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Merry Christmas

Wednesday, December 26, 2012 0

Merry Christmas everybody, I have not been updating the blog recently due to the holiday season. One thing I can mention is all the delicious food I've been eating -- it's going to be tough to burn those calories off.

Oh, and Happy New Year!!

Introduction to Bonds

Tuesday, December 18, 2012 0

As most of these posts usually start, I'll begin with a definition from somewhere (wikipedia?) and try to explain it in layman's terms. I like this approach the most.

"A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity.[1] Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market."

So, firstly, let's begin with the first part of the definition. No, a bond is not an instrument like a guitar or a piccolo. It's an abstract device that's used by corporations and governments. Essentially, companies sell bonds as a way to raise money to fund for capital expenditures. If a company says "Oh, we need $200,000 more dollars to expand our operations into China.", then they might raise that money by selling bonds. This is a key concept to remember, and one that I had trouble with when I just started learning all these business terms.

Buying Bonds = Lending money to Government/Corporations
Selling Bonds = Borrowing money

Now, why would anyone want to lend corporations or the government money anyway? Is there a benefit to this? The answer is yes. The seller of the bond pays the bond back in payments, with the interest either being blended into the payments, or the payments being pure interest and the principal being paid fully at the end. So if you buy a $200,000 10 year bond with an interest rate of 10% payable annually then the interest payments are either $20,000 a year with a $200,000 lump sum payment at the end or the $200,000 gets blended in with your interest payments (this will lead to higher payments) and you get nothing at the end. There really isn't a difference though, depends on your desire for current income.

The maturity date is self-explanatory; it's when the bond matures a.k.a when it expires and the full payment + interest must be repaid. Bonds are further complicated by being issued in the secondary market, similar to stocks. To be brief, if the bond pays 10% and the market (other bonds) pay 8%, the 10% bond can sell at a premium and you can make a quick buck because the market interest rates went down. When interest rates go down, this is typically how you can profit and sell your bond if you think interest rates might rise again. If you have an 8% bond and the market (other bonds in the market) is paying 12% then you're really at a loss if you're buying bonds because other bonds are paying a higher interest than the ones you have. These are sold at a discount (lower than facevalue).

Valuing a bond is much easier than valuing a stock, since it can be done mathematically. However, this will be discussed further in a later post as I'm not exactly time-inclined to give a financial math lesson.

Good luck!

Introduction to Diversification

Friday, December 7, 2012 1

Diversification is important when investing, and it's a topic I want to briefly explain in this post, and eventually go more in depth later. To be brief, I'm going to cover a few general principles and reasons for diversification.

1) Don't put all your eggs in one basket.

Simply put, if you drop a basket that has all of your eggs in them, every egg will break, and you'll have no eggs left. In investing terms, as an extreme example, imagine you invest all your money into one company. If that company manages to go bankrupt, you literally lose all that money. The beauty of diversification is that you can minimize risk and potentially minimize losses too, if you do it correctly. It's a very advanced topic and will thus only be covered briefly for the fundamentals.

To minimize risk in the basket of eggs case, imagine having 10 baskets each with 1 egg. If you drop one basket and the egg breaks, you only lose 1 egg instead of all 10 if they were in the same basket.

2) Don't just invest in stocks

In order to maximize diversification, this cannot be done only with stocks. As Benjamin Graham's book "The Intelligent Investor" states, a portfolio should typically have 25% bonds and 75% stocks. This is a very general statement as things can get further complicated as an investor becomes more adept. This leads us to the next rule.

3) Don't just invest in bonds and stocks, GIC's and TFSA are important too

To further diversify and minimize risk and losses, one can structurally plan to buy stocks in different countries, invest in real estate, private equity, infrastructure, and commodities. If you live in Canada, it is of utmost importance to invest in GIC and Tax-Free Savings Accounts. These are virtually zero risk and although the return is low, it is better than having money vacant.


Although this post wasn't in depth and possessed a little redundancy, I hope it got the point across. Diversification is a complex topic and there are people who work in risk management -- in fact there are risk management departments at many banks. A solid investor allocates his investments so that if, for example, stocks manage to give subpar returns in Canada, this can be partially offset by higher returns in bonds, foreign stocks, etc.

