...PERFORMANCE OF VALUE VS. GROWTH STOCKS: EVIDENCE FROM INTERNATIONAL MARKETS Zugang Liu, Pennsylvania State University Hazleton, USA Jia Wang, Rowan University, Glassboro, NJ, USA ABSTRACT This paper studies the long-term risk and return characteristics of value stocks versus growth stocks for three international markets: Asia, Scandinavia, and Europe. We focus on the downside of returns and use Value at Risk as our risk measure. We find that value stocks outperform growth stocks in terms of both risks and returns across all time horizons for all three markets. We further conduct cross country analysis. Interestingly, we find that there is some risk and return trade off in short term investment horizon across the three countries. When investment horizon lengthens, Scandinavian market has the best performance in both risks and returns for both value and growth indexes. Keywords: Value, Growth, Risk, Time Horizon 1. INTRODUCTION Value or growth? This is an age old debate in the investment world. Value style stock commonly refers to a stock that is undervalued relative to its fundamentals (i.e. dividends, earnings, sales, etc) and often has a low market to book ratio, a high dividend yield or a low P/E ratio. Growth style stocks are often shares from companies that are expected to grow at a higher than average rate and such stocks often have high market to book ratios, low dividend yields or high P/E ratios. Which one is more profitable? Basu (1977), among others, reports that value portfolios...
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...Chapter 7 Stock Valuation Solution to Problems P7-1. LG 2: Authorized and Available Shares Basic Maximum shares available for sale Authorized shares 2,000,000 Less: Shares outstanding 1,400,000 Available shares 600,000 $48,000,000 = 800,000 shares (b) Total shares needed = $60 The firm requires an additional 200,000 authorized shares to raise the necessary funds at $60 per share. (c) Aspin must amend its corporate charter to authorize the issuance of additional shares. (a) P7-2. LG 2: Preferred Dividends Intermediate (a) $8.80 per year or $2.20 per quarter (b) $2.20 For a noncumulative preferred only the latest dividend has to be paid before dividends can be paid on common stock. (c) $8.80 For cumulative preferred all dividends in arrears must be paid before dividends can be paid on common stock. In this case the board must pay the 3 dividends missed plus the current dividend. P7-3. LG 2: Preferred Dividends Intermediate A B C D E $15.002 $8.80 $11.00 $25.504 $8.10 quarters in arrears plus the latest quarter only the latest quarter only the latest quarter quarters in arrears plus the latest quarter only the latest quarter Chapter 7 Stock Valuation 171 P7-4. LG 2: Convertible Preferred Stock Challenge (a) Conversion value = conversion ratio × stock price = 5 × $20 = $100 (b) Based on comparison of the preferred stock price versus the conversion value the investor should convert. If converted, the investor has $100 of value versus only $96 if she...
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...Price: $40.25 +0.17(+0.42%) Financial Strength : 6/10 vs industry Cash to Debt Equity to Asset Interest Coverage vs history WACC vs ROIC 5.30 ROA (%) 2.21% 12.59% WACC ROIC 1.13 ROE (%) Z-Score: 3.32 5.97 Net-margin (%) 5.10 2.13 Revenue Growth (3Y)(%) Forward P/E Good Signs 2011 2012 Per Share Revenue: 2013 Consistent growth 2014 P/S Ratio: Close to 1-year low 2015 Apr 0 0 373 357 569 412 374 29.70 1.92 Quick Ratio Days Inventory 1.12 88.42 Days Sales Outstanding 37.24 15.20 Quarterly Revenues Jan N/A Current Ratio 5.10 vs history 1.44 EV-to-EBIT 2.40 EBITDA Growth (3Y)(%) Valuation Box vs industry P/S ROC (Joel Greenblatt) (%) 30.59 EPS Growth (3Y)(%) Warning Signs Valuation Ratios vs vs industry history Operating margin (%) -0.27 Stock PDF Enterprise Value: $3.42 B Profitability & Growth : 5/10 0.08 GuruFocus 09/25/2015 8:09PM EST Market Cap: $2.5 B Company Description Jul Oct Full Year ... (Read More) Competitors: Guru Trades 487 501 1,773 Quarterly Earnings per Share DCF Jan Earnings per share: $-0.32 Growth Rate in the next 10 years: 5.20% Terminal Growth Rate for 10 years: 4% Fair Value: $-3.47 2011 2012 2013 2014 2015 Reverse DCF 2011 2012 2013 2014 2015 Expected eps Growth Rate: inf% Apr Jul Oct Full Year 0.00 0.00 ...
