Individual Term Project - Daniel Figueroa

Individual Term Paper: Systematic Value Investing Daniel Figueroa Pepperdine University DESC 656.44: Quantitative Analysis for Business Operations Instructor: Dr. Owen P. Hall, Jr. December 3, 2009

Individual Term Paper: Systematic Value Investing Strategy

Table of Contents Introduction..........................................................................................................................4 Market Outlook....................................................................................................................4 Forecasting Method.........................................................................................................5 Analyze Stock....................................................................................................................10 Positions Sizing.................................................................................................................16 In Summary.......................................................................................................................19 Table of Figures & Tables: Figure 1 (Chart: VEU)........................................................................................................6 Figure 2 (Chart: VTI)...........................................................................................................7 Figure 3 (Advisory Sentiment Chart)..................................................................................8 Figure 4 (U.S. Industry Bell Curve)....................................................................................9 Figure 5 (Chart: XLV).........................................................................................................9 Figure 6 (Chart: EMS - Eyeballing)..................................................................................10 Figure 7 (Chart: EMS – Regression Trend Line)..............................................................11 Figure 8 (Chart: EMS – 10m EMA)..................................................................................11 Figure 9 (Probability Chart: EMS)....................................................................................14 Figure 10 (Probability Chart: EMS)..................................................................................15 Table 1 (Markets)................................................................................................................5 Table 2 (Intrinsic Value: EMS).........................................................................................12 Table 3 (Risk Tolerance – Beta Weight)...........................................................................17 Table 4 (Existing Portfolio)...............................................................................................18 Table 5 (New Portfolio).....................................................................................................19 Table of Appendix: Appendix A (Correlation between VTI & VEU)..............................................................20 Appendix B (EMS’ Bearish Break-out)............................................................................21 Appendix C (Correlation between EMS & XLV).............................................................22 Appendix D (NPV of EPS)................................................................................................23 Appendix E (NPV of FFCF)..............................................................................................24 Appendix F (Key Fundamental Ratios for EMS)..............................................................25 Appendix G (Portfolio Betas)............................................................................................26

Executive Summary The objective of this paper is to illustrate the process of opening a new stock position within an existing portfolio, utilizing a systematic value investing strategy. This strategy is unique in so that it was designed to utilize many of the quant analysis methods learned throughout the trimester. The investment strategy is broken down into four main tasks as illustrated below: Market Outlook  Identify Sector  Analyze Stock  Position Sizing

2

Individual Term Paper: Systematic Value Investing Strategy The market outlook identifies where the market is as in relation to where it has been over the past months. Looking at both the global and U.S. equity markets with the use of exponential moving averages, a bullish trend emerges. From there the healthcare sector was chosen using technical analysis. Of all the stocks in the healthcare sector, Emergency Medical Services Corp (NYSE: EMS) was chosen due to its bullish technical indicators and its strong key fundamentals. Some of the tools utilized in the analysis consisted of forecasts: moving averages and regression lines, simple regression, factor analysis and net present value. Once the stock was chosen, stop-losses and a target were determined using standard deviations for probabilities. The next step in the process was to determine the desired portfolio beta and identify the position size for EMS. The last step performed was to calculate how many share of EMS were to be purchased. Using this strategy the value investor, with conservative growth tolerance, would purchase 167 shares of EMS. The investor would expect less volatility than the stock market as a whole and would be proactive in managing risk. The investor should expect to lose a maximum of $1,250.83 if the position goes completely against him. This would be an expected portfolio drawdown of 1%.

