In this paper we analyze change the profitability of an investment in stocks will vary according to different variables. Try to see the importance of price when buying the shares. For this analysis we rely on the stock assessment model that we saw in http://investmentandeconomictheories.blogspot.com/p/itt-educational-services-esi.html
Abstract:
* The IRR or return we get from our investment, according to model 1, is sensitive to price changes or PER at the time of purchase of the shares, return on equity, payout ratio and PER at the time of the sale of actions.
* The variable which the IRR is more sensitive is the return on assets and what is least is price. So although the price is very important is probably the least important of the 3 variables that influence the IRR of an investment.
* It is difficult to predict how prices evolve an action in the short term. We can have greater certainty, the greater the investment period.
* Buy an action that trading at a PER less than their peers not imply a good return in the short term. Price is important but not the most important criteria for buying a stock.
* I think the ideal is to buy the shares that you select on the basis of a TIR lens and use a procurement mechanism that allows us to limit the risk of volatility. It is more profitable to choose either an action to buy it at a low P therefore wanted to focus on selecting the action and then use mechanisms to reduce the risk of price changes. If the action passes the evaluation criteria of action that means the current price we will have our profitability target this mechanism can be seen in http://investmentandeconomictheories.blogspot.com/p/itt-educational-services-esi.html
That focus when preset actions? That is what most affects the IRR of an investment in stocks?
In http://investmentandeconomictheories.blogspot.com/p/itt-educational-services-esi.html saw a mathematical model to calculate an IRR if the action complies with a certain hypothesis. Having this mathematical model makes it easier for us when you know what else should we look at an action, we need to do more focus.
To analyze this we will do is take the IRR calculation model and analyze how the IRR vary by changing the value expected if the variables involved in calculating it. Thus if we can see that is more sensitive variable expected IRR.
From A to these variables and see how much impact such a change of 10% in one of the variables in the IRR. The more variety the IRR the more sensitive to this variable. Thus we see that we have to pay more attention when pre-screen action.
Mathematical model
The model we saw in http://teoriasdeinversion.blogspot.com/p/evaluacion-de-acciones-itt-educational.html, but begin with an action model with different ratios.
Initial PER = 10
Book value = 5
Yield = 20% equity
Final PER = 10
With these variables we get the following cash flow, which generates an IRR of 16%.
Año | Venta / Compra acción | Patriomonio por acción | Beneficio por acción | Dividendo por acción | Flujo fondos |
Año 0 | - 10,00 | - 10,00 | |||
Año 1 | 5,00 | 1,00 | 0,30 | 0,30 | |
Año 2 | 5,70 | 1,14 | 0,34 | 0,34 | |
Año 3 | 6,50 | 1,30 | 0,39 | 0,39 | |
Año 4 | 7,41 | 1,48 | 0,44 | 0,44 | |
Año 5 | 8,44 | 1,69 | 0,51 | 0,51 | |
Año 6 | 9,63 | 1,93 | 0,58 | 0,58 | |
Año 7 | 10,97 | 2,19 | 0,66 | 0,66 | |
Año 8 | 12,51 | 2,50 | 0,75 | 0,75 | |
Año 9 | 14,26 | 2,85 | 0,86 | 0,86 | |
Año 10 | 32,52 | 16,26 | 3,25 | 0,98 | 33,50 |
16% | |||||
If we change the initial PER, return on equity or equity per share initial price change and with this the TIR.
In year 1 the company made a profit of 1 um per share, as the pay out is 30% for a dividend of 0.30 um and 0.70 um reinvested. Thus the equity per share for the second year is increased to 5.70 um and have a return on equity of 20% will benefit the second year of 0.34 um.
Thus we see that changes in initial PER, return on assets and equity per share will also affect cash flow in year 1. In addition to cash flow this year will affect the pay out, and that reducing the fixed year 1 would be less but would be higher earnings per share for year 2 and to reinvest more.
