Valuation Ranges
[vc_row][vc_column][vc_video link="https://www.youtube.com/watch?v=OQAarXbGVc0"][vc_column_text]PURPLE CHIPS TUTORIAL VALUATION RANGES
Welcome to a Purple Chips Tutorial webinar. I am John Schwinghamer, the author of Purple Chips published by John Wiley & Sons and available everywhere.
Disclaimer;
The information contained in this presentation is based on the criteria of the Purple Chips model and is not intended to be a solicitation to buy or sell securities or investment advice. This presentation has not been approved by the author’s employer. The information contained herein is believed to be accurate but cannot be guaranteed. Stocks can be risky and you should consult a professional before investing in the stock market.
Today’s presentation is about valuation ranges.
Key points;
We want to emphasize the following key points;
Basically we update the valuation ranges on a regular basis.
You should check the website often because it is changing all the time. There is constantly updates that are happening.
Valuation range changes are being influenced by;
Earnings reports and so the progression of earnings per share and for that I will show the example with Oracle (ORCL).
They are influenced by valuation resets. Recently we saw a case with Open Text (OTEX or OTC on the TSX index).
Valuation ranges are also affected by the valuations relative to the market. So we will look at these things and I will explain all about that with an example with Priceline.com (PCLN).
They are also influenced by the known news and in this case we are going to use SNC in our example.
Charts;
To start let’s look at the charts here and there is an example using Oracle corporation (ORCL). With Oracle the key point here is that the valuation range is changing all the time. Every time there is an earnings release and of course the progression of the earnings has been very, very good with Oracle stock so in effect…. I am just going to draw this for you; Let me start over here I am just going to raise this. At this point here what you would have seen is that the valuation range would have been at the high end; it would have been based on the shape of the earnings curve and so the earnings curve would look like that and essentially we would have said that the valuation range would be somewhere between $36 and $27. Now, that the earnings per share has gone higher the valuation range is now higher than that because if I take this earnings per share line and shift it up here you can see that the higher end would be $38 on Oracle and the lower end would be around $28. That is how you establish the valuation ranges.
Let’s go and look at some other examples of how do we decide the valuation range and how does it change. When there is something like a valuation reset as in the case of Open Text (OTEX on Nasdaq and OTC on TSX). What you see here is the chart going back to the inception about Open Text. In this case we have what we call a valuation reset. When Open text was up until very recently Open Text had basically the low end of the valuation; it would have been something like this and high end based on recent highs was about that. Than what occurred was valuation reset here and the valuation reset happened here and so what happened was that the earnings curve shifted down to a new low valuation and so in effect the new valuation range is being established. If we take the shape of the earnings curve we would expect it to be somewhere between let’s say $60 and the lower end here which is around $46. That’s what I would expect with Open Text and that shows you how a valuation reset will influence our estimates of the valuation range.
Let’s look at another example; this time we are going to use the example of Priceline (PCLN). This is the case where you have an expensive stock, something that has a high multiple and we compare this to the market. We are trying to keep the risk minimal every time when we invest. So if we indicate that something is at a low valuation it’s because the risk level is very low. That’s the beauty of following the Purple Chips Model.
In the case of Priceline we would say that the low valuation, the low risk entry point would be somewhere under $550 like $540. The reason why we say that is because we want to make sure that we are buying at a low risk entry point. So this would be an appropriate entry point and a higher end if you owned Priceline we would urge you to take profits at around $720 or so. It should be relatively high as compared to its recent high valuations. So there is an example of us being conservative so we are not taking the normal lower end of the range here we would be actually going a little bit lower than that because we think that if Priceline is sold off you would see it down to $540 may be even $530 so want to be conservative in our estimate of where to buy this.
Another example would be in a case where there is news that affect a stock and we will change our valuation. I am just going to point what happened here; up to this point here basically the news was that the company was doing quite well and then they had litigation that had happened and the earnings actually fell sharply and the stock followed too. So, at that point and time we decided that SNC was risky. We had bought SNC fairly low, we bought it down here and we ended up selling it on this uptick grade right here. The reason we sold it was because the news hadn’t come out yet and the news did just come out then that there was litigation and there were issues happening and there was some forecast, there was some visibility on the earnings and you see these parts here hasn’t come out yet but they are going to come out and so we did change our estimates on SNC and we actually ended up eliminating SNC from our list of Purple Chips following that news. So that’s no longer on the list of Purple Chips but that shows you how the news can affect our decisions in valuation ranges.
So, this is all to say that it is very important to check the website regularly because we are constantly updating the valuation ranges on all the stocks and we currently have over 245 stocks in the universe of companies that fit the Purple Chips Model so you should consult it often and check the website all the time because there is plenty to see there and lots of things changing.
That’s all from now; I am John Schwinghamer the author of Purple Chips and thank you for watching.[/vc_column_text][/vc_column][/vc_row]