3

Individual Term Paper: Systematic Value Investing Strategy

Introduction The objective of this paper is to illustrate the process of opening a new stock position within an existing portfolio, utilizing a systematic value investing strategy. This strategy is unique in so that it was designed to utilize many of the quant analysis methods learned throughout the trimester. Explanations of the formulas for the tools used are not within the scope of this paper, identifying how to use quant tools is of most importance. The investment strategy to open a new position is broken down into four main tasks as illustrated below: Market Outlook  Identify Sector  Analyze Stock  Position Sizing Each main task will include its own underline assumptions. However, the overall strategy has its own main assumptions. This paper assumes: • • • • •

That the investor is interested in opening a new long, unlevered, position. It assumes that the investor will only be watching the market on a monthly basis. Desires to minimize draw-downs. It assumes that no traditional sector diversification is desired. Lastly, that the objective is to use a safe systematic strategy, not create the “holy grail” of investment strategies. Because this paper focuses on entering a new position it will not include portfolio

performance. This paper also does not provide expected returns because CAPM is not utilized. Nor does this paper provide back-testing because doing so tends to shape a strategy towards unpredictable capital gains and away from risk management. This paper does use the portfolio’s beta to match the investor’s known risk tolerance. It will focus on being proactive in managing risk and reactive to responding to market conditions.

Market Outlook This paper uses a liberal top-down analysis. A top-down analysis is described as: An investment approach that involves looking at the "big picture" in the economy and financial world and then breaking those components down into finer details. After looking at the big picture conditions around the world, the different industrial sectors are analyzed in order to select those that are forecasted to outperform the market. From

4

Individual Term Paper: Systematic Value Investing Strategy this point, the stocks of specific companies are further analyzed and those that are believed to be successful are chosen as investments (Investopedia, 2009) The use of the word liberal in the earlier statement is used because this paper will factor in some underline market assumptions. Due to the accessibility and liquidity with exchanges for stock market indices, the paper assumes weak-form market efficiency. This means that all known economic fundamental factors are priced into the market indices. The technical analysis used in this section is not to beat the market, but simply identify where the market is as in relation to where it has been i.e. a map. The trend identification takes into consideration Newton’s First Law of Motion that an object in motion will remain in motion unless acted upon by another force. Normally an investor should look at a minimum of the five markets, as listed in the table below: Market Bonds Commodities Real Estate Total US Stock Market Total World Stock Market

Ticker IEF DBC VNQ VTI VEU

Description iShares Barclays 7-10 Year Treasury PowerShares DB Commodity Index Tracking Vanguard REIT Index ETF Vanguard Total Stock Market ETF Vanguard FTSE All-World excluding - US ETF Table 1 (Markets)

For brevity and purposes of this paper we will only analyze the Total World Stock Market, which excludes the U.S., and the Total U.S. Stock Market. The main “market outlook” task is broken down into three subtasks as illustrated below: Forecasting Method  Analyze Markets  Sector Selection Forecasting Method Since the paper assumes all known economic fundamental data is incorporated into the indices’ prices, it then only has to determine if the stock market is in a bullish or bearish trend. To do so this strategy will utilize technical analysis with a 10 month exponential moving average as the forecasting tool. The 10 month (m) exponential moving average1 (EMA) is represented on the charts as a green line. To establish whether the market is bearish or bullish, this paper uses an end-of-month close, moving average crossover. If the monthly close is above the 1

The exponential moving average is based off industry standards and not optimized for mean absolute deviation.

5

Individual Term Paper: Systematic Value Investing Strategy 10m EMA, it is assumed the market is in a bullish trend. If the monthly close is below the 10m EMA it is assumed the market is in a bearish trend. The charts are setup to display 5 years worth of monthly data. Each month is represented by 1 bar. This setup will help reduce noise, being that the objective is to perform investment analysis on a monthly basis using a systematic strategy. Analyze Markets As stated prior, this paper will only analyze two markets the Total World Stock Market (VEU), which excludes the U.S., and the Total U.S. Stock Market (VTI). Since there is a high correlation between VTI and VEU, VTI will only be analyzed if VEU is found to be in a bullish trend. Running a simple regression on VTI and VEU, with VEU being the independent variable, VTI has a coefficient of 0.76. Of that correlation, 85% of the volatility can be explained by the relationship between the two. (Appendix “A”) Analyze VEU Below is the chart for Total World Stock Market (VEU):

Figure 1 (Chart: VEU)1

1

"Total World Stock Market (VEU)." Chart. Total World Stock Market (VEU). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp

