Eureka Correspondence

The good oil on Caltex, eBet, and picking the market line.

The good oil on Caltex

Can you please explain to me why Collected Wisdom advises to buy Caltex at the share price of $19.38 when StocksInValue (SIV) says the intrinsic value of the company is $12.56?

Name withheld

John Abernethy’s response: Thanks for your query. Because Caltex reports at year’s end, the $12.56 valuation is based on 2012 figures. However, the current expected valuation is $13.06 at December 31, 2013. (Caltex will announce its latest full-year results on February 24).

This is still obviously well below Caltex’s current share price. But you must understand SIV uses its own value methodology, while Collected Wisdom collates recommendations from a whole range of sources including broker reports and newsletters.

To get the value of $13.06, SIV used 17% normalised return on equity (NROE) because Caltex has not achieved above 12% in any of the last five years. SIV is adopting 17% as the mid-point above recent high and the market forecasts.

SIV always suggests that in long-term value investing it is better to be conservatively wrong than optimistically wrong.

Also remember that brokers are commission agents. SIV is a valuation system that does not generate commission by being bullish.

Is eBet still a safe bet?

I have spent a bit of time studying eBet to understand what it does and its potential (massive I think). I see this was first recommended in Eureka Report, report back in June, but since then the stock has risen significantly.

The question is, at the current price is it still a buy (assuming of course risk appetite was aligned to the nature of this company)?

SA

Brendon Lau’s response: There is a lot to like about eBet and I can see the business continuing to grow strongly in the coming years. The stock has come up a long way but I think there is probably another 15-20% upside before it reaches fair value, in my opinion. However, it is important to remember it is still a higher-risk stock given that many of the factors that can impact on the company’s valuation are outside management’s control.

You can read my last article on the company here.

Fully valued, or more value in store?

Australian Foundation Investment Company today says the market is fully valued and Adam Carr says gains of 20% to 30% are possible. From two respected fields, this comparison for mums and dads is a big worry.

Name withheld

Adam Carr’s response: Thanks for your comment. AFIC isn’t alone in thinking the market is overvalued, and this is one key reason why I think the Australian market is ripe for an upside surprise. There is more debate and disagreement in the domestic market, although within that I'd note that institutional funds would love nothing more than for SMSFs to sell out of some of the big-name blue-chips – like CBA – so they can pick up a bargain. You'll note that the view of AFIC and others is predicated on domestic economic softness. The Australian economy needs to be weak for their view to hold. If that view is wrong, and I think it will turn out to be, then there is significant upside for the Aussie market – maybe not in the early months, but as the year progresses. 

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