OCI: Other Comprehensive Income... and how to interprete it.

Thursday, December 6, 2012 0

What is OCI?

Once again, I'll start with a definition from investopedia and go a little deeper.

An entry that is generally found in the equity section of a corporation's balance sheet. Accumulated other comprehensive income measures gains and losses of a business that have yet to be realized.

Basically, each company has a balance sheet which lists at a given date how much the company is worth. (Assets = Liabilities + Shareholder's Equity) Unfortunately, I assume basic accounting knowledge terms are already known so if you're having trouble understanding I would suggest a few very basic accounting textbooks to get you started. The shareholder's equity section of a company's balance sheet simple states how much equity a company has (stocks, retained earnings, etc). Also included in equity is accumulated other comprehensive income. What this does is simply measure gains and losses where the company has not actually received any cash yet. This means they are unrealized gains. Examples of this are simply gains on securities, pension liabilities, options/futures, etc. They are typically intangible objects of some sort.

Why OCI? Why not just include it into net income?

Well to begin with, the fair value of unrealized gains/losses in OCI eventually make it to their way to net income. This happens once companies sell the asset (security, option/future, etc). Companies keep OCI separate at first from net income because, in actuality, OCI really isn't part of a company's main operations (unless it's an investment bank/hedge fund etc). Disregarding financial companies, OCI does not include assets involved in normal, continuous operations of a company. Also, OCI would create higher volatility in net income. From an intuitive standpoint, investments in derivatives in securities are generally a lot more volatile than a company's normal operations and will therefore be very high in some periods and low in others. To keep this bias and volatility at a minimum, it's easier to just create a separate section for it.

What does a smart investor take away from this?

Simple. A smart investor knows that when the equity markets do good, a company's total OCI will increase and can use that as a predictor, even if the company's operations/earnings do bad. It is of course an assumption that a company has relatively competent investing knowledge and performs in a way similar to the market.

Good luck!

Buffett Mocks Norquist Idea on Taxes Thwarting Investment

Saturday, December 1, 2012 0

One of the points I found most interesting in this article was how even when capital gains were still taxed relatively heavily, people still invested. This shows some evidence against Romney's beliefs that people/businesses will invest more if the rich are taxed less.

Source: http://www.bloomberg.com/news/2012-11-26/buffett-mocks-norquist-idea-on-taxes-thwarting-investment.html

Warren Buffett, the second-richest man in the U.S., pressed his call for more taxes on the wealthy by mocking the idea that higher rates discourage investment.

Legislators should increase taxes on those earning more than $500,000, including minimum rates of at least 30 percent on all income above $1 million, Buffett said in an opinion piece in the New York Times today.

U.S. lawmakers returning this week from the Thanksgiving recess are seeking a budget deal to avoid a so-called fiscal cliff with more than $600 billion in tax hikes and spending cuts set to begin in January. Republicans including Mitt Romney, the defeated presidential candidate, and Grover Norquist, who encourages lawmakers to sign a pledge shunning tax increases, have said lower rates can boost the U.S. economy.

“Let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if -- gasp -- capital gains rates and ordinary income rates are increased,” Buffett wrote. “Only in Grover Norquist’s imagination does such a response exist.”

Buffett, worth $46.5 billion according to data compiled by Bloomberg, is using his clout to urge Congress and Obama to include measures that raise revenue as part of a deal to resolve the fiscal cliff, which may push the U.S. economy back into recession.

“We need to get rid of arrangements like ‘carried interest’ that enable income from labor to be magically converted into capital gains,” Buffett, chairman of Berkshire Hathaway Inc. (BRK/A), wrote. “And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.”

Cayman Islands

Romney’s returns show investments in funds located around the world, including Ireland, the Cayman Islands and Bermuda. The former governor of Massachusetts has said it is fair for him to pay a lower tax rate than a worker making the median annual income of about $50,000.

“It’s the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work,” Romney said in an interview with “60 Minutes” on CBS, broadcast on Sept. 23. Romney, who paid a 14.1 percent tax rate on $13.7 million in income last year, makes most of his income from investing a fortune estimated at $250 million.