6

Individual Term Paper: Systematic Value Investing Strategy The last monthly bar clearly closed above the 10m EMA. This means it is forecasted that the international stock market will likely continue in a bullish direction. As a result it may be safe to enter new positions given further research. Analyze VTI Below is the chart for the Total U.S. Stock Market (VTI):

Figure 2 (Chart: VTI)1

The last monthly bar clearly closed above the 10m EMA. This means it is forecasted that the U.S. stock market will likely continue in a bullish direction. As a result it may be safe to enter new positions given further research. Analyze Market Sentiment Sentiment indicators are used in technical analysis to quantify the levels of optimism or pessimism present in the market (Investopedia, 2009). The advisory sentiment indicator is a judgmental system used to quantify a qualitative response from a sample of financial advisors on whether being bullish or bearish. Below is the advisor bullish/bearish sentiment chart:

1

" Total U.S. Stock Market (VTI)." Chart. Total U.S. Stock Market (VTI). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp

7

Individual Term Paper: Systematic Value Investing Strategy

Figure 3 (Advisory Sentiment Chart)1

Currently 50% of financial advisors are bullish, while only 19% are bearish. This means there is a sense of optimism in the market, but being that it is below 60% it is not euphoric or resemblance of a bubble. As a result today’s market conditions may be sustainable. It may also be safe to enter new positions given further research. This sentiment indicator may also be used for identifying a method of entering a position. If the bullish sentiment is trending down or low, it may be best to dollar cost average into a position since pricing may stay low or drop. If bullish sentiment is trending up, it may be best to enter on a lump sum basis to keep average cost low. It may also be best to sit on the sideline if the bullish sentiment is extremely high. For this paper we will only consider a lump sum deposit. Sector Selection To select a sector this paper uses the U.S. Industry Bell Curve. The criteria for this strategy will be to find an industry that is not bearish or over-bought. Preferably it would be between the 40% and 70% range.

1

"Advisor Sentiment Chart." Advisor Sentiment Chart. Investors Intelligence. Web. Nov. 2009. http://www.investorsintelligence.com/x/default.html

8

Individual Term Paper: Systematic Value Investing Strategy

Figure 4 (U.S. Industry Bell Curve)1

For brevity of the paper the Healthcare (HEAL) industry was selected for further analysis. It has a bullish percentage score of 59% which falls within the desired criteria. A search for healthcare exchange traded funds (ETF) reveals a Spyder fund as a candidate. Below is the chart for Healthcare SPDR ETF (XLV):

Figure 5 (Chart: XLV)2

The last monthly bar clearly closed above the 10m EMA. This means the forecast is that the healthcare sector will continue in a bullish direction. As a result it may be safe to enter new positions within this sector, given further research.

1

" U.S. Industry Bell Curve." U.S. Industry Bell Curve. Investors Intelligence. Web. Nov. 2009. http://www.investorsintelligence.com/x/default.html 2 " Healthcare SPDR ETF (XLV)." Chart. Healthcare SPDR ETF (XLV). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp

9

Individual Term Paper: Systematic Value Investing Strategy

Analyze Stock Our objective in this section is to select a stock within the healthcare industry so a position may be opened. The main “analyze stock” task is broken down into five subtasks as illustrated below: Scan Stocks  Stock: Technical Analysis  Stock: Fundamental Analysis Determine Target  Determine Stop-losses Scan for stocks Scanning for stocks within a sector is a manual activity which is accomplished by reviewing their charts. Usually this task is performed by flickering through the charts at about 5 seconds per chart with the forecasting tools preconfigured on the charts. For this paper the forecasting activities will be broken down into individual components: eyeballing, regression trend line and 10m EMA. This will be explained concurrently with analyzing Emergency Medical Services Corp’s (NYSE: EMS) chart. Stock: Technical Analysis The eyeballing method is a crude way to identify a trend. This paper is looking for a stock in an upward trend. An upward trend is defined as having higher peaks and higher valleys. In the chart below of Emergency Medical Services Corp (NYSE: EMS) the peaks are represented by magenta ovals, while the valleys are represented by blue ovals.

