DAMODARAN WATCH: THE KIM KARDASHIAN OF VALUATION

AM | @agumack

Students know that I am a fan of Professor Aswath Domadaran. In class, I call him "The Lionel Messi of Finance". But it turns out that he calls himself "The Kim Kardashian of Valuation"! That's because, as he tells Barry Ritholz in the podcast below, he "shows everything". This is of course a reference to the tonnes of material that he publishes online. You can see some of the relevant links to the right. Anyway, here are some recent ideas from the man himself. Enjoy!

[1] Apple valuation. Prof. Damodaran calls Apple [Nasdaq: AAPL] the "Greatest Cash Machine in History" [see his detailed post]. (I remember that we used to say the same thing about Google a few years ago). In his Free Cash Flow to the Firm (FCFF) valuation, he arrives at a value per share of $129.02. As the market closed yesterday at $135.35, the shares are "fullly valued", although he will wait for a price of $140 before selling his position. Well done! In class at EU Business School, I use Apple as an example of how a company can successfully 'declare war on its WACC'. The Cupertino giant does that by outsourcing its production (lower beta), by turning the iPhone into a non-discretionary good (lower beta), by gently increasing its debt ratio, and by aggressively using interest rate and foreign currency swaps (lower cost of debt). 

[2] Podcast. Listen to this Barry Ritholz podcast with Professor Damodaran; he calls himself "The Kim Kardashian of Valuation". And he discusses lots of topics about finance, valuation, active vs. passive asset management, etc.

[3] Equity Risk Premium. On his Twitter account, Prof. Damodaran publishes his monthly estimation of the Equity Risk Premium. Instead of relying on historical data, he estimates the expected return on the S&P500 index by projecting cash flows in a two-stage growth version with a Terminal Value. We might take a look at that method this summer in Corporate Finance at EU Business School. The latest estimate: 5.59%.





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FIRST MEETING OF THE EU BUSINESS SCHOOL'S FINANCE CLUB

AM | @agumack

We finally had the first meeting of the EU Business School Finance Club. Congratulations to Luka! Let us remember the date: February 7, 2017. It's all about persevering! We discussed a number of ideas about ... what to do at the Club. The truth is that we still don't know in what direction we are going to take it. We discussed some proposals about running investment portfolios. Nikita showed us how a Swedish bank was sponsoring a portfolio contest at a Latvian university—with both long-term and short-term investments. The winners get real money. Interesting idea! Another participant suggested inviting guests to discuss big data and the use of algorithms in the context of asset management. That would be really useful.

* * *

I briefly discussed my views on what to do at the Club. I am a rather bookish person, so book reviews will always be part of my suggestions. I could review Ruchir Sharma's The Rise and Fall of Nations. Forces of Change in the Post-Crisis World (New York: W.W. Norton, 2016); I already mentioned the chapter about "Good Billionaires, Bad Billionaires" in the course on Ethics in the Financial World. And Prof. Damodaran's book is high on my agenda too (we have already ordered it at EU Business School).

At the next meeting I plan to introduce three 'products':

1. The EU Business School Finance Club's Financial Conditions Index. It combines a number of credit market indicators (spread Treasuries/speculative grade bonds, the US yield curve, the iTraxxEurope Crossover CDS index and the iTraxxBRIC CDS index), a few exchanges rates to the USD, and some commodity prices. It is already up and running, so I'll post shortly about it.

2. The EU Business School Finance Club's Global Dollar Liquidity Indicator. It comprises the stock of foreign central banks' holdings of US Treasury bonds under custody of the US Federal Reserve, and the Fed's own 'Fed credit' item on the asset side of the central bank's balance sheet. See our first post. 

3. The EU Business School Finance Club's Country Risk Index. It combines a series of governance measures —judicial independence, freedom of the press, network readiness and central bank independence— that indicate the strength of political checks and balances in each country. I trust that the diversity of our student base will help us to improve the index over time.

Finally, I provided some views on the extraordinary challenges faced by active asset managers. On the one hand, the Vanguard juggernaut continues unabated. On the other hand, quants appear to be the only salvation for active asset managers. But where does that leave traditional discounted cash flow valuation? Questions, more questions.

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THE $50BN MALE GROOMING MARKET AND THE DETERMINANTS OF BETA

AM | @agumack

What a great story when you need to teach about beta and the CAPM! Lindsay Whipp reports on the ups and downs of the $50bn market for male grooming [1]. What caught my attention was the following paragraph:

The slowdown in growth for male grooming products is partly explained by lacklustre economic growth, analysts say. Unlike women, who count beauty products as essential items, for many men, particularly those with families, male grooming items —with the exception of razors— more easily drop off the shopping list when money gets tight. Brazil, a top male grooming products market, had been a particularly bright spot, having enjoyed a 16 per cent CAGR increase in the five years to 2015. But as the nation’s economy struggles in a deep recession, growth in 2016 is estimated at 4.6 per cent to $6.79bn.

Remember Prof. Damodaran's 'determinants of beta': "... the degree to which a product's purchase is discretionary should affect the beta of the firm manufacturing the product. Thus, the betas of discount retailers such as Wal-Mart, should be lower than the betas of high-end specialty retailers, such as Tiffany's, because consumers can defer the purchase of the latter's products during bad economic times" [2].

                             

[1] Lindsay Whipp: "Made-up men reflect changing face of male grooming", Financial Times, 6 February 2017.

[2] Aswath Damodaran. Applied Corporate Finance, Fourth Edition. John Wiley & Sons, 2017, p. 117.
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EU BUSINESS SCHOOL FINANCE CLUB'S WEEKLY GLOBAL DOLLAR LIQUIDITY MEASURE

AM | @agumack

The U.S. Federal Reserve released yesterday its weekly H.4.1 report on monetary aggregates. At the EU Business School Finance Club, we look at the key off-balance sheet item: the stock of U.S. Treasury securities belonging to other central banks, but held in custody at the Fed. Adding back domestic 'Fed credit', we obtain the EU Business School Finance Club Weekly Global Dollar Liquidity measure, now at $7.58 trillion:

USD million
Custody holdings	$3,166,181	-2.82%
Fed credit	$4,417,599	-0.61%
Global Liquidity	$7,583,780	-1.54%

Custody holdings recovered by almost $9bn over the week. However, the post-election rally has stalled, courtesy (perhaps) of continued capital flight from China. At this point, we remain skeptical about any significant recovery in world GDP growth. 

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