Buffett has said his tax rate is the lowest among the about 20 employees at Berkshire’s headquarters in Omaha, Nebraska. Capital gains from most assets held for longer than a year are taxed at a top rate of 15 percent, while wage income is taxed at a top rate of 35 percent. The difference between those two accounts for Buffett’s lower rate.

Middle Class

Buffett managed funds for investors from 1956 to 1969 through partnerships. Taxes never led any of his clients to forgo an investment during that period, he wrote today, even though the capital gains rate was as high as 27.5 percent and the top marginal rate was at least 70 percent.

“Under those burdensome rates, moreover, both employment and the gross domestic product increased at a rapid clip,” Buffett wrote. “The middle class and the rich alike gained ground.”

Buffett continued to make investments under Berkshire, a textile maker he took control of in 1965 through a partnership. Since then, he has built the firm into a business with operations in insurance, retail, energy, freight and manufacturing. Its market value as of Nov. 23 was $220 billion. Buffett is the company’s largest shareholder.

Paper trading and some other stuff

Friday, November 23, 2012 0

Hi guys,

As a person who wants to learn as much as possible about finance, I have taken a little interest in trading. I am going to be doing paper trading first (trading with fake money) to get the hang of it. I will be doing it on this website:  http://questrade.com/platforms/free_trial.aspx . After that, I plan on learning futures. Since many people have serious trouble with these concepts, I feel it'll definitely give me an edge of competition. As someone mentioned about finance, "It's not hard, nothing is really hard. There's just a lot to know", and this is 100% true. In order to be absolutely great in finance and make accurate and sound decisions, you have to really know how everything works. You have to know all the terms, you have to know all the different types of investment strategies. These things, in my opinion, are the fundamentals. Many people say "blahblah you need a good temperament, focus on emotions first". This helps once you know actually how the heck to invest in the first place. If you have no idea what a bond, derivative, or even a security is, then even with the perfect temperament you will still suck at investing.

In preparation for paper trading, I've been watching a few of these videos as of late.  http://www.youtube.com/user/InformedTrades It's a guy named Simit (if I recall correctly) who works as a trader and teaches you important skills in a concise way. Really informative and great.

Over the past while I've been reading a few articles on Bloomberg here and there. Some of the articles are really interesting and informative and really give you some insight on how certain industries work. For example, I was reading an article on how the Hewlett-Packard share price has dropped significantly due to a write-down of $8.8B. HP wanted to expand into the software industry due to a competitive disadvantage (Apple, Microsoft, etc are all hardware and software producers) and an attempt to reach new markets. They acquired Autonomy, a software company, and everything went great, until auditors figured out that Autonomy counted resales of Dell computers as revenue, when in fact it was Dell's revenue. Therefore, the executives at Autonomy cooked the books and let's just say they're in some deep doo-doo. Unfortunately, HP had to pay the price since it now owns Autonomy.

Recall that price per share = Total Equity ($) / (Total Shares Outstanding)

It's easy to see that if equity goes down, price goes down. If shares outstanding increase, price goes down. Simple math.

..until next time folks.

Stocks falling, the cue for their return is news on government action

Friday, November 16, 2012 0

With people becoming excessively worried over the fiscal cliff in the U.S and the debt crisis in Europe, stocks dropped significantly. What they did wrong is that they sold low and bought high. This is no way to invest, and it is definitely the easiest way to lose any potential gains.

S&P rose 0.5 percent, or 50 basis points to 1359.88 at 4 p.m eastern U.S time. As Walter Hellwig mentioned, any good news is going to cause prices to rise significantly, and any bad news is going to cause them to drop to the pits of... yeah. This is mostly due to the market being oversold and there being a lot of foolish investors. Anybody who can understand basic psychology can really see that the market is full of these type of "reactors" who react on impulse on good or bad news. Thus, with the prices dropping, it's a perfect time to buy in as they rise. The saying "no news is good news" doesn't take effect here. It's "good news is good news" and "bad news is bad news".

As the European debt crisis begins to solve itself, international purchases of U.S assets are down the drain, plunging from $90.3 billion in August to $3.3 billion in November. The U.S needs to take action, and when news comes out that action will occur, it's time to buy those stocks as the prices fly up.

