Jargon

The posts published on website uses abbreviations and financial jargon which are explained here.

FV –  Fair Value. The 2CentView Fair value of a stock  is a future consensus earnings model  calibrated to current stock prices.  It reveals opportunities between the current stock price and the changing earnings potential. MVAL and FV are the same and older posts may say MVAL.

RR – Risk Reward. Risk Reward is your potential upside/downside on a new position. For example a 3:1 RR implies your potential profit is 3 times your loss. All investments should have RR greater than 1:1, otherwise you may as well play black jack!

Beta – this is how the stock moves relative to the Index.  If the beta of a FTSE100 index is stock is 1 it generally moves in line with the index. If it is 2 it moves twice as much as the index and so on. Your portfolio should have high beta(>1.5) names (risky) and low beta (<0.75) names (less risky) with good yields and upside potential.

TP (or Target or PT)- Take Profit  target. The Take profit target is usually at or below the FV. Taking profit does not necessarily mean you should sell all your position, but just take some of initial investment out and let the profits rise (house’s money!). If you like the company you should keep some (core position) for long term, but this does always have to be the case.

Stop  or Stop Loss.  The price when to cut your loss. Stick to your stops!

Core Position – the amount of shares you would like to keep long term.

EPS – earnings per share. The amount of dollars and cents a company earns (post tax) per share. The Future Earnings Per Share of a company (normally out to 3 years) are determined by analysts and an important input to the 2CentView model.

P/E Ratio or Multiple – the Price of the Stock over the Earnings Per Share (either the last Earnings or Next Earnings, which sometimes referred to as the forward P/E Ratio). 2CentView does not consider last earnings, so P/E ratios refer to the next forward P/E. P/E Multiples often used to compare valuations (prices can never be used) – but looking at just one year multiple does not always give true value.

PEG Ratio – the P/E Ratio over the Growth rate of the stock. PEG Ratios greater than 2 imply the stock could be expensive. Growth rates can be found on most popular financial websites.

Impl(ied) growth – the 5Y Growth rate implied by 2CentView model and the current stock price. The stock has to grow at this constant growth rate every for year 5 years to substantiate the price. The 5Y implied growth rate is very powerful way of comparing growth stocks where P/E ratios tell you little about the value of the company. The model shows that there are only 4 categories: Super Growth  – between 50% and 75% (e.g. amazon, netflix, tesla),  High Growth between 30% and 50% (e.g. FaceBook), Moderate Growth between 15% and 30%  (e.g. Google) –  and Low Growth less than 15% (e.g. Apple, Microsoft). Stocks with Negative Implied growth imply the market thinks earnings will decline e.g. Blackberry at the beginning of 2012. I made money on FaceBook because at a price of $20 it was in the Moderate Growth category when it should have been in the High Growth category assuming it could develop a Mobile strategy – which it said it would – and which it delivered in an amazing 6 months.

Dividend  – the dollars and cents paid out to shareholders from the earnings.

Dividend Yield – the dividend / stock price.  Be careful with stocks with dividend yield > 7% – it normally implies future dividends will be cut. Dividend yields should be between 0.5% and 6% depending on the maturity of the company. Dividend yield is often termed as ‘carry’ a trading term indicating you are paid a return to hold the position.

Total Addressable Market (TAM) – this is the total dollar value of the market can be addressed by a company – when Apple first launched the Iphone, they looked at the TAM, how much of the TAM they could grab to make the investment profitable (only 5% at the time!). For AMZN the TAM is huge  – the total global value of all goods sold – so investors buy the stock on the basis of how much more TAM it can grab.

Dilution –  Companies may issue new shares to raise capital via rights issue which ‘dilutes’ the Earnings per share. The recent (2013) examples are Barclays and Thomas Cook. Dilution can be bad, good or fairly neutral. If the company is in trouble and needs to raise more equity or convert debt it cannot pay into equity it is normally bad. If a company issues more shares to restructure a balance sheet and pay off debt it can be good e.g. as in the case of Thomas Cook as the savings in interest costs more than offset the earnings per share dilution.

Gross Margins – the margin over the  total cost of goods sold. Companies with HIGH gross margins are normally in businesses which have high barrier to entries, oligopolies (very few competitors) or amazing products where it is difficult to penetrate market share (e.g. Apple IPHONE, IPAD and the 250,000 apps which run on them). When Gross margins start to decline, it means there are competitive pressures building which can have a significant impact on the value of the company (e.g. Google Android/Samsung starting to erode Apples Margins).

Revenues or Top Line –  the income the company receives from selling goods or services.

Bottom Line – the Revenue Less total cost of producing that revenue. When Companies cannot grow the top line they often focus on the bottom line i.e. reduce the cost of producing the revenue to maintain profit growth.

Fast Money –  a trade where you look to make a quick profit e.g. buying or selling before results. 2CentView occasionally puts out fast money ideas but generally the thesis is to invest for long term growth.

Sector Discount – when all the companies in sector are trading at discount to the FV, it implies the market as a whole is negative about that sector e.g. Commodites at the beginning of 2013. So if a commodity company is trading at 20% discount to FV, but the overall sector is trading at a 15% discount, then the real discount is only 5%.

Short Covering – Many hedge funds ‘short stock’ i.e. sell shares they do not own by borrowing stock from a long term holder and then sell the stock hoping to buy it back at a cheaper price. This strategy should only be used by ‘professional investors’ because if it goes wrong e.g. the company gets a  take over bid, all the shorts will scramble to buy back their shorts all at the same time, inflating the price and realizing huge losses. The 2CentView model is conservative as it assumes an amortizing growth curve beyond 3 years, so should NOT be used to take short positions.

CDS – Credit Default Swaps. These instruments are useful indicators of default probability (inability to pay debt or interest on debt due to lack of cash). If a company cannot pay its debt, the equity is worthless. For distressed names like $JCP (JC Penney), it is important to know what the CDS market is saying about the chances of default before buying a stock. Distressed Companies where the chances of default are declining (e.g. Dixons, Thomas Cook), can often lead to large rallies in the stock prices as it indicates the company is on the road to recovery.

 

Copyright 2CentView.com,  November 2013.

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