Practical Personal Investing 2, Session 1, Fall 2015 1

Growth at Reasonable Price (GARP)

Definition of 'Growth At A Reasonable Price - GARP‘: An equity investment strategy that seeks to combine tenets of both growth investing and value investing. Source: http://www.investopedia.com/terms/g/garp.asp

PEG RatioThe PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.

For example: The growth rate is expressed as a percentage above 100%, and should use only real growth to correct for inflation. To illustrate, if a company is growing at 30% a year in real terms and has a P/E of 30, it would have a PEG of 1.A lower ratio is "better" (cheaper) and a higher ratio is "worse" (more expensive).Source: https://en.wikipedia.org/wiki/PEG_ratio

Practical Personal Investing 2, Session 2

Practical Personal Investing 2, Session 2, Fall 2015 2

There are cases where EPS and P/E -based stock analyses—which we discussed last time—are not the best tools for evaluating stocks.

Examples of such stocks would be growth companies that do not have earnings, real estate investment trusts (REITs), utilities, and oil and gas companies, among others.

In such cases, different matrix and evaluation criteria should be used.

The price/sales (P/S) ratio is calculated in the same way as P/E, except with a company's annual sales as the denominator, instead of its earnings.

P/S = (Stock Price) / (Sales per Share)

This ratio can be used to analyze companies that do not have earnings.

An additional advantage of using the P/S ratio is that it is based on sales, a figure that is much more difficult to manipulate and is subject to fewer accounting estimates than earnings.

Additionally, because sales tend to be more stable than earnings, P/S can be a good tool for screening cyclical companies and other companies with fluctuating earnings patterns.

Practical Personal Investing 2, Session 2

Evaluation of Real Estate Trust Companies

Practical Personal Investing 2, Session 2, Fall 2015 3

A REIT is a real estate company that offers common shares to the public. A REIT's primary business is to manage properties; most of its profits are distributed as dividends.

There are significant differences between stocks and REITs, due to the accounting treatment of property. Accounting rules require that REITs charge depreciation against the asset; however, REITs don't actually spend this money; depreciation is a non-cash charge.

Therefore, we add the depreciation charge back into net income, in order to produce funds from operations (FFO). The idea is that depreciation unfairly reduces net income because buildings probably don't lose much value over a few years. FFO fixes this presumed distortion by excluding the depreciation charge.

Adjusted funds from operations (AFFO) is a key REIT measure.

The AFFO of a REIT, despite being subject to various computation methods, is generally equal to the trust's FFO, with adjustments made for recurring capital expenditures used to maintain the quality of the REIT's underlying assets. The calculation takes into account adjustments to generally accepted accounting practices’ straight-lining of rent, leasing costs, and other material factors.

Source: http://www.investopedia.com/terms/a/affo.asp

Practical Personal Investing 2, Session 2

Practical Personal Investing 2, Session 2, Fall 2015 4

Ticker Company Market cap ($ bil) Price/AFFO EV/EBITDA Dvd Yld Dvd payout ratio Debt/equity

REI.UN-T RioCan REIT 8.12 16.29 19.92 5.28 67.28 0.85

HR.UN-T H&R REIT 6.00 12.26 19.64 5.70 65.97 1.02

CWT.UN-T Calloway REIT 3.66 15.30 18.32 5.61 74.14 0.79

BEI.UN-T Boardwalk REIT 3.60 19.57 22.06 2.92 43.92 0.63

CAR.UN-T Cdn. Apt. Prop. REIT 2.83 16.53 21.49 4.55 27.45 0.94

AP.UN-T Allied Properties REIT 2.79 18.26 21.64 3.87 71.14 0.65

AX.UN-T Artis REIT 2.13 11.77 16.03 7.41 69.90 0.98

DRG.UN-T Dream Global REIT 0.97 11.13 13.17 9.04 31.27 1.10

NPR.UN-T Northern Property REIT 0.95 12.11 16.87 5.74 69.80 0.94

AAR.UN-T Pure Industrial REIT 0.85 12.06 18.43 7.00 43.66 1.00

DIR.UN-T Dream Industrial REIT 0.50 10.89 13.31 7.45 75.74 1.47

Average 14.20 18.26 5.87 58.21 0.94

Source: The Globe and Mail, Nov 18, 2014, http://www.theglobeandmail.com/globe-investor/investment-ideas/number-cruncher/how-canadas-reits-stack-up/article21643787/

Practical Personal Investing 2, Session 2

Practical Personal Investing 2, Session 2, Fall 2015 5

The dividend yield is equal to a company's annual dividend per share divided by its stock price per share. Therefore, if a company pays an annual dividend of $2.00 and has a stock that trades for $100, its dividend yield is 2.0%. If that same stock's price fell to $50 per share, its dividend yield would increase to 4.0%. Conversely, all else being equal, the dividend yield falls when a stock's price increases.

Dividend Yield = (Annual Dividends per Share) / (Stock Price)

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:

“Tricks”: Return of capital as dividend and issuing new shares

Practical Personal Investing 2, Session 2

Practical Personal Investing 2, Session 2, Fall 2015 6

The price/book ratio (P/B) relates a stock's market value to its book value (also known as shareholder equity) from the most recent balance sheet. The book value can be thought of as what would be left over for shareholders if a company were to shutter operations, pay off its creditors, collect from its debtors, and liquidate itself.

Book Value per Share = (Total Shareholder Equity) / (Shares Outstanding)

P/B = (Stock Price) / (Book Value per Share)

Brian Acker at Acker Finley model portfolio: https://modelprice.wordpress.com/key-concepts/

The price/cash flow (P/CF) ratio is not as commonly used or as well known as the other measures we've discussed. It's calculated similarly to P/E, except that it uses operating cash flow instead of net income as the denominator.Cash flow can be less subject to accounting shenanigans than earnings, as it measures actual cash—not paper or accounting profits. As a measurement criterion, price/cash flow can be helpful for firms such as utilities and cable companies, which can have more cash flow than reported earnings. The P/CF ratio can also be used in place of P/E when there are so many one-time expenses that reported earnings are negative.

P/CF = (Stock Price) / (Operating Cash Flow per Share)

Source: http://news.morningstar.com/classroom2/course.asp?docId=143911&page=6&CN=COM

Practical Personal Investing 2, Session 2

Practical Personal Investing 2, Session 2, Fall 2015 7

Q&A

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