Rules when buying (or holding) Gold and Silver Stocks

Monday, November 12, 2012 0

Today we will discuss three "golden" rules regarding debunked myths around these two precious metals.

Let's first define what volatility is, as mentioned on investopedia:

"1. A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

2. A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used."

This is basically saying that volatility = risk, however volatility does not equal risk when considering gold and silver stocks. This is because banker cartels can easily manipulate the price volatility of gold and silver derivatives. This in actuality has nothing to do with the actual physical supply and demand of gold and silver. Hence, in this case, volatility is not a valid indicator regarding risk.

Next, it is absolutely imperative that you have patience for small upcoming companies to come out on top. A huge mistake that investors can make is immediately selling out after the price dropped. Gold and silver's volatility is NOT an indicator for actual risk. It is in many cases artificial, so you have to be patient for the price to rise again. For example, a gold company in the great depression lost 50% of its share price, everybody sold out, and then for roughly 6 years it earned 1258% of its share price a year. Patience is a virtue.

Typically, when gold/silver have a low risk high reward setup, the news, bankers, etc are very likely to say there is no opportunity. This is a decent point to buy in, since there's a fair chance risk is actually a lot lower than it is made out to be. Conversely, when silver/gold prices are rising, many will try to persuade you (directly or indirectly) to purchase stock. Interestingly enough, right after this, the price will drop a ton. This is all based on historical evidence.

So in conclusion, this all sounds like a conspiracy theory, however as I mentioned above it's based on factual evidence. Good luck!

Bombardier Pitch Information

Wednesday, November 7, 2012 0

Our research group pitched Bombardier today. Here are a few relevant facts that we gathered, however the most important was the introduction of their new CSeries aircraft. Q3 was just released today too, and it fulfilled our expectations, which were to depress the stock even more just so it rises in due time.

Business Aircraft
At a total retail price exceeding $6.7 billion US, NetJets' order is
the second largest aircraft purchase agreement in the history of
private aviation, second only to NetJets' unprecedented aircraft order
in June of 2012 which included firm orders and options for upto 275
Challenger jets from Bombardier with a potential value of $9.6 billion

-Net ordersf or business aircraft have been increasing

Commercial Aircraft
Subsequent to the end of the quarter, we received a conditional order
from an undisclosed customer for
5 CS100 and 10 CS300 aircraft and we signed a letter of intent with
Air Baltic Corp. for 10 CS300 aircraft. Based on list prices, firm
orders would be valued at $1.02 billion and $764 million,

-Lower demand for commercial aircraft, however the CSeries may spark
some bullishness

Emerging Markets
Significant orders:
Nordic Aviation Capital A/S (Denmark) 12 CRJ1000 NextGen - $595 million
PrivatAir (Switzerland) 5 CS100 5 CS100 $309 million
PT. Garuda Indonesia (Persero) Tbk. 6 CRJ1000 NextGen 18 CRJ1000
NextGen $297 million
Eurolot S.A. (Poland) 8 Q400 NextGen 12 Q400 NextGen $246 million
Ethiopian Airlines 5 Q400 NextGen - $160 million

Signed several significant contracts, with: San Francisco Bay Area
Rapid Transit District (BART), U.S., for
410 metro cars, valued at $897 million

Other points:
In the second quarter of 2012, the regions Asia-Pacific and Other had
moderate levels of activity mainly explained
by a temporary slow-down of rail investment in China. We expect growth
in rail investment to resume in China as
well as in other emerging markets, driven by the strong need for
mobility to support rapid urbanization and
continued economic growth

Growth in rail investment in the region Other will continue to be driven
by the Middle East, Brazil and Russia.

In India, investment in mass transit continues to be promising with
multiple cities
expected to invest in metros and monorails

We continued our long-term investment in emerging markets, with: the
opening of the monorail facility in
Hortolândia, Brazil, in April 2012

In North America, the level of activities increased due to major metro
contracts awarded in New York and San
Francisco, which represent a significant share of this marke

WACC... what is that?

