1. Value Investing
Charles Dalziell CFA

2. 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

3. 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

4. Macquarie Research - Style Indices Value vs. Growth
Source: Macquarie Research

5. 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

6. 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

7. 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

8. Typical Characteristics of Value Investors
Disciplined
Patient
Contrarian
Courageous
Thorough
Focused
Self belief
Conservative
Thinks like an owner

9. Value Process 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

10. Valuation Models Art Rather than a Science
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

11. Typical Characteristics of a Good Business
Solid track record
High ROIC
High margins
Dominant market share
Low cost producer
Pricing power
Brand recognition
Capable management
Minimal Government regulation

12. 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

13. CSL Limited
Source: IRESS

14. CSL Limited MBA PER Relative to S&P/ASX 300
Source: IRESS, MBA

15. 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

16. Shortcomings of Value Investing
Value traps
Buying too early
Selling too early
Underperforming for long periods

17. Telstra Corporation Limited Value Trap?
2000 PER: ~28x
2010 PER: ~9x
Source: IRESS

18. Disclaimer
This presentation was prepared by Maple-Brown Abbott Limited (Maple-Brown Abbott) ABN , Australian Financial Service Licence No. (AFSL) , 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.