Chinese Companies Go Dark

"Going dark" typically means that a company delists its stock from an exchange. Today, three Chinese companies announced plans to go dark from the New York Stock Exchange. What is interesting is that the companies will still be listed on the Stock Exchange of Hong Kong. The reason for delisting from the NYSE is that American regulators have warned Chinese companies that they would be forced to leave U.S. exchanges unless they allowed regulators to see the records of the company auditors.   

A Cold Secondary Stock Offering

You can own a sports team. The Green Bay Packers are offering 300,000 shares of stock at a price of $300 per share.There are currently a little over 5 million shares of the Packers outstanding. Of course, you will never receive a dividend and have no say in the operations of the Packers. Since you are now a part of of an NFL franchise, there are rules: You cannot own another NFL franchise, you can't act as an agent for any NFL player, you can't publicly criticize the NFL, its management, coaches, or officials, and you can't bet on any NFL games. It doesn't sound like there is much green investing in Green Bay stock!

Morningstar Stock Valuation

So how do analysts value a stock? A recent video from Morningstar, one of the most trusted independent sources for stock values, discusses the methodology it uses. If you watch the video, you will hear a lot of methodology similar to what we discussed in the textbook, especially discounted cash flow analysis. Similar to what we discussed, the value of the stock increases by the capital gains yield and will change as new information is received. Notice an important point: Morningstar only recommends a stock if it believes that is fair value is significantly above the current market value, which implies Morningstar does not believe the market is semistrong form efficient.

Apollo Shareholders Rule

One trend in corporate finance is that many companies have moved to unequal voting rights. For example, Comcast, Alphabet, Facebook, Lyft, Pinterest, and many others have some type of dual class share structure, with different voting rights for each share class. Investment management company Apollo Global Management is feeling different. Recently, former CEO Leon Black proposed that the company move to one share, one vote. As Mr. Black stated:

Moving to a “one share, one vote” structure to ensure that the voting rights of our shareholders align with their economic interests by eliminating the Class C voting stock, as well as examining a move to a single class of common stock.

Apparently, Mr. Black feels that shareholders should be counted by the number of shares owned.

 

An Interview With Eugene Fama

Recently, an interview with Nobel laureate Eugene Fama, who laid the foundation for the efficient markets hypothesis, was published by The Market/NZZ. The wide-ranging interview covers topics from the problems with growing government debt, stock market bubbles, the efficient markets hypothesis versus behavioral investing, the reason for negative oil prices, and negative interest rates. Professor Fama also discusses his belief that the power of central banks is much more limited than many believe. The interview is definitely worth a read.

Thiel In Control

Palantir Industries, the data-mining company owned by billionaire Peter Thiel, went public this week. But take note, if you buy stock in the company you will have virtually no say in the company's operations. Thanks to super-voting shares, Thiel and two other co-founders will retain voting control in perpetuity. Other Silicon Valley companies like Alphabet, Facebook, and Snap have similar voting structures. As Ohio State professor Michael Weisbach notes, "They  set it up so Peter Thiel can still sort of run it like a private company and still have the advantage of being public." The three co-founders will retain 49.99 percent of the voting power in the company regardless of the number of shares owned.    

Corporate Projections

A question often asked by students is how to get projections for a particular company. One way is to listen to what the company itself says, and the analyst call is a good place to start. Publicly traded companies have analyst calls to disclose management's opinions on the current state and future of the company. You can actually listen to many calls online, and the information on the call is reported online if you can't listen live. For example, Chevron recently held its analyst call. A lot of information is available If you look at the Corporate Overview link, you will find, for example, that Chevron expects its capital expenditures to be $20 billion in 2019, $18-$20 billion in 2020, and $19-$22 billion per year for 2021, 2022, and 2023. The company also reports that it has the lowest breakeven oil price in the industry. In short, the company itself is an excellent place to start for projections. However, we should advise you that these projections are not set in stone, but a only a good place to begin your analysis.

