Products & Services : Global Equity Research : Research Approach
Global Equity Research
Research Philosophy
Our approach to evaluating stocks focuses on determining the true value of the business, the risks associated with the business and whether the current stock price is accurately reflecting the risk and reward. In determining the fair value of a business, we focus on:
- Cash flows, and not just reported earnings
- Return on invested capital and cost of capital for the company
- Revenue growth rates of the company
- The market/sector the company operates in
- Competitive advantage of the company and the competitive advantage longevity
- Currency analysis to identify cross-border opportunities/risks and optimal entry point
Our analysts then use their in-depth industry knowledge to analyze the competitive positioning of the company within its industry. They focus on the company’s ability to keep competitors at bay via factors such as high switching costs for customers, patents or copyrights, or being a low-cost producer. Our analysts initially forecast the industry metrics and then drill down to the company's specific forecasts for revenue growth, operating profit margins, capital expenditure and working capital required for each company under coverage.
Valuation Methodologies
Our analysts apply the following methodologies to triangulate the fair value of every stock:
- Discounted Cash Flow analysis
To calculate the present value of the company’s future cash flow based on its cost of capital, as determined by our analysts. - Comparative valuation (generally two metrics used)
Comparison of key historical and forward multiples to assess the relative value of the stock against peer group. - Other methodologies such as Dupont Analysis, EVA, Dividend Discount Method are utilised where applicable
Stock Ratings
Since estimating a company’s fair value is extremely challenging, we don’t presume we’ll always be right. So we look for stocks with a deep enough discount to our fair value to offer a reasonable margin of safety. Such stocks earn a BUY rating. Stocks which are trading within 10% of the fair value are rated a HOLD. The stocks which are trading more than 10% above our fair value are rated a SELL.
- Buy recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) by at least 10%.
- Hold recommendations assume that value is fully reflected in the current share price or that the overall view on the stock is fully compensated by the currency impact (where applicable).
- Sell recommendations are expected to deteriorate, based on consideration of the fundamental view and the currency impact (where applicable) by at least 10%.
Currency Impact
For global equities coverage, we also factor in currency impact on the target price of the derivative stock e.g. the ADR. Depreciation/appreciation of the US$ against local currencies can have a significant impact on ADR price, as demonstrated by the depreciation of US$ between February-April 2007, which resulted in approximately 3%-5% differential returns. By applying our expertise in currency analysis, our research identifies opportunities and risks associated with investing in a stock in US$ or local currency.
Our currency impact analysis can be applied to all currencies/exchanges.
In every case, the reader is easily able to deconstruct the analysis in order to see the relative importance of the currency impact and the fundamental analysis in every rating and target.
Technical Analysis
We also provide technical analysis on all stocks which we cover fundamentally for those clients who are trading-oriented utilising our proprietary Pronet system.
In addition, we will soon provide shorter-term technical trading strategies for all of our stocks. Find out more…
In conclusion, our stock ratings are attributed after an in-depth analysis by our analysts and scrutiny by our research oversight committee, and are subsequently closely monitored as the industry and company evolve.