Saturday, November 3, 2012 0

Many people seem to be having trouble with understanding what this number means. Let's start off with a definition, from investopedia:

"A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk."

What the heck does this even mean, really? What is a cost of capital? What's a beta? Valuation? WHAT?!

WACC stands for weighted average cost of capital. 

The cost of capital is simply the minimum rate of return that investors expect when they buy stocks, lend etc to the company. More concisely put, it is the rate of return an investor should expect on a project given a specified risk.

The beta of a firm is simply its overall volatility compared to a benchmark, usually the market (S&P 500).
Ex// The beta of a new technology company is 2.0 and the market is ALWAYS 1.0. This means the volatility is 2x more risky than a company with average volatility. This company will either do extremely well given good conditions, or hit rock bottom. It is very sensitive to changes in economic activity, etc.

Valuation is simply the value of the company/stock. If the WACC increases, then its minimum return on projects are larger and thus riskier. In summary, a lower WACC (2%, e.g) will always be better than a higher WACC (10%, e.g) although the case of 2% is quite rare and may not be realistic. Certain industries will always involve higher WACCs, such as precious metals.

Hope you learned as much as you can -- I had to be concise. Time is money.

Bombardier Inc.

Tuesday, October 30, 2012 0

Buy, Hold, or Sell?


Bombardier is experiencing significant growth in emerging markets, and is taking advantage of this by shifting its focus towards non-US customers. Demand in many regions remains high and above the world average, including Brazil, Latin America, and Asia-Pacific. China and Europe, with their recovering economy, are going to be one of the major players in the company's growth. Bombardier also secured a $7.3 billion order with Buffet's NetJets. This is quite important, as its the largest purchase agreement in the history of private aviation. In addition, its new CSeries of jets, being more environmentally friendly and so on, has a significant amount of orders and may play a part in company growth. It is expanding its operations too -- in April 2012, it opened a new sales and marketing office in Shanghai. In Nouaceur, Morocco, it built a new manufacturing plant. This is big news.


The company experiences quite a variety of risk, being in such a volatile industry. Oil prices, appreciation of the Canadian dollar (less exports), subordinate voting share structure (The CEO Pierre Beaudoin and his family own 64% of total shareholder votes), volatility of airline customers (Air Canada, anyone?), etc. These all impact the company and impact our decision on whether to buy, hold or sell.


Based on analysis of EBITDA and FD EPS, I suspect the price will go up to $4.65-4.80. This is over $1.00 of a capital gain.

Buy it.

Silver Wheaton

Thursday, October 25, 2012 0

After a massive low, this company seems to be doing some justice regarding increasing stock prices. It is virtually dominating competitors, with the exception of First Majestic Silver (TSX: FR). Also, its stock prices closely correlates with S&P. Whether investing in precious metals is a good idea or not, many consider it to be an excellent hedge against inflation. If you know this or not, more money supply being injected into the economy allows for gold/silver prices to inevitably increase. This is happening as we speak especially in the Asian countries.

Silver Wheaton has been closing tons of deals lately, so people are definitely going to be optimistic. The company risk is generally low, since it doesn't own mines at all -- just the silver. Its market cap is around $13.5 bln, where the average silver company is around $4.5bln. This is an enormous difference, and this goes hand in hand with their earnings that have been increasing over the past few years.

Their EPS is expected to skyrocket for 2013, so many feel this is the best time to buy in. However, it is just important to note that after the price goes up, get out as fast as you can. A goal of buying in around $37 and selling at $43 may very well be a viable choice. As many know, after silver goes up, it goes down like crazy. You make the choice.

SNC-Lavalin: Buy or Sell?

Tuesday, October 23, 2012 0

Hi all,

After some thorough analysis on SNC-Lavalin, I came to a few conclusions. If you noticed, they had a new CEO October 1st, 2012. Interestingly enough, after this date, the stock price began to rise gradually again. Actually, they've been going up finally instead of dropping significantly. The 52-week high is $55 or so, so I believe the stock still has a lot of room for growth.

You can see this >here<.