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...CHAPTER 7 Stocks, Stock Valuation, and Stock Market Equilibrium 1 Topics in Chapter Features of common stock Valuing common stock Preferred stock Stock market equilibrium Efficient markets hypothesis Implications of market efficiency for financial decisions 2 The Big Picture: The Intrinsic Value of Common Stock Free cash flow (FCF) Dividends (Dt) D2 D1 D∞ + + ... + (1 + rs )1 (1 + rs)2 (1 + rs)∞ ValueStock = Market interest rates Market risk aversion Cost of equity (rs) Firm’s debt/equity mix Firm’s business risk Common Stock: Owners, Directors, and Managers Represents ownership. Ownership implies control. Stockholders elect directors. Directors hire management. Since managers are “agents” of shareholders, their goal should be: Maximize stock price. 4 Classified Stock Classified stock has special provisions. Could classify existing stock as founders’ shares, with voting rights but dividend restrictions. New shares might be called “Class A” shares, with voting restrictions but full dividend rights. 5 Tracking Stock The dividends of tracking stock are tied to a particular division, rather than the company as a whole. Investors can separately value the divisions. Its easier to compensate division managers with the tracking stock. But tracking stock usually has no voting rights, and the financial disclosure for the division is not as regulated as for the company. 6 Different...
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...diversification. For instance, equities have many representations in the mutual fund world. Variants or subclasses refer to more granular characteristics of the asset class. Here are some examples: Equities can vary according to: * the size of companies represented in a “basket” (e.g. large vs medium vs small cap stocks) * the way the stocks’ prices move as the stocks chart their growth (e.g. growth vs value stocks) * the geographical market in which the stock moves (e.g. domestic vs international) Bonds can vary according to: * their maturity dates (e.g. short term vs long term bonds) * their level of risk (e.g. junk bonds, anyone?) * who issues the bond (e.g. government vs corporate) * how they pay out Cash vehicles vary mostly according to rates of return and level of security offered, which are usually characteristics that are inversely proportional to each other. Generally, within the investment world, the higher the rate of return, the less stable the fund value is expected to be. Tip: You can find additional diversification down to the class variant level from mutual fund institutitions, Treasury Direct, or online stock brokers who can assist with giving you more information. Try Morningstar as well to help you with more details on this topic. Note though that most of the time, you don’t really need to seek this kind of detailed representation to achieve a well diversified portfolio, as positions in basic asset classes...
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...=Average and =STDEV functions Measuring Standalone Risk: Coefficient of Variation Coefficient of variation = CV=σr Risk Aversion and Required Rate of Return Assume risk aversion for investors Textbook Example: Basic Food’s Price up to $150 from $100 Sale.com Price down to $75 from 100. Difference in return, 20%-10%= Risk Premium Risk in Portfolio Context Expected return on portfolio=Weighted expected return=rp=i=1nwiri Portfolio Risk Stocks can be combined into portfolios which then become less risky to riskless depending on the correlation of the assets. Stocks with a ρ=-1 are perfectly negatively correlated. The inverse is positively correlated. Expected ρ also called R = t=1n(ri,t-ri,Avg)(rj,t-rj,Avg)[t=1n(ri,t-ri,Avg)2][t=1n(rj,t-rj,Avg)2] Where i and j are stocks ri,t is the actual return for stock i in period t and ri,Avgis average return during n period sample Or just use =CORREL function in Excel Diversification does NOTHING to reduce risk if stocks are perfectly positive correlated!!! Diversifiable Risk VS Market Risk Almost...
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...Analysis and Valuation March 2015 In-Mu Haw (许 仁茂) 1 Create value through acquisition to build brands (over 100) 2 Lenovo vs. HP Stock Price Lenovo created value through acquisitions Poor acquisition (overpaid: $8.8B) $18 million in 2013 3 Deloitte Report Chet Wood, Managing Partner of Deloitte LLP, Merger & Acquisition Services: • • About 70 percent of all health plan M&As fail to create meaningful shareholder value. CFOs and management can take a stronger role in M&A deal evaluation, especially on revenue growth. 4 Use of Financial Statements for Valuation “I am considering to buy a small packing company. They offered me RMB 15 million and gave me their last 2 years’ Income Statements and Balance Sheets. I think it’s overpriced. How much do you think I should pay?” How will you use I/S and B/S to assess the target firm’s fair value? 5 Warren Buffet Emphasized importance of looking at a firm’s Competitive advantage of products Long-term growth potential… for good investment 6 Sound Fundamental Analysis One does not buy a stock, one buys a business. When buying a business, know the business. Good firms can be bad buys (if overpriced). Price is what you pay, value is what you get. Value of firm = Value of Debt + Value of Equity TA = L + SE (BV) on B/S 7 TA – L = SE SE (BV) vs. Market value of equity 8 Stock Price What is intrinsic value? Is the price overvalued? P/E=41: What earnings growth rate investors predicted? 9 Learning Objective of the...
