Tag Archives: outlook

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.

Catch These Poland ETFs On The Upswing

Poland’s currency zloty, bonds and stocks gained on Monday (May 16, 2016) as Moody’s reaffirmed its long-term credit rating for the country at A2. And unsurprisingly two ETFs tracking the country – the iShares MSCI Poland Capped ETF (NYSEARCA: EPOL ) and the VanEck Vectors Poland ETF (NYSEARCA: PLND ) – jumped 3.4% and 3%, respectively. Poland, one of the outperformers in the EU, has been lagging in recent months thanks to growth slowdown in the emerging markets. Eurozone troubles also continue to weigh on the country. Still, as per IMF forecasts, the country’s GDP growth rate is expected to touch 4% in 2016 as compared to 3.6% in 2015 building investors’ confidence in the country. Headwinds Remain Although Poland did not get a downgrade from Moody’s, the rating agency revised its outlook for the country to negative from stable. The agency cited several reasons for the change in outlook including fiscal risks arising from a substantial increase in current expenditures, uncertainty as to offsetting revenue measures and the government’s intention to lower the retirement age. Another factor affecting the outlook was the risk of deterioration in the investment climate thanks to unpredictable policies and legislations. The President’s office has recently presented a proposal to implement a law converting Swiss franc mortgages into zlotys. The International Monetary Fund (IMF) has criticized this proposal and stated that the country’s financial system along with credit and economic growth will stand to suffer if the country goes ahead with its plan to convert foreign-currency denominated mortgages. The IMF has also warned that the increase in government expenditure would lead to a rise in budget deficit to 2.8% in 2016. The rising budget deficit could even cross 3% in 2017, breaching the European Union’s budgetary rules. Instead, the IMF has encouraged the Polish government to follow policies that are market friendly. Despite these concerns, investors who believe that Poland is poised for a turnaround could catch the Poland-focused ETFs. Both the ETFs carry a favorable Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting room for upside. EPOL in Focus EPOL has about $173.4 million in AUM and an average daily volume of 274,000 shares. The product tracks the MSCI Poland IMI 25/50, charging 63 basis points a year from investors. With 40 stocks in its basket, this fund puts as much as 46.1% of its total assets in the top five holdings, suggesting high concentration risk. Financials actually makes up roughly half of the portfolio with 44.7% exposure. Energy and materials round off the top three sectors with exposure of 17.3% and 9.6% respectively. Shares of EPOL fell roughly 5.4% in the last one-month period ended May 16, 2016. PLND in Focus The fund looks to track the VanEck Vectors Poland Index and has 26 securities in its basket, charging investors 60 basis points a year in fees. The fund has 36.4% of its total assets in the top five holdings. PLND also puts heavy focus on financials, with as much as 37.1% exposure, followed by a 14.1% allocation to energy, 12.7% coverage in utilities and 11.4% in consumer discretionary. PLND sees a paltry volume of around 13,000 daily, while the ETF lost more than 5.8% in the last 30 days. Original Post

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).