Introducing the Boss Score part 4 – How it works in practice (KO, MUV2, Jumbo)
After my previous posts about the “Boss Score”, I think I had lost some of the readers. So I try to show with some hopefully interesting examples how the score works in more detail.
Low Price /Book ? – example Coca Cola
One reader commented that the strategy is designed to look for low P/B stocks. This is not the case. Lets have a look at CoCa Cola, maybe one of the most famous Warren Buffet / Moat style investments.
Coca Cola trades at a P/B of 5.2 and a PE of ~20, so how does this work in the screener ? In the current “simple” version without share repurchases, the database shows the following 10 year history:
|Book per Sh||Div||TROE %|
This results in a 10 year average TROE of 29% and a standard deviation of 9.8%. If we plug this into the CAPM formula, Coca Cola gets an adjusted (fundamental) CoC of 5.4%. Assuming now a constant 29% ROE based on a book value results in an assumed 4.21 USD constant earning per share going forward.
Divided by the 5.4% CoC, the “fair Value” of Coca Cola turns out to be ~74.80 USD, -0.8 below yesterdays close. The corresponding “boss Score” is -0.01, indicating a “fair valuation“.
So one clearly sees that the model is reacting very positively on high ROEs, solid balance sheets and stable owner’s earnings. However by design, any future growth is not included. So CoCa Cola might be even a great investment if one is sure that they will grow going forward.
Low P/B Financials – Example Munich Re
Munich Re has become a favourite for many conservative investors. It trades below book, has a low P/E and pays a good dividend, so what could go wrong ?
|Book||Div.||“Owner Earnings”||Stated earnings|
If we look at the comparison of “owner’s earnings” and stated EPS, we can see the problem clearly: EPS only reflect part of value creation or destruction. Munich Re is booking a lot of negative stuff directly into equity, thanks to the benefit of modern IFRS accounting.
Over the last 10 years, Munich Re reported a total of ~93 EUR in EPS, but summing up equity and dividends, the owner only received 62 EUR. This in turn leads to a relatively miserable TROE of 5,1%. In the “Boss model”, together with the relatively high volatility, this is considered as “value destruction” and the “fair value” of Munich Re if they continue like that is something like 15 EUR.
As I have mentioned, this should be not considered to be a hard price target. As Winter pointed out, one could also argue for some general “mean reversion”, however this is not the goal of the exercise.
I am looking for boring companies with a historical good track records of value creation and Munich Re is definitely not such a company.
Greek Stocks: Example Jumbo SA
Some Greek stocks score incredibly well, for instance Jumbo SA
Despite the relative decline in 2011, the company still scores extremely well in the model, as to a certain extent the 10 year average would imply some kind of “mean reversion”. In any other country, Jumbo might be just the boring stock I would be looking for, but being a Greek stock, it is more like the “hot potato stock” (TM rueckzugsgut) I want to avoid.
In the case of Greece, one has to judge potential future developments. So any Greek investment would be definitely a “special situation” and not part of my “Boring sexy stock” universe.
Summary: As expected, the score should not be used for automated investment decision but adds some interesting historical information to the “standard” set of value indicators. The three examples (Coca Cola, Munich Re and Jumbo) show that results seem to be within expectations but should be taken as a starting point only.
At the moment, I am still building up the database, I hope I will be able to show some more comprehensive tables later this week.