In 10 action and sell the cash flow consists of the dividend plus the sale price. The sale price is equal to the benefit of the final PER, in this case 3.252 * 10 = 32.52. If the change changes the final TIR Carnet.
Now, once assembled, the mathematical model will vary one by one the variables and see how it affects the IRR which initially was 16%.
The following tables and graphs:
Sensibilidad TIR | |
PER inicial | TIR |
6 | 23% |
8 | 19% |
10 | 16% |
12 | 13% |
14 | 11% |
16 | 10% |
18 | 8% |
20 | 7% |
30 | 3% |
Sensibilidad rentabilidad patrimonio | |
R. Patrimonio | TIR |
10% | 1% |
15% | 9% |
20% | 16% |
25% | 22% |
30% | 28% |
35% | 33% |
40% | 39% |
50% | 49% |
Sensibilidad Pay out | |
P.out | TIR |
0% | 18% |
10% | 17% |
20% | 16% |
30% | 16% |
40% | 15% |
50% | 14% |
Thus we see that a variation of 100% return on equity causes a 144% increase in the IRR. Performance 1 = 20% IRR 1 = 16%, yield 2 = 40%, 2 = 39% IRR.
Also a 100% increase in the initial PER produces a variation in the IRR of -56%. PER 1 = 10, IRR 1 = 16%, PER 2 = 20, IRR 2 = 7%
And a 100% variation in the pay out a variation of -6% in the IRR. Pay out 1 = 20, IRR 1 = 16%, Pay out 2 = 60%, 2 = 15% IRR
We can therefore conclude that the IRR is more sensitive to return on equity, then something less to the variation of the purchase price or initial and final PER insensitive to pay out. This gives us the key to what we have to pay more attention to find a company is its return on equity.
Why not buy stocks just because they are trading at a PER lower than the sector.
In the short term to buy a stock at a PER of 10 just because it quotes a PER less than that of firms in the same sector, for example trading at 11.6, we can give a yield of 16% if that price is reached in 1 year, if achieved in 2 years the return is 8% and if done in 6 months is 32%. But I know of no person who can predict what the stock price tomorrow.
Often price increases are given a day and those who hope to detect the lost during periods of volatility we can see how often an action in one day rise by 3% or more. Many times we as analysts recommend buying a stock because it is going broke to the upside, etc ... this is almost always buy high, and the stock rose.
But meremos as is the sensitivity of the IRR to the final PER:
Sensibilidad PER final | |
PER final | TIR |
6 | 11% |
8 | 14% |
10 | 16% |
12 | 18% |
14 | 19% |
16 | 21% |
18 | 22% |
20 | 23% |
Here we see that if we choose the action because it passes the criteria for the evaluation of actions that we saw, if the action that we bought 10 PER PER does not change in 10 years would have made a profit of 16%.
If fortunately you do to 11.6, whereas before we gave a yield of 16% if it was at 1 year, in this case would be a return of 18%.
And if unfortunately the PER drops to 6, which in the short term is a loss of 40% in the long term would be a gain of 11%.
Thus we see that it is very difficult to estimate the profitability of short-term action, as is mentioned not know anyone to do so effectively, however it is quite feasible to calculate the long-term profitability with the same change in valuation of the company ( PER).
Why is this:
* In the short term the only win for the investor is the change in rating or PER.
* As the time increases each time the company generates more profits, which are received by the investor as dividends or reinvested. Also the share price varies, but this variation is less affected since it is only part of the profit received by the shareholder.
* A longer term gains more weight and less variation generated valuation.
Focus on the selection of the title and use a stock purchase scheme
As we have seen is very difficult to predict the evolution of a stock price in the short term and secondly the long term this variation affects the IRR but it is the variable that does.
So I think the important thing is to focus on selecting the appropriate action, this is what most influence on the IRR and then as we can not fight the price variation mechanism using a stock that allows us to minimize the risk of variation prices.
These mechanisms can be seen in http://investmentandeconomictheories.blogspot.com/p/itt-educational-services-esi.html
