Value Investing
Charles Dalziell CFA
What is It?
“The strategy of selecting stocks that trade for
less than their intrinsic values. Value investors
actively seek stocks of companies that they
believe the market has undervalued. They
believe the market overreacts to good and bad
news, resulting in stock price movements that do
not correspond with the company's long-term
fundamentals. The result is an opportunity for
value investors to profit by buying when the price
is deflated.”
Source: Investopedia
Investing vs. Speculating

Investing in stocks means only buying
shares when you have a thorough
understanding of the underlying business
fundamentals of the company, as well as a
sound basis for determining that stock’s
value.

Speculating is buying stocks without this
knowledge
Macquarie Research - Style Indices
Value vs. Growth
18,000
Value
Growth
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
0
Source: Macquarie Research
Why does Value Work?

Much of the downside is already priced in

Value often gets free options on upside surprise

Bird in the hand theory

Negative sentiment doesn’t last forever

Value avoids paying for high expectations

Growth stocks get punished more than value
stocks if they fail to deliver

The market is generally short-term in focus
Signs of Value
But not a guarantee

Low price/earnings ratio (PER)

Low price/cash flow ratio (PCF)

Low price/book value (PBV)

High dividend yield

Low price/NPV

Solid balance sheet
Typical Characteristics of Value
Stocks

Out of favour with the market

Share price has been weak or has
underperformed

Problems are temporary or fixable

The underlying business is well placed

Demonstrating attractive value criteria

Changing management
Typical Characteristics of Value
Investors
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Disciplined
Patient
Contrarian
Courageous
Thorough
Focused
Self belief
Conservative
Thinks like an owner
Value Process

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Screen for Ideas
Focus on your circle of competence
Study the competitive landscape
Evaluate the management
Understand the financials
Is the business a good one?
Value the stock
Is the stock cheap? Why?
Act on your idea
Don’t be too clever
Valuation Models
Art Rather than a Science

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Price/Earnings Ratio (PER)
Price/Cash Flow
EV/EBIT
EV/EBITDA
Discounted cash flow
Price/Book
Total Rate of Return (TRR)
Most important inputs to models are Growth Rates
and the Multiple or Discount Rate
Typical Characteristics of a
Good Business

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Solid track record
High ROIC
High margins
Dominant market share
Low cost producer
Pricing power
Brand recognition
Capable management
Minimal Government regulation
Good Business vs. Good Stock

A company can have a great business but be a poor
investment if you pay too much

Every business has a value. Some are more easily
calculated than others.

Every company has been or will be a value stock at
some stage
CSL Limited
$45
$40
$35
$30
$25
$20
$15
$10
$5
2010
2008
2006
2004
2002
2000
1998
1996
1994
$0
Source: IRESS
CSL Limited
MBA PER Relative to S&P/ASX 300
(X)
2.6
2.2
1.8
1.4
1.0
Historical PER Relative
MBA - 5 year average
Broker - 5 year average
2010
2009
2008
2007
2006
2005
2004
2003
2002
0.6
Source: IRESS, MBA
Misconceptions about Value
Investing

Value Investing is a myth

No consideration is given to growth

No emphasis is given to quality

Stocks must have low PERs

Great businesses are never good value

Value investing is cigar butt investing
Shortcomings of Value Investing

Value traps

Buying too early

Selling too early

Underperforming for long periods
Telstra Corporation Limited
Value Trap?
$9
2000 PER: ~28x
$8
$7
$6
$5
$4
$3
2010 PER: ~9x
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$2
Source: IRESS
Disclaimer
This presentation was prepared by Maple-Brown Abbott Limited
(Maple-Brown Abbott) ABN 73 001 208 564, Australian Financial
Service Licence No. (AFSL) 237296, is intended to provide general
information only, and does not have regard to an investor’s
investment objectives, financial situation or needs. The content
does not constitute advice and should not be relied upon as such.
Our presentation, including comments we make about individual
stocks, is intended only to explain our approach to managing funds.
In discussing individual stocks or other investments we do not make
any recommendation or give any statement of opinion that is
intended to influence anyone in making an investment decision.
Investment advice should be sought in respect of individual
circumstances.