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...when Fulton County passed prohibition legislation. Carbonated water was added later by accident when Pemberton was mixing drinks for a friend and incidentally included it. His friends loved the new taste, so he altered the original formula to incorporate it. | Pepsi - International Directory of Company Histories, Vol. 40. St. James Press, 2001. (http://www.fundinguniverse.com/company-histories/the-pepsi-bottling-group-inc-history/). Major Suppliers Pepsi Cola | Coca-Cola | PolandEgyptUnited Arab EmiratesCanada | Poland China Bulgaria Egypt Hong Kong Canada | Coca-Cola Stock Analysis The company has managed to deliver a 9.7% annual increase in EPS since 2002. Analysts expect Coca-Cola to earn $4.08 per share in 2012 and $4.47 per share in 2013. In comparison, Coca-Cola earned $3.69 per share in 2011. Coca-Cola’s 2020 Vision Strategy strives for a high-single-digit annual EPS growth throughout this...
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...Energy Transfer Equity Company By Securities Analysis FI560 Abstract My stock analysis project is on Energy Transfer Equity, Inc. The analysis consists of a very extensive study in five areas: 1. The background of the company with a life cycle analysis 2. An analysis of Return on Equity 3. The company’s projected future growth rate of earnings 4. An analysis of its required rate of return using CAPM measurement 5. The company’s intrinsic value using the discount valuation techniques. This analysis was done on weekly basis in conjunction with learning objectives and real-world applications in our course. My stock analysis should substantiate an investor to invest or not to invest in this stock in a well balanced portfolio. Based on the analysis of good performance and growth potential, I would recommend investing in this stock. Company Background With Life Cycle Analysis A Texas-based energy company that began in 1995 as a small intrastate natural gas pipeline company, Energy Transfer is now one of the country’s fastest-growing natural gas transportation companies with widespread business operations that are highly regarded throughout the energy industry and the investment community. Energy Transfer owns and operates a diversified portfolio of energy assets. Their operations include the gathering, treating, processing, marketing...
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...prospective profitability of a company to assess its fair market value 2. Quantitative tools: dividend discount model (DDM) 3. P/E (price-earnings ratio) 4. Free cash flow models 1. Valuation by Comparables P/E, price-to-book value, price-to-sales value, price/cash flow ratio Comparative valuations ratios are used to assess the valuation of one firm vs. others in the same industry Limitations of book value Liquidation value per share Replacement cost of its assets – liability 2. Intrinsic Value vs. Market Price * 第一种方法 Investor’s expectation= cash dividends + capital gains/ loss (price appreciation/ depreciation) Expected (HPR) holding-period return= EP1-P0+E D1P0 = EP1-P0P0+E D1P0 = capital gains yield (expected rate of price appreciation) +expected dividend yield 是你期待从这个投资里得到的 Required rate of return: k 是根据CAMP算出来的 如果k= expected return, 则说明price correctly (market capitalization rate) 如果k< expected return, 则说明overpriced （会想要更多的此股票） 是opportunity cost, 是我投资这个项目应该得到多少钱。 如果expected> required, 则投资( positive alpha) * 第二种方法 Intrinsic value (V0) of a share of stock to its market price V0是present value of all cash payments= all dividends + 从卖股票里得到的proceeds, 再discounted V0=D1+P11+k 然后比较V0和P0, 如果V0>P0，说明这支股票underpriced (positive-alpha stock= required> expected) 3. Dividend Discount Model (DDM) The stock prices are determined ultimately by the cash flows accruing to...
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...shares is called Stock. The person who owns a stock is a shareholder. The major shareholders of the corporation elect board of directors. The shareholders would not have direct control because, in a corporation, direct control and ownership are often separate. Board of directors makes rules on how the corporation should run and delegates the decision making to corporate management team. The Corporate management team will consists of Chief executive officer (CEO) and Chief financial officer (CFO). The main important job of a financial managers is to make best decision to increase the value of the company which would increase the value of stock invested by the investors. Corporation would also make invest on other big corporations to increase their value. The chief financial officer takes responsibility for making those financial investment decisions on other companies by purchasing those company’s stocks. There are two options of stock available in the stock market which is Value and Growth stock. Value stocks are usually low price to earnings ratio and low price to book ratio. Sometimes a company may have weak temporary earnings and had fallen on bad times. Sometimes poor quarterly earnings depress the company’s stock price temporarily and create a long-term stock buying option. Many investors look for these corporations called as Margin as Safety which means the market has discounted the price of the stock more than its intrinsic value, the present value of its future cash...