Moreover, SNC-Lavalin is winning quite a significant amount of contracts, in which their revenues should continue to experience respectable growth. The problem with the company is not cash flows or revenues though, it is their expenses. Due to the previous CEO and other key executives cooking the books and breaching the code of ethics in various foreign countries, this has put a lot of undue stress unto the company in forms of expenses to various stakeholders and also contingent liabilities. In fact, they have a contingent liability of $1.5B from a class-action lawsuit from stakeholders. More than likely this won't go through, the company seems to be doing all it can regarding getting back on track and so forth, and it is a solid company in general.

In case you're interested, here are the remedial measures the company has been doing to get back on its feet:
1) Management override policy (specific procedures if management does unethical things/tries to force certain things)
2) Code of ethics amended (whistleblowing encouraged)
3) New financial management solution in individual business units

Note: this is taken directly from the MD&A, rewritten a bit in simpler more concise terms

The stock price should be going anywhere but down. They have a new CEO, new policies, and a solid foundation for a company. I am sure shareholders are wide aware that such a scandal will very likely never be happening again. Things are looking optimistic.

Bottom-Up Company Analysis: SNC-Lavalin

Saturday, October 20, 2012 0

Bottom-Up Company Analysis: SNC-Lavalin

After my last post, which was part I of the transportation sector as a whole, I've now decided to actually begin the process researching my first company. What I will do is try to set up the post so that it'll be somewhat interactive in the sense that you can also do the research yourself, and I won't be spoonfeeding you information (if you're interested in seeing what exactly goes into these analyses). For today, we will solely go over public available information and financials derived from them. Anyway, since us financiers like it concise and short, I'll begin:

Company Fundamental Analysis'

Step 1: Review Public Information

  • 10-K (http://quote.morningstar.com/stock-filing/Annual-Report/2011/12/31/t.aspx?t=XTSE:SNC&ft=&d=576922afa6235de01d716b084d032106)
  • 10-Q (http://quote.morningstar.com/stock-filing/Quarterly-Report/2012/6/30/t.aspx?t=XTSE:SNC&ft=&d=85a4526d9aff1d73b61c4dcf6dca9756)
  • Annual Reports (this can be found on (http://www.sedar.com , company search SNC-lavalin and the date is April 26, 2012)
  • Conference calls (optional, will not be done in this analysis)

Step 2: Financials

1) EPS growth rate

To determine this, we will look at the diluted EPS (which is more accurate than basic EPS) for the previous years, which can be shown as such from the annual report:
EPS                                               Growth
2008: $2.05
2009: $2.36
2010: $3.13                            (3.13-2.36)/(2.36)=  32%
2011: $2.49                            (2.49-3.13)/(3.13) = -20%
1st quarter
2011: $0.50                             -12%
2012: $0.44
2nd quarter
2011 $0.67 
2012 $0.21                       (0.21-0.67)/0.67 = -68%
6 months
2011 $1.17      
2012 $0.66                        (.66-1.17)/(1.17) =  -43%

Since there seems to be a lot of bad spark around SNC around 2011 for Bangladesh and other things, this seems to be the reason why the EPS dropped. Also, in May 2012 there were class action lawsuits commenced, and thus we base a prediction on future EPS growth to be negative. Based on this, the growth rate between Quarter 1 and Quarter 2 is (0.21-0.44)/(0.44) = (-52%) EPS will continue to drop.
  • Cash Flow from Operations 2011 2012 % growth
    2Q 82452 185051 124.4348227
    6M 202055 227182 12.43572295
    Revenues 2011 2012 % growth
    2Q 564388 787011 39.44502718
    6M 1044541 1456065 39.39759186
    EPS 2011 2012 % change
    1Q 0.5 0.44 -12
    2Q 0.67 0.21 -68.65671642
    6M 1.17 0.66 -43.58974359
    Current Assets 2010 2011 2012
    1YR 3566480 3546282
    6M 3670533
    Current Liabilities 2010 2011 2012
    1YR 2886592 3514328
    6M (june 30 2012) 3789849
    Current Ratio 2010 2011 2012
    1YR 1.235533113 1.009092492
    6M 0.968516951
    Working Capital 2010 2011 2012
    1YR 679888 31954
    6M -119316
    Total Net Cash Flow 2010 2011 2012
    6M 1111399 1241419
    inc of 10370
    Net Income 2010 2011 2012
    6M 183665 100040
    Gross Margin 2010 2011 2012 % change
    1yr 1301 1252 -3.76633
    6M 592801 578113 -2.54068

Anything that was bolded above is a positive indicator for the company. As you can see, it is doing phenomenal with its cash flows and revenues. Unfortunately, this can not be said for much of anything else.

