rely on someone else or just throw darts in the wall. If you want to do it right it takes time.