The direction of the rationale for the investment idea "from below-upwards"
An upward analysis is based on the prevalence of analysis at the firm level (through the calculation of past and forecast financial and production indicators). The bottom-line analysis is used mainly by private investors, for whom access to other local markets or to the global capital market is significantly hampered. The emphasis is on analyzing the reporting documentation for the issuing company. Based on the analysis of financial statements, the quality of corporate governance, the study of investment plans and the declared business development strategy, analysts build forecasts of revenues and profits (cash flows) for a number of years (usually five to ten, taking into account industry specifics), and then adjust the estimates from taking into account possible changes in the external environment (for example, analysts are building several scenarios or options for obtaining financial benefits for the company). The final recommendations on investment attractiveness also take into account the degree of satisfaction of the expectations (forecasts) that were made earlier.
Basis of analysis in the upstream cascade - evaluation of the main financial ratios and quality characteristics of the company and comparison with analogues in the market. Selection of analogues within the industry can follow a number of criteria, for example: 1) profitable companies (with a maximum operating profit margin); 2) a certain growth rate of revenue (for example, fast-growing companies for two to three years); 3) multiplier "market/balance valuation of the company"; (for example, less than twice the size, or a different benchmark can be used). Computer search programs built into databases of large information providers (for example, in Bloomberg, Factiva), allow candidates to be selected for fundamental analysis, even from different industries that satisfy specified search parameters. Further, the feasibility of the company's industry binding is considered.
Algorithm for the implementation of the upward analysis approach:
1) financial and non-financial indicators are analyzed for each company (revenue growth rate, return on sales, return on capital, quality of management and corporate governance, ownership structure, state regulation level, etc.);
2) the forecast of key performance indicators within the chosen business model of the company is under construction;
3) analysis of the risk associated with the forecast of financial indicators;
4) the company is evaluated by one of the methods in the framework of fundamental analysis (for example, DCF-model);
5) for different time horizons (for example, five, seven, 10 years), the value growth potential is estimated;
6) choose the most attractive companies for investment.
Some of the most famous asset managers, for example Peter Lynch and Warren Buffett, note the benefits of the "upward analysis". At the same time, behind the scenes within the framework of this direction, forecasting of the industry development is carried out. Paradoxically, industry analysis in the classic version of the "ascending cascades" is not present. Until recently, this was due to the fact that in the second half of the XX century. diversification by region (local markets) showed much better results than by industry. In addition, in the last stages of the algorithm of the "upward analysis" in a number of cases, the sectorial life cycle (industry cycle) was taken into account. Note that if macroeconomic aggregates are widely available to investors, public analysis of the life cycle of the industry requires additional purchase of information and additional analytical knowledge. Thus, until the late 1980s. industry analysis has not actively developed.
In recent years, the role of industry analysis has increased significantly. Diversification of assets across countries has given fewer and fewer effects in the past few decades. Investment analysts are paying increasing attention to the modification of the "top-down approach" associated with the active integration of industry analysis into the selection algorithm for investment objects. Among investment analysts, the third direction in building the cascade of forecasts is gaining popularity - modified top-down approach .
The main thesis of the modified approach is that the results of portfolio investment depend to a large extent on the choice of the sectorial ownership of assets. In part, interest in industry analysis was warmed up in the late 1990s. investment optimism about Internet companies, companies of high-tech industries such as biotechnology, Internet companies, etc. Every year is noted by investors' interest in one or two sectors (investors are infected with a certain investment idea). The first half of 2008 was characterized by interest in the United States market for shares of companies producing coal and iron ore, and in 2009 - communications and ferrous metallurgy.
The two main investment ideas of M. Mobius are investing in the consumer and commodity sectors of countries where per capita incomes are growing rapidly. In this case, investors, according to Mobius, should maximize diversification of capital - diversification is needed not only in the share market, but also between asset classes, between fund managers. Owing to the increasing demand for food and consumer goods in the world, the thesis is maintained that, in dollar terms, commodity prices will only grow in the long term.
Five-step algorithm of the modified approach:
1) aggregates are analyzed for each industry (growth rate of production, price changes);
2) the forecast of aggregates is built;
3) an industry assessment of growth prospects is carried out;
4) the available assets in the industry are compared (both undervalued and having growth potential);
5) selected options for investment within the industry.
Next, we will examine in more detail the key elements of fundamental analysis.
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