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Stock Market Values – How To Value A Company With No Earnings

Is it just a case of irrational exuberance? Not necessarily. Traditional discounted cash flow analysis is a useful tool when it comes to evaluating financial assets, but it has its limitations. One aspect of investing that DCF analysis ignores is management’s flexibility. They can delay bringing a product to market, or expand its production to meet an unexpected surge in demand, or shift how their facilities are used – perhaps to produce a different kind of product. This kind of flexibility has real value. To capture this value, we use option-pricing methods to supplement traditional valuation. An option is an asset that can go up, but is limited to the downside. If management possesses a patent on a new drug, that patent has value even though it’s not producing cash right now. The upside may be huge while the downside is limited to the cost of bringing the medicine to the marketplace. Click to enlarge Call option pricing. Source: Wikipedia This is also why many tech companies seem to persistently carry such high valuations. The market is putting a high value of its potential growth, and the flexibility management has to pursue different approaches to its business. Putting a value on this kind of asset – management flexibility – is difficult, but it can be done. It depends on the cost of exercising the flexibility, the potential upside a change could realize, the amount of time management has to make the decision, and how volatile conditions are. The more volatile things are, the more these options have value. These values can all be quantified in a pricing model. Click to enlarge Black-Scholes Option Pricing Formula. Source: Wikipedia In practice, this involves a lot of assumptions about stock prices and strike prices and market volatility run through an analytical model with decision points and normal distributions. Additionally, the real world will insert complexities that our models can’t accommodate. Nevertheless, options methodology is essential for understanding why some money-losing companies still have high market values and why some profitable companies seem so cheap. Today, it seems the market is putting a lot of value on the options that Internet-media companies like Amazon (NASDAQ: AMZN ) and Netflix (NASDAQ: NFLX ) possess. It’s not necessarily irrational just because you don’t understand it. Sometimes, what is unseen is more important than what is seen. It’s all in the options. Disclosure: I am/we are long THE MARKET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The Story Of A Diversification Graph

How do you decide what stock or which sector to invest in? You rely on the media? You just invest in the latest hot stock? Or you setup a process to strategically help you out? When all is good, it seems easy to buy a stock but when the markets turn sour, it becomes more challenging and emotions start to make their way in. For example, did you ever sell a stock because you weren’t happy with the customer service you got? That would be an emotional transaction. Finding the Story… There are a number of ways to look at the graph… It’s important to put all the data points into context between your investments and the markets and economies impacting your investments. The graph below is a snapshot of my diversification by sector as of May 2016. First and foremost, the graph tells me that I should rebalance between my consumer defensive and technology sectors with the other deficient sectors. However, I do not like to sell that way, instead I just focus on those sectors when I add new money. The other story it tells when you take the markets into account is that the energy and basic materials sectors are out of favour. This is where the graph can start conflicting with emotions. You may not be happy about the performance of your current energy or basic material investments and the graph is telling you to pour more money in it. This is when you have a chance to buy low and sell high if you can pick a strong company that will bounce back. For me, that’s Suncor (NYSE: SU ), Enbridge (NYSE: ENB ), or TransCanada Corporation (NYSE: TRP ). As for the industrial and consumer cyclical sector, they have just fallen behind due to the movement of the others. When looking at my holdings, I only have 1 investment in each of those sectors and they have been doing fine over the past couple of years. McDondald’s (NYSE: MCD ) is doing remarkably well considering the lull it was in for a while. The sector deficiency isn’t based on performance but rather due to an increase in portfolio size. As it grows, so does the percentage of each sector. The same applies to Canadian National Railway ( TSX:CNR , NYSE:CNI ) Final Graph Reading As you can see, there has been 3 ways to read the graph each with its own story to tell. As I get ready to invest new money, I take into consideration the following: Any investment opportunity too good to pass on The stories of my diversification graph How much I have in a specific holding Readers: What’s your process?

U.S. Fund Flows Report: Investors Shy Away From Equity Funds

By Patrick Keon Click to enlarge Thomson Reuters Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) experienced net outflows of approximately $266 million for the fund-flows week ended Wednesday, May 11. This almost-static outcome was the result of negative net flows from equity funds (-$6.1 billion) and taxable bond funds (-$514 million), offset by similar positive net flows into money market funds (+$5.1 billion) and municipal bond funds (+$1.2 billion). Equities bounced back from two straight weeks of losses on the strength of one trading day. After losing roughly 2.5% combined in the previous two weeks the S&P 500 Index posted a gain of 0.3% this past week, all of which was captured on Tuesday, May 10, as the index appreciated 1.25% for the day. This one-day spike represented the best daily return for the index in two months and was driven by a surge in oil prices as well as a rally in some beaten-down sectors. Oil prices rose on the news that U.S. crude inventories would not increase as much as they have in recent weeks. Meanwhile, sentiment on the street was that the interest in healthcare and biotech stocks was not sustainable, since it was most likely driven by value hunters and was not an actual bullish view of the sectors. The outflows from equity funds were basically split down the middle between mutual funds (-$3.1 billion) and ETFs (-$3.0 billion). Among mutual funds domestic equity funds saw $3.2 billion leave their coffers, while nondomestic equity had net inflows of $100 million. For ETFs nondomestic products accounted for the majority of the net outflows, with the iShares MSCI Eurozone ETF (BATS: EZU ) ( -$950 million ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) ( -$933 million ) leading the way. Taxable bond ETFs (-$1.1 billion) were responsible for all of the net outflows for the group, while taxable bond mutual funds took in almost $700 million of net new money. The iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) ( -$1.5 billion ) and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) ( -$697 million ) had the largest net outflows among the ETFs, while funds in Lipper’s Core Plus Bond Funds category had the largest net inflows (+$1.1 billion) among the mutual funds. Municipal bond mutual funds extended their string of net inflows to 32 weeks-taking in $1.1 billion of net new money this past week. Funds in the High Yield Muni Debt Funds (+$287 million) and General and Insured Muni Debt Funds (+$278 million) classifications were the largest contributors to the week’s inflow totals. This past week’s flows activity (+$5.1 billion net) marked the third consecutive week of positive flows for money market funds, during which time they took in $16.7 billion of net new money. Funds in Lipper’s Institutional Money Markets Funds classification were responsible for all of the net inflows for the group this past week (+$9.2 billion).