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...owners * Ease transfer of ownership * Limited liability * Ease of raising capital * Disadvantages: * Double taxation * Cost of set-up and report filing Maximizing value * Limited liability- the lower the risk the higher the value, all else equal * Growth opportunities: corporations can raise capital easier to take advantage of these opportunities. * Liquidity: an asset value also depends on how easy it is to sell it. Management’s primary goal Our focus: profit, publicity held companies Management’s goal: maximize shareholder wealth, which translates into maximizing the stock price. Maximizing shareholder value: A company’s shareholder wealth is equal to the number of shrares outstanding times market value per share. * We need to know what factors affect the stock price. * The value of a share of stock is the present value of the cash flows an “average investor” expects to receive in the future id he or she bought the stock. * Long-term view important. Market price VS intrinsic value Stock’s market price: actual market price of the share of stock. Value based on perceived returns and risk. (could be wrong) Intrinsic value: what a fully informed analyst would estimate as the “true” value of a stock...
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...provided in the case, but we did assume a reduction in the interest rate back to the 7.25% for the current loan in 2012, when the Notes Payable to Accounts Receivable ratio falls back below the 70% threshold. One concern not discussed in the case is the relative growth of Flash Memory vs. the SSD category. Based on the information provided, we estimate Flash’s share of the market at 15% in 2007 which rapidly declines to an estimated 2% by 2013. This underscores Flash Memory’s need to accelerate top line growth to remain a significant player in the market. The forecast balance sheet (Exhibit 2) shows the account balances for Flash Memory assuming they do not invest in the new product line. The financing requirements in 2010, 2011 and 2012 are $14,433, $17,120 and $13,228 respectively. This increase in debt levels has changed the capital structure of the firm over time, increasing debt as a percentage of capital from 28% in 2007 to as high as 39% by 2011 (vs. a target of 18%). We calculated WACC for both scenarios - funding by increasing notes payable or by the issuance of stock. For the notes funding, we assumed a 9.25% cost of debt (loan rate of 3.25% prime + 6%) and a forward looking 2010-2012 average forecast debt/value ratio of 41%, resulting in a WACC of 10.11% (Exhibit 3). For the equity funding, we assumed a 7.25% cost of debt (loan rate of 3.25% prime + 4%) and the target debt-to-capital ratio of 18%, resulting in a WACC of 11.67% (Exhibit 4). The proposed investment...
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...Goode-Middleton MBA 570 Growth Stock and Value Stocks March 21, 2015 Purchasing stock makes investors part owners in the corporation. The stock purchased is an equity investment in the company. This makes the owner of the stock entitled to returns on their investment. When making stock investment decisions, there are two main stock types to consider investing in called value stocks and growth stocks. The goal of both stock types is to gain the best returns possible. However, they differ in characteristics. Value stock is defined as, a stock that tends to trade at a lower price relative to its fundamentals and thus considered undervalued by a value investor. Common characteristics of such stock include a high dividend yield, low price-to-book ratio and/or low price to earnings ratio (Investopedia, 2015, para. 1). Value stock investors are looking for stocks that are not reflecting their fundamental worth. The reasons for the stock being undervalued can be many. A company’s stock can be undervalue because it is experiences difficulties, its industry can be in decline or it can have a period of poor quarterly earnings. These are a few of the reasons why the stock can be undervalued. In general, value funds focus on perceived safety rather than growth, often investing in mature companies that are primarily using their earnings to pay dividends. As a result, value funds tend to produce more current income than growth funds, although the also...
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...billion, Price/Earnings is 22.4, Price/Book is 4.6, Net Profit Margin is 23.1%, Return on Equity is 17.5%, Total Debt/Equity is 26.3, and the dividend yield is 1.2% (Yahoo! Inc., 2011). One of the biggest leaders of this industry is Google Inc. Google Stands Strong In 1998, Google was launched with about 25 million pages. Today Google index is billions and billions of pages, which is roughly around 100 million gigabytes (Google, Inc, 2011). Google not only provides a top search engine, it also has its hands in search advertising, display advertising, mobile advertising, tools for publishing, and local business databases (Google, Inc., 2011). If you can afford to purchase a stock that has a listing price of $542.66, I would recommend investing in Google. Google’s current timeliness rank according to Value Line is 3. Although it is not expect to be the highest...
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