Regular Investment Lessons

firstuser

I enjoy finance and hope to post regular mini-lessons/facts that interest me (and others?) from LinkedIn and X posters.

Today, I try to understand a post by Wei Li, BlackRock Global Chief Investment from LinkedIn.

The post: _"To be clear, the software price drop (orange) is not driven by hashtag#earnings (yellow). The gap suggests market narrative is less about quarter-to-quarter results and more about a reassessment of terminal values.
Interpretation: Software stock prices right now are based more on long-term valuations than earnings reports.

When the lens flips from hope to fear, price action becomes indiscriminate. But AI disruption creates first and foremost hashtag#dispersion. Including in saas, enterprise providers that offer mission critical platforms or prop data stand to benefit.
Interpretation: When there is hope or fear, everybody benefits or suffers, but AI causes prices to separate, especially benefiting mission critical platforms or prop data, whatever that is.

We also continue to favour broad AI hashtag#infrastructure exposure. The advantage of the infrastructure layer - spanning semiconductors, broadband networks, hardware, power, cooling, and data centers - is that it does NOT require picking the exact application winners, which is inherently difficult."_
Interpretation: what it says, you don't have to pick the right software

Now I try to understand some of the vocabulary in it without understanding the whole thing. (Don't understand this post too well.)

Accidentally looked this up:
Grok: "12-month EPS (also called trailing twelve months EPS or TTM EPS) is a key financial metric that represents a company's earnings per share over the most recent 12 months. It is calculated by summing the net income (minus preferred dividends) from the last four consecutive quarters and dividing by the average number of common shares outstanding during that period. This gives a rolling, up-to-date view of profitability per share, rather than being tied to a fiscal year-end.

Why it's used:
Provides a more current picture of performance than annual EPS (which might be outdated if reported months ago).
Commonly used to calculate the trailing P/E ratio (stock price divided by TTM EPS).
Helps investors compare companies or assess trends without seasonal distortions."

Google AI Overview: Dispersion in finance measures how much individual stock returns diverge from each other and from the overall index, serving as an indicator of market volatility, risk, and opportunity for active managers. High dispersion suggests a "stock-picker's market," while low dispersion favors passive investing. Dispersion trading seeks to profit from the spread between implied volatility of individual stocks and the realized volatility of an index.

AI Overview: Terminal value (TV) represents the estimated value of a business beyond a set forecast period in a discounted cash flow (DCF) model, often accounting for 60-80% of total valuation. It is calculated using two primary methods: the Perpetuity Growth Method (assuming constant growth forever) or the Exit Multiple Method (assuming a sale at a terminal year multiple).

Perpetuity Growth Method (Gordon Growth Model)
This formula assumes free cash flow (FCF) grows at a steady rate forever.

TV = (FCFn * (1 + g))/WACC - g)

FCFn : Free cash flow in the last forecasted year (e.g., Year 5).
g : Perpetual growth rate (usually 1-3%, ideally below the long-term GDP growth rate).
WACC : Weighted Average Cost of Capital.

Why it works: It takes the projected cash flow for the first year after the forecast period (
) and capitalizes it by the spread between the cost of capital and the growth rate.

Exit Multiple Method
This method assumes the company is sold for a multiple of a financial metric in the final year.
Final Year Metric: Usually EBITDA, EBIT, or Revenue in the last projection year.
Exit Multiple: A reasonable multiple based on comparable company analysis (e.g., EV/EBITDA).

firstuser

Today, I try to understand a post by Wei Li, BlackRock Global Chief Investment from LinkedIn.

Oil futures in steep backwardation through this week - near term prices well above longer dated contracts (chart) - a signal that markets see supply disruption as temporary

Interpretation: Short-run oil futures are much higher than long-term oil futures. Since the long-term oil futures did not rise with the "war," it implies that nobody sees the "war" as changing oil prices in the long run.

Backwardation occurs when an asset's spot (current) price is higher than its futures prices, creating a downward-sloping futures curve. Often driven by immediate supply shortages or high, short-term demand, this scenario benefits long investors through positive roll yields. Risks include volatility and potential for market reversals to contango, impacting consumers with higher costs and prompting producers to release inventory.

Contango is a market condition where the futures price of a commodity or asset is higher than the current spot price, creating an upward-sloping forward curve. It often reflects higher costs of carry, such as storage, insurance, and financing, for future delivery. Investors often experience "negative roll yield" in contango markets when rolling over futures contracts.

Near-term prices refer to market valuations for assets or commodities over a short timeframe, usually ranging from a few hours to several months. These prices are driven by immediate supply-demand imbalances, inventory levels, and geopolitical risks, often showing higher volatility than long-term trends.

Longer-dated contracts are agreements (business, employment, or financial derivatives) that span extended periods, typically over one to five years or more. In finance, these are often options (LEAPS) lasting 9 months to 3 years, offering lower volatility sensitivity and reduced time pressure compared to short-term trades.

firstuser

This is post by Wei Li on Linkedin.

Residual FCF (blue bar) is falling. Capex is rising. The gap will need to be financed. That is a feature of this environment.
Interpretation: If CapEx is rising and residual FCF is falling, then the company may need external financing moving forwards.

Expect more issuance: debt first, potentially equity, public and private.
Interpretation: A company will take loans, then stocks? or assets?, then stocks and/or bonds publicly and privately

Capex and buybacks compete for the same dollar. Less buyback support impacts earnings per share and total shareholder returns today, increasing reliance on future growth.
Interpretation: Companies can either spend their money on operational assets or repurchasing stocks. If you repurchase stocks, there are less shares, which causes higher earnings per share and may increase stock price. With less buyback, neither of these two things happens. Without the growth from buybacks, investors must rely on future growth in stock price.

You have to be in it to win it. Many are choosing to stay in at a cost. Only some will win.
Interpretation: Investing in US hyperscalars isn't a sure thing.

Hyperscalers are massive cloud computing providers—notably AWS, Microsoft Azure, and Google Cloud—offering vast, scalable infrastructure for data processing, storage, and AI. They utilize thousands of servers across global data centers to provide, on-demand, flexible, high-availability services for large-scale applications and enterprises.

Residual Free Cash Flow (RFCF) represents the cash remaining after a company covers its operating expenses, working capital needs, and capital expenditures (CapEx). It indicates a firm’s financial flexibility to pay dividends, buy back shares, or reinvest. A falling residual FCF, often driven by rising CapEx, signals a need for external financing.

Capital expenditures (CapEx) are funds companies use to acquire, upgrade, or maintain physical, long-term assets—such as property, buildings, or equipment—to increase operational capacity or improve efficiency.

Issuance is the formal, official act of producing, distributing, or making something available, such as financial securities (stocks/bonds)

Equity is the value of an asset (e.g., home, business) after deducting liabilities, or an ownership interest represented by shares.

Public issuance involves selling securities (stocks or bonds) to the general public, requiring
SEC registration and high transparency. Private issuance (placement) sells directly to accredited investors, offering higher speed, lower costs, and less disclosure. Public issues provide higher liquidity, while private placements allow for tailored, long-term financing.

A share buyback (or repurchase) occurs when a company buys its own outstanding shares from the market, reducing the number of shares available, boosting earnings per share (EPS), and returning excess cash to investors. They are used to signal confidence, increase ownership percentage, or prevent takeovers.

firstuser

MIT Lecture on Randomness

When a lot of players are trying to predict the market, there is randomness. When there is no randomness, players didn't think this area of the market (i.e. stock) was worth predicting.