Sector Overview: Transportation Part 1

Sunday, October 14, 2012 1

What is the Transportation Sector? (PART 1)
A Brief Analysis on Industries in the Sector

Transportation is everywhere, essentially when you move it's a form of transportation. This does not pertain to our interest, though. What we're interested in is the transportation sector, which is a type of stock related to the transportation of goods or customers. Typical examples of this include: airlines, railroads, shipping, and trucking companies.

Sector Performance Indicators

A major factor indicating the success of many transportation firms is the price of oil. This makes perfect sense, as if the price of oil/fuel decreases, these companies will have lower costs and thus earn more. If the price of oil/fuel increases, higher costs will lead to lower profits and lower cash flows. Therefore, knowledge of oil prices is essential in determining the right time to buy in to a company. In fact, fuel cost are airlines' second highest expense, indicating how important they are in determining profits.

Major Airlines

Company Profiles
As indicated on Yahoo! finance (source: http://biz.yahoo.com/p/770mktd.html), the top 5 major airlines (based on market cap) include:
1) Ryanair Holdings
2) easyjet PLC
3) Air China Limited
4) Cathay Pacific Airways Ltd.
5) China Southern Airlines

If you haven't noticed, Ryanair Holdings is absolutely dominating the market in terms of size and share. Shortly, we'll be looking at specific indicators to really understand why it's on top, and to deem whether how strong these businesses really are currently.

An important fact to note here is that major airlines are not solely regional airlines, which are companies that only focus on short-haul flights (typically have <$100M revenues)

Performance Indicators

Labour, according to the ATA is an airline's number one cost. Pilots, flight attendants, dispatchers, customer service, baggage handlers, security guards - these numbers do add up.

In addition fuel costs are airlines' second highest expense, really proving how important monitoring the price of oil is. 

Weather also plays another major unpredictable and variable factor. The cancellation/delay of flights is quite common (I'm sure we've all been delayed before, right?)

A few other indicators are: airport capacity, route structures, technology, and costs to lease or buy aircraft. 

Regional Airlines

As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/771mktd.html), the top 5 regional airlines (based on market cap) include:

1) LATAM Airlines Group S.A
2) Southwest Airlines Co.
3) Copa Holdings SA
4) Alaska Air Group Inc.
5) JetBlue Airways Corporation


As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/775mktd.html), the top 5 shipping companies (based on market cap) include:

1) Adani Ports & Special
2) China Merchants Holdings
3) Irish Continental Group PLC
4) Essar Ports Ltd
5) Ocean Wilsons Holdings Ltd


As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/776mktd.html) the top 5 railroad companies (based on market cap) are:

1) MTR Corporation Ltd.
2) Container Corporation of India
3) National Express Group PLC
4) Union Pacific Corporation
5) Canadian National Railway Comp

Railroads, as outdated and old western as they seem, are still a crucial part of our economic infrastructure. Like airlines, railroads are in a type of industry that is very cyclical (in good economic times, higher profits, and the inverse) and thus it is important to monitor macroeconomic indicators. More products that companies will sell = more cargo that will be shipped via railroads.

Interestingly, there is indeed profit opportunity in smaller short-line railroads (coal mines, power plants) though it's a bit hard to actually tell whether the company is great or the industry is growing. If it's the latter, fundamental analysis of companies will not be sufficient in determining the value of a company. This is because the companies will have high start-up costs and thus negative cash flows. These companies will have to be analyzed in different ways, particularly by highly skilled adept investors. Speculation will inevitably occur and the risk is very high, but so is the reward.

However, it is important to note that the railroad industry is in a declining market due to decreased demand due to the fact of more efficient ways of transporting goods (air transport). Lack of adaptation to environmental and competitive pressures is another major factor. The bright side of this is that even though it's a declining sector, the non-competitive firms have been weeded out and therefore most of the current companies still in the game will still experience periods of growth.