Zuckerberg Loses New Votes

Even though Mark Zuckerberg currently controls the majority of Facebook's voting shares, it appears that even that has limits. Facebook recently announced that it would not seek approval of Class C shares that would effectively allow Zuckerberg voting control forever. Market sentiment on dual class shares has shifted, as indicated by the announcements that no new companies with dual voting share classes would be admitted into the S&P 500 or any FTSE Russell indices. Additionally, the approval of Class C stock with super-voting power would probably have prompted a shareholder lawsuit in which Mark Zuckerberg would have been for a deposition or as a witness, something he would likely wish to avoid.

From 1.68 million to 1

In June, Greek shipping company DryShips executed a 1-for-5 reverse stock split. While this itself is not unusual, it was the 7th reverse stock split by the company in the last 13 months! In fact, if you had owned 1.68 million shares of the company stock on March 12, 2016, you would currently own only one share. And the company stock has dropped over 99.9 percent. The stock would have to increase by 17.79 billion percent to reach its all-time high. One investor, who had invested $220,000, the bulk of his nest egg, currently has less than $1 invested in the company. Hopefully, this will drive home the importance of diversification. The story of DryShips is long and may involve "pseudo-underwriting", and one investor, Kalani Securities, Ltd., appears to have made millions on the stock.

Ticked Off

If you look at stock prices, you will see bid and ask prices that may only be different by a penny. What you may not realize is that this has only occurred since 2001. Prior to that, stock prices were quoted in eighths or sixteenths, so a price quote of 40 1/8 meant $40.125. Part of the reason for the change was that the bid-ask spread was the dealer profit, which also meant that investors were paying this difference. However, it has been argued that small cap stocks were hurt by decimalization because market makers have less incentive to trade less liquid small cap stocks and this has also lead to less research on small companies. Today, a pilot program was begun in which 10 small company stocks began trading on 5 cent tick sizes, meaning the smallest change in the stock price for these stocks is now a nickel. About 1,200 stocks will eventually be included in the test program, with three different groups with different trading rules. The goal of the study is to determine if increasing the tick size can lead to increased liquidity in small cap stocks.

What Is Dell Really Worth?

While students often expect that stock price valuation should result in an exact price that everyone agrees with, this almost never happens in practice. Take the court case involving Dell's management buyout (MBO). When the MBO went through in 2103, the price calculated by management experts, through a year-long process, was $13.78 per share. However, a group of dissident shareholders had independent experts value Dell at $28.61 per share, a difference of $28 billion. In the valuation, both parties used the same components: the forecast cash flows for a specific period, the value of the cash flows beyond that period, and the discount rate (WACC). However, the experts differed on the company's capital structure, as well as the cost on equity. In the end, the court used its own assumptions and arrived at a share price of $17.62 per share. As you can see from Dell, experts can use the same technique and arrive at widely differing answers when valuing a company.

A Critical Examination Of Earnings

A recent article made us think about the importance of definitions. The article states: "After all, in the long-run stocks are fundamentally driven by earnings and expectations for earnings growth." While we agree in part with this statement, we bet most people reading the article automatically think of earnings as net income and EPS. In reality, "earnings" is often used loosely to relate more to cash flow, which is a more important driver of stock price than accounting earnings. Remember, accounting numbers can be distorted much more easily than cash flow. There is another factor that is equally, if not more important, that is the required return. In increase in the required return on the market or a stock can often have a large impact on stock prices.

PE Ratio Math

As we mentioned in the textbook, when you are examining ratios, it is important to not only learn if a ratio has changed, but why it has changed. A recent article about the PE ratio highlights our discussion. Most people believe that an increasing PE is due to an increasing stock price, but as with any fraction, a change can also occur due to a change in the denominator. Currently, the PE ratio of the S&P 500 is about 19, above the 5-year and 10-year averages of about 16. As a result, many market analysts are predicting a declining stock market. However, even with a falling PE ratio, stock prices can still increase as long as earnings per share increase at a faster rate than stock prices. While we are not predicting the stock market, the article does note there are many periods in stock market history that earnings growth exceeded stock price growth, PE multiples declined, yet the bull market continued.

