Markets have been absolutely horrible the last couple of days ever since S&P downgraded the credit rating of the US from AAA to AA+. When the markets go mad, what do you do?

You pull out a trusty spreadsheet, that’s what!

I heeded the words of James Montier of GMO and made a DCF calculator. What this essentially does is allow you to project cashflows, discount it to the present and therefore derive an implied value of what the stock is worth at the moment. However, Montier’s idea takes it one step further- instead of seeing the future, why not use it to understand what the markets are saying now? That is the idea behind Reverse DCF.

My DCF calculator is a very simple one- just 10 years of cashflow projections based on average (as long as possible up to a maximum of 10 years) Free Cash Flows (essentially CFO – Capex). I used CFO + CFI in the case of Investment Holding Companies (e.g. Haw Par) because they have substantial cash inflows (outflows) from investments. After getting a value of projected FCF, add it to equity and divide by number of shares outstanding to get a ‘per-share’ value.

Lastly, use Excel’s ‘Goal Seek’ function to find the FCF growth rate implied by today’s market price. That gives you the FCF growth rate per year implied by the markets for the next 10 years.

As of today’s close, the prices of the following stocks that I hold imply the following:

Adampak $0.245  (-11%) @ USD/SGD 1.212
First Reit $0.755 (-68%)
GRP Ltd $0.195 (-187%)
Spindex Industries $0.275 (0%; IV is $0.67)
Micro Mechanics $0.430 (5%)
Haw Par Corp $5.91 (0%; IV is $11.24)
Singtel $2.95 (11%)
SATS $2.15  (0%)
Popular $0.159 (0%; IV is $0.27)

Notes: Sometimes ‘Goal Seek’ can’t a solution when the growth rate is negative (due to cashflows changing signs leading to multiple solutions. For those, I’ve indicated the Intrinsic Value (IV) implied by a 0% FCF growth rate.

In sum, what the markets are saying about my Stocks at current prices is that, over the next 10 years, 6 of ’em are going to shrivel and die, 2 of ’em are going to underperform the historical long-term market growth rate of about 8-9% and only 1 is going to do better than that.

So the question is: Do you believe Mr. Market?

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