Rail traffic also is a useful indicator for economy activity - carload traffic correlates well with it, as do railcars deployed and stored.

Evaluating Railroad Companies

Factors to consider when choosing to buy into a railroad company are quite abundant, but there are a few important ones that standout:

1) Revenue growth and strong margins
2) Operating income, operating cash flow, and operating margins
3) Operating Ratio (major measure of profitability) 
  • Operating Expenses / Revenue
  • A ratio of 80 or lower is acceptable, but less than 75 is excellent
4) Top Line sales
  • At the "top" of the income statement, the first line at the top is usually gross sales. Therefore, a company that increases their revenues experiences 'top line' growth
  • The reason why it's important is because pricing can signal investors about management's strategy
5) Capital expenditure needs
  • Railroads aren't very successful at converting revenue into free cash flow
  • These companies are essentially in virtual duopolies and have lower costs of capital than might be expected
  • In laymen's terms: railroads spend a lot of money, but money spent by railroads is lower risk and more probable return than money spent elsewhere
Dangers/Threats for the Railroad Industry

Things to note before investment in the railroad industry is commenced:

1) Fuel Costs (20% of operating expenses)
2) Labor Costs (33% of operating expenses, workers heavily unionized)
3) Capital Demands (High capital requirements)
4) Economic Activity (if the economy is active, a railroad can stimulate demand through this)
5) Cyclical Nature (limits viability of railroad stocks as long-term investments, but these can be useful in the short term)
6) Difficulty to Value (Due to high capital expenditures, railroads aren't exactly gold when looking at discounted cash flow models, though due to the lower risk nature of the cost of capital, a lower discount rate can be utilized. Other methods include price/book, EV/EBITDA, and price-to-earnings.


As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/774mktd.html) the top 5 trucking companies (based on market cap) are:

1) Stagecoach Group PLC
2) FirstGroup PLC
3) CSR Corporation Ltd.
4) Go-Ahead Group PLC
5) Stobart Group Ltd.

This is it for now, part 2 will include company specific analysis of the top five companies for each component of the transportation sector. It will be fairly detailed, in order to give a more efficient technical analysis of companies that are doing well in the sector and how this affects prices.

Research Assistant for Investing Club

Friday, October 5, 2012 2

Hi all, it has indeed been awhile since my last post. To be brief - I have taken this blog into a new direction. A direction that will hopefully provide you and myself with advice, ideas, and perspective on how I will slowly become an adept investor.

First things first - I have been accepted to an investing club as a research associate for the industrial sector. The position is a lot more work intensive than I thought it'd be, but that is a main factor for driving my motivation. Yes, this is indeed a good thing.

We had a somewhat long-somewhat brief training session today that lasted about 90 minutes. An executive of the club very briefly went over fundamental analysis and technical analysis. Going in, I had no idea what to expect.

I however recognized most of the "fundamental analysis" of investing due to some finance and accounting courses. These include: a company's health, management, competitive advantage, and an economic/industry/company specific analysis. Most of this is derived from the financial statements (10-Ks). Moreover, management discussion and analysis will be analyzed in great detail. In addition, certain ratios are used heavily in fundamental analysis - some in certain sectors more than others.

The topic that will be the most troublesome not because of its intricacies and complexities, but because of the obligation to learn two different software programs (Bloomberg and Reuters Eikon). They are extremely complex to use at first, but after awhile it becomes quite basic and almost instinctual. Technical analyses include trendlines, relative strength index, and a few other indicators. Most of these graphs can be snagged almost instantaneously from Bloomberg, but Google Finance/Yahoo is a viable source if you have some time to waste.

Bi-weekly research reports and stock pitches are the norm with a position such as this. The template for the report is a bit intimidating, but doable. All in all, it will be a great experience for real-life practical investing knowledge and it is a huge competitive advantage as an individual interested in finance.

Back to e-valuating stocks I go!

Here is a Relative Strength Indicator.

Included below is what Bloomberg typically looks like. Definitely not used for its aesthetics!

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