This week, with the Cedears WBA falling more than 25%, Many investors wondered if it was a buying opportunity. Before giving my opinion on this Cedear I want to explain When a price drop is an opportunity and when it isn’tsince the context and factors are not the same in all cases.
If a Cedear or a stock is at a value close to its historical minimum, or suffered a very strong fall in recent days, it does not mean that it is an opportunitythis is not an indicator at all of what may or may not be an investment opportunity. The price of the share or Cedear, by mere comparison to its historical or previous value, cannot be used as an indicator if the current context of the company, the sector and the local and global economy is not known.
The famous investor Warren Buffett He stood out throughout his life for investing in companies based on their value and not their price, that is, he did not take into account the share price as a fundamental driver but rather the value that the company generated and could generate in the future. Obviously there is a relationship between value and price and always, for an investment to be successful, the price (what is paid) must be less than the value (what the company generates or can generate).
When analyzing a Cedear we have to take into account first of all that its price is made up of 3 parts; its ratio with respect to the underlying share, the value of the underlying share and the exchange rate.
Cedears: key points you need to know
He ratio It is the number of Cedears that are equivalent to one share, since in very few cases 1 Cedear is equal to 1 share. Generally, there is a differential ratio that essentially allows local investors to buy fragments of shares and thus facilitate market access. For example, the APPL Cedear ratio is 20:1. There are also cases where 1 Cedear represents more than one share, such as in the case of ARCO.
He underlying stock price It is the price of the share that Cedear represents in the market where the company is listed and it is the most important value that we have to take into account for the analysis.
He exchange rate It is the value of the peso against the dollar that is on the market. Although each Cedear has its own implicit exchange rate, this must be similar to the market reference rate. If this is not the case, it could mean an opportunity for arbitration between markets or currencies.
Analysis of a Cedear
First analysis to be carried out, it applies only to the case of wanting to arbitrage a Cedear against the underlying stock or the currency against another asset. For this what we are going to do is Divide the underlying share price by the Cedear ratio and in this way we will obtain the implicit exchange ratethen you must compare against the reference exchange rate or another asset and from that result we will be able to know if the exchange rate of the chosen Cedear is higher or lower than the market.
If the exchange rate is lower, it may be an opportunity to buy the Cedear in pesos, convert it into shares abroad, sell the shares and then sell those dollars through another asset with a higher quote. This requires a large capital and the transaction cost must be taken into account in the calculation. It is not recommended to do this if the difference between exchange rates is less than 5%.
On the other hand, if the exchange rate of the chosen Cedear were higher, the reverse operation could be carried out by sending dollars abroad through an asset with a lower exchange rate, buying the share abroad, converting it into Cedear and then selling the Cedear on the local market.
For all calculations, it must be taken into account that the exchange rate to be used is the cash settlement rate (CCL).
The second analysis to be carried out is based on the investment in the Cedear or in the underlying action or local action, as know the real price of Cedear and its evolution It is important, since many times The exchange rate, splits and ratios make it difficult to interpret and make one think that there is an opportunity where there is none.
When a Cedear is going to be evaluated, the title should not be evaluated at the local levelyou must resort to information on the action that it represents, its price and evolution in the market where the company is listed to avoid deviations that the Cedear may, with its ratio, splits and exchange rate, generate on the calculation of the real value of the company.
From this point on, the analysis is the same for a Cedear as for a local stock, evaluating the price of the stock in order to know if the low price is an opportunity. We must first collect historical data, not only the price, but of company sales, sales/capitalization ratio, profits and their relationship with sales and market value. This data can give us a historical average of the company’s value. Once this average is obtained, it is necessary to compare it with the company’s current data or against its future forecasts and thus we can determine if the stock is trading above or below the company’s real historical value. Only when it trades below can we consider a buying opportunity.
It is important to know the reason for the price drop if it occurs overnight or over a short period of time, since this factor may not yet be included in the company’s future forecasts, which may result in the previous analysis being based on erroneous information.
If we know that the reason is included we can be sure to be versus a good investmentThis type of opportunity is usually caused by a macroeconomic factor such as a pandemic or war conflicts. Generally, the price of companies is affected by external factors and the entire market at the same time. It can also occur in specific sectors or due to problems in a particular region.
Why is price not an indicator of opportunity? Let’s say a company was historically listed on the market with a sales to share price ratio of 50%, meaning that for every 50 cents in sales, the stock was worth $1. The company will (probably) be listed maintaining that ratio in the future; if the company’s sales fell by 10%, the stock will fall by 20% to continue respecting the ratio. It will only be an opportunity when the stock falls by more than its historical ratio. For example, in this case, at 30% where the sales/share value ratio increases and over time the historical ratio is recovered, causing its price to rise.
The above calculation must also be carried out with other indicators such as profit on sales and profit on share price and any other possible ones. If in all of them we detect that the current price is lower than the historical average, we will know that it is a buying opportunity.
Taking all this into account, together with my research team we analyzed the WBA cedar yesterday and we consider that it is not an opportunity even though it is at minimum values and far from its historical maximum of 2014, our analysis determined that the historical ratios and the sales and profit forecasts coincide, so the price represents the real value of the company.
There are other cases such as SPCE and UPST where, despite being at a minimum, we consider it an opportunity given that their historical ratios (even though they are relatively young companies) are below their projections. This usually happens in businesses that are innovative and mainly in technology because a success usually makes the company earn a lot of money, something that is not possible in companies in traditional fields. SPCE can be a pioneer in a gigantic market such as aerospace research and with a product or project become the new Amazon while WBA does not have that possibility, since although it was and is a large chain its business It takes a long time to grow. On the other hand, this makes stocks like SPCE much more volatile than others on the market.