T-Mobile's Stock Giveaway

T-Mobile recently announced that it would reward customer referrals with a share of the company's stock. When a customer refers a friend who joins the company's network, T-Mobile will credit the customer's account in the amount of the stock price at the time, and for subsequent referrals, it will give the customer a share of the company's stock. T-Mobile will not issue new shares for the stock awards, but will purchase its shares on the open market. Of course, Uncle Sam will benefit as well. While the billing credit is not taxable, the shares of stock awarded will have to be listed as taxable income by the recipients. And when the stock is later sold, taxes will have to be paid on any capital gains above the original price.

Atlanta Braves (Stock) Sinks

The Atlanta Braves have the worst record in the National League so far this year, and the tracking stock has mirrored the team's on field performance. Liberty Media, the owner of the Braves, issued tracking stock on Monday that tracks Liberty Media's Braves ownership. Tracking stock is stock that is intended to track the performance of a particular unit of the company. Tracking stock generally has no voting rights, but is often used to track the performance of specific units of the company and may occur ahead of a public offering. The Braves tracking stock was a sinker ball as the stock dropped 40 percent on the first day of trading, then about 10 percent the next day.

Private Company Valuation

With a public company, the price per share is easy to obtain by looking at the stock market. For private companies, stock prices are more difficult. Although you can price a private company using multiples or free cash flow techniques, the valuation of private companies by mutual funds shows how much disagreement exists. For example, cloud-based storage company Dropbox is valued at $9.40 per share by T. Rowe Price, while Hartford Financial Services Group has a value of $15.20 per share. The valuations on database software company are even wider, ranging from $8.06 to $18.55. As Jeff Grabow, head of the valuation practice at EY states, “Valuation is as much an art as it is a science.”

Valuation Models Go Up In Smoke

Students often ask us how stocks are valued in the "real world." While analysts go into more depth than we do in this textbook, commonly used models are PE ratios, EV/EBITDA ratios, and free cash flow models, which we have discussed. However, in some cases, these valuation models go up in smoke. Take a look at Cannabis Sativa (CBDS), which is trading at just under $2 per share and has a market cap of about $31 million. The company has had negative earnings for the past three years, but more importantly, had revenues of $8,000 through the first 9 months of 2015 and $7,000 in 2014! Since the company has had no earnings, the PE ratio is not reported, but the PS ratio is almost 2,000. All-in-all, CBDS is priced at an extremely high growth rate.

Greek Stocks Tank

Even though Greece reached an accord on the repayment of its sovereign debt, there are still those who believe the reprieve will be short-lived. Given this fear, coupled with the weak Greek economy, it is little surprise that the Athens stock market nose dived when it opened for the first time in five weeks. Overall, the Athens market fell 16.2 percent today, with several bank stocks dropping 30 percent, the maximum allowed according to Greek stock market regulations.

The Chinese Stock Market Rout

Any market can experience a bear market and the Shanghai Composite, the 144 China-based companies that have a primary listing on major U.S. stock markets, is no exception. The Shanghai Composite lost about 8.5 percent on Monday and is down about 27 percent since its June 12 peak. The result is a loss of about $40 billion in stock value! Another measure of Chinese stock performance, the CSI300, which comprises the largest listed companies in Shanghai and Shenzhen, fell 8.8 percent Monday. As a result, the Chines government has said that it was ready to buy shares of stock to stabilize the market and stop the "systematic risk." Regulators also said that they would harshly punish anyone who was malicously shorting stocks.

A $120 Million Bogey?

So what affects stock prices? In reality, pretty much everything, possibly even a bogey at the famed Road Hole at St. Andrews in Scotland. For the non-golfers, phenom Jordan Spieth made a bogey (one over par) on the 17th hole in the final round of The Open Championship on Monday, which virtually eliminated him from contention. Shortly after he made the bogey, stock in Under Armour, the company Spieth has a marketing deal with, fell from $89.47 to $88.79. While this is a relatively small dip, it reduced the market value of the company by $120 million. All in all, a pretty expensive round of golf.