Intelligent Investor's Notes: Joel Greenblatt

Saturday, 7 June 2014

Earning Yield comparison for APOLLO and LONBISC

Below tables present the Earning Yield Calculations for APOLLO and LONBISC.

APOLLO

Share Price	4.85
NOSH	80,000
Market Cap, E	388,000
Minority Interest	0
Total Debt	0
Excess Cash	64,863
EV	323,137

EBIT	42,449
EV/EBIT	7.61
EY = EV/EBIT	13.14%

LONBISC

Share Price	0.83
NOSH	142,224
Market Cap, E	118,046
Minority Interest	64,205
Total Debt	263,076
Excess Cash	-91,819
EV	537,146

EBIT	31,004
EV/EBIT	17.33
EY = EV/EBIT	5.77%

The enterprise value for APOLLO and LONBISC is 323,137 and 537,146 respectively.

APOLLO is trading at 7.6 times its Ebit (Earnings yield 13.41%) while LONBISC is value at a higher price with a 17.3 times of EV/EBIT (EY of 5.77%) eventhought the business quality of LONBISC is poorer than APOLLO as presented by following analysis:-

The numbers is telling us that there is a good company selling at cheap price, and a lousy company selling at an exorbitant price. Do you able to name it?

References:-

Wednesday, 7 May 2014

Magic Formula - Joel Greenblatt

Magic Formula to beat the market by Joel Greenblatt, a top-performing hedge fund manager since the 1980s
A long-term investment strategy designed to buy a group of above-average companies (High return of capital) when they are available at below-average prices (low EV/Ebit)

Earnings Yield = EBIT / Enterprise Value

Enterprise value = Market capitalization + Total Debts + Minotiry Interest – Excess cash

Return on Capital = EBIT / (Fixed Assets + Net Working Capital)

Fixed assets generally is the property, plant and equpment
Net working capital = Receivables + Inventories – Payable

Formula

Establish a minimum market capitalization (usually greater than $50 million).
Exclude utility and financial stocks.
Exclude foreign companies (American Depositary Receipts).
Determine company's earnings yield = EBIT / enterprise value.
Determine company's return on capital = EBIT / (net fixed assets + working capital).
Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
Continue over a long-term (3–5+ year) period.

It outperformed S&P 17 out of the 22 years and achieved a compounded annual growth of 23.8% as compared to the 9.6% of S&P.
Why it works?

Most investors tend to avoid buying many of the biggest winners

Why Cheap? the near future for a company might not look quite as bright as the recent past or there’s a great deal of uncertainty about the company for one reason or another
It systematically avoided by both individuals and institutional investors

Investors tend to sell their good stocks after they underperform for some time.

It’s hard to stick to a seemingly good stock that’s not working for a little while.

Many Investors sell their good stocks after the market and their portfolio declined

It should work better in Bursa than US

less institutional investor and hence less followers of this magic formula
institutional investor have no mandate to buy stock meet the magic formula - which most of them is small & mid cap stocks
retail investor is not savvy in fundamental investing - don't know how to determine a good company or a good price.
retail investor normally relying on IB's report (who have their own interest) or listen to the rumours in the market
retail investor influenced by greed and fear,

Improvement on Magic Formula

Steady income for pass few years

Quality on earning - check the cash flow

Opg Cash Flow close to or above net profit
FCF positive most of the year- 10% of invested capital, 5% of revenue

Healthy balance sheet - little & manageable debt (low risk)
Price is well below the DCF intrinsic value (huge MOS)
Some growth.....

Mr. Chong Magic Formula's Pick