Transcript StockPointer

“A GPS in the Stock Market Jungle”
www.stockpointer.ca
“Investment Modeling”
Developing an Investment Model using
StockPointer©
and the EVA approach
Summary
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Our objective today
StockPointer© : the kernel to our model
Investment objectives
Investment strategy
Investment rules
On-going portfolio management
Appendices
– Canadian filter
– American filter
– Stocks in the current Model
Copyright © 2001 StockPointer©
For Internal Use Only
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Our Objective today
Present the methodology used to develop a typical
Investment Model allowing Investment Advisors to
present a highly professional approach in portfolio
development and investment management:
 Comprehensive and well structured
 Easy to explain and understand
 Demonstrates value for fee-based accounts
 Highly productive for IA’s
Building a trust
relationship with your
clients and prospects
For Internal Use Only
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StockPointer
 StockPointer’s EVA-based lists of topranked stocks have significantly
outperformed the TSX over the past 6+
years
SPiX – Top 40 Buy/Hold – 12 Months
StockPointer Index
 Produce economic portraits of over
6,500 Canadian and American stocks
with data updated daily
20,3% / yr
S&P/TSX Index
 Trusted and exploited by over 250
Investment Professionals across
Canada
7,8% / yr
Over 6 years 10 months
 Strategic partnership with
Nov99 2000
 User credentials can be found on
www.stockpointer.ca
 The EVA© (“Economic Value Added”)
model:
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Recognized concepts
Emphasis on wealth creation for shareholders
Highly structured and disciplined
Professional image
Easy to understand and appreciate by clients
and prospects
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Aug06
StockPointer© is based on the EVA© (“Economic Value
Added”) economic performance approach
“EVA analysis is at the heart of understanding how
companies create shareholder wealth. Most
importantly, it helps investors measure and
understand those factors that create or destroy
value.”
Steven Einhorn, Global Investment Research, Goldman Sachs & Co.
EVA© is a registered trademark of Stern Stewart & Co.
For Internal Use Only
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Investment objectives
Objective
Specific target
Targeted ROI
To outperform the S&P/TSX over a mid-term investment period.
 Consider Dividends even though not calculated in ROI.
 Consider Transaction Costs even though not calculated in ROI.
Investment Term
Objective is to adopt a Buy / Hold strategy over 12+ months
unless strong indications to do otherwise
 To encourage stability.
 To create confidence.
« La Bourse reflète la perception des investisseurs, et non la réalité.
La réalité, c’est quelque chose qui se matérialise à long terme. »
« The stock market reflects investors’ perception and not reality.
Reality is something that happens longer term. »
Stephen Jarislowsky, Affaires Plus, Mars 2006
For Internal Use Only
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Investment strategy (1 of 2)
To invest only in companies that create wealth for the shareholders
and are not overvalued by the market
Economic Performance
Stock Price Evaluation
Identify the companies that properly
manage their capital in the best interest
of their shareholders and generate a
return that is higher than expected for a
similar level of risk
Wealth Creation (or EVA)
becomes criteria #1
Insure that stock is not over-priced
compared to the company’s
Intrinsic Value
EVA-$ = NOPAT-$ – Cost of Capital-$
= ROC-$ – COC-$
= (ROC-%-COC-%) x Capital
> 0 if and only if ROC > COC
Performance Index = ROC / COC
Intrinsic Value = NPV of future EVA’s
Performance Index > 1
0.4 < P\IV < 2.5
« Better to invest in an economically sound company at the
reasonable price than invest in a poor company at a cheap price »
For Internal Use Only
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Investment strategy (2 of 2)
To align the risk associated with a portfolio with the
degree of tolerance that the end-customer is
comfortable with
Level of risk associated with a stock
Adjust the desired level of risk of the overall portfolio using the
Future Growth Value (FGV) calculation for each of its stocks
FGV = Market Value of Company – Current Operations Value
= MV – NPV of future Profits
= or < 0 for minimum risk
FGV < Acceptable Risk level
Other risk factors include:
- Sector over-weighting compared to Top-80
- P/IV too good to be true
- Profit and EVA going in different directions
For Internal Use Only
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Investment guidelines
Objective
Basic Guidelines
Reduce volatility
of the portfolio
 Adopt a good diversification strategy along four pillars:
+/- 25 stocks, size of companies, sector weighting and a good
Canada/USA split
 Choose companies with a demonstrated economic
performance over many years
Avoid paying a premium associated with expected growth
 Respect a minimum sales volume ($250M in Canada and $2.5B
in the US)
 Analyze many convergent sources of information (fundamental
vs technical, tradepress, newspapers, etc
Avoid the 4 major levels of risks: over-pricing, sector
weighting, “to good to be true”, EPS vs EVA trends
 Growing Dividend over the years is always a good sign of
prosperity
 Free Cash Flow generation is a good indication of wealth
creation
For Internal Use Only
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Investment guide/rules
Objective
Guide/Rules
 Use a filter to get initial list
 Sales over $250M in Canada and over $2.5 Billion in the USA
 Performance Index > 2
 Return on Capital > 10%
 Price / Intrinsic Value < 1.5 but > 0.4
 FGV < 30%
 Price Change (12 months) > -20% but < 25%
Buying/Selling
Rules
 Get rid of any stock that is not paying dividends
 Get rid of any stock for which IV < Adjusted IV
Try to match the SPiX 80 sector weighting; get rid of the least
performant stocks that are over weighting a sector
 Use american stocks (or ADR’s) to compensate for weak
presence of canadian economy in some sectors
 No stock should weight for more than 7.5% of the portfolio
 Objective of 10% cash should be kept in portfolio
For Internal Use Only
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Investment management
Objective
Keep Value
Guide/Rules
A more important annual review will put emphasis on replacing
old investments that could have performed well but are now at a
point where some new comers are better.
The annual review is also good to make appropriate sector
weighting
 Choose the right time to replace individual investments; not
necessarily all at the same time
 Follow-up closely tendency changes in major StockPointer
indicators such as EVA
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Building a portfolio
StockPointer
US stocks
Canadian stocks
US filter
Canadian filter
Recommended
stocks
Recommended
stocks
Investment
Model
Other
sources of
information
SPiX – Top 80
Sector weighting
Minor
Monthly
reviews
Major
Annual
reviews
Final selection
Investment
Model
For Internal Use Only
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Canadian filter
For Internal Use Only
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USA filter
For Internal Use Only
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The resulting Model
For Internal Use Only
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The resulting Model
For Internal Use Only
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