Figure 6 (Chart: EMS - Eyeballing)1 1

" Emergency Medical Services Corp (NYSE: EMS)." Chart. Emergency Medical Services Corp (NYSE: EMS). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp

10

Individual Term Paper: Systematic Value Investing Strategy Using the eyeballing method the stock appears to be in an upward trend. This means it would be advisable to continue analyzing with a regression trend line. The next forecasting tool is the regression trend line. While regression trend lines are typically performed on scatter plots, it is performed on this bar chart using end-ofmonth data.

Figure 7 (Chart: EMS – Regression Trend Line)1

As predicted prior via the eyeballing method, EMS is verified as being in an upward trend by the regression trend line. This means it would be advisable to continue analyzing with a 10m EMA. The exponential moving average is best used when a stock is trending. If the stock is consolidating sideways, a momentum indicator may be more useful. Since the regression trend line indicates an upward trend, a 10m EMA may be overlaid on the chart to identify bullishness.

Figure 8 (Chart: EMS – 10m EMA)2

1

" Emergency Medical Services Corp (NYSE: EMS)." Chart. Emergency Medical Services Corp (NYSE: EMS). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp 2 " Emergency Medical Services Corp (NYSE: EMS)." Chart. Emergency Medical Services Corp (NYSE: EMS). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp

11

Individual Term Paper: Systematic Value Investing Strategy As predicted prior via the eyeballing and regression trend line methods, EMS is verified as being in an upward bullish trend by using a 10m EMA since it did close above the moving average3. This means it would be advisable to move into analyzing the stocks fundamentals. Stock: Fundamental Analysis A common question asked is why an investor should perform fundamental analysis on individual stocks and not the market indices. If market efficiency is assumed with the indices why should it not be assumed with individual stocks? A response would be that individual stocks hold more unsystematic risk than do an index, thus more volatile. Also, if an investor buys a stock during what is forecasted to be a short down turn, and the stock has strong fundamentals, then he is implementing a value investment strategy. If that same investor does so with a stock with weak fundamentals, then he is placing a speculative gamble and risks the company filing bankruptcy. This paper will focus on implementing a value investment strategy. Before performing fundamental analysis, it is crucial to identify the correlation between EMS and XLV to ensure that the investment is in the correct sector. Again, using a simple regression between EMS and XLV, with XLV being the independent variable, a coefficient of 0.91 is identified. Of that correlation, 19% of the volatility can be explained by the relationship between the two (Appendix “C”). Thus, by investing in EMS one is investing in the healthcare sector. Now that reasoning for a value investment strategy and correlation has been established, EMS’ intrinsic value must be identified. To do this paper implements two strategies: discounting all future earnings per share (EPS) and discounting all future free cash flows (FFCF). To do this a net present value calculation is performed. See Appendix “D” for the NPV on EPS. See Appendix “E” for NPV on FFCF. Ticker

Price

NPV of EPS

Potential Return

NPV of FCFF

Potential Return

EMS

47.81

64.25

34%

105.23

120%

Table 2 (Intrinsic Value: EMS)

3

Note that the bearish trend which ended in July due to the close above the 10m EMA was not confirmed until August when the move exceeded 1 trailing standard deviation. See Appendix “B”

12

Individual Term Paper: Systematic Value Investing Strategy EMS is currently selling at a discount to both its EPS and FFCF. Table 1 indicates that there may be a potential return between 34% based off EPS and 120% based of FFCF. This is not to be interpreted as a guaranteed return, but instead akin to a moving magnet, where current price should gravitate slowly towards that direction. Being that EMS is selling at a discount, this means it would be advisable to analyze the company’s key fundament ratios. The company’s key fundamental ratios can be analyzed using multifactor analysis. We will analyze EMS’ ratios against its industry’s ratios. The key ratios used in this strategy as the factors are: P/E, P/S, P/B, P/CF, ROE, D/E and CR. These ratios along with 3 red flag indicators will be used as the factors. The 3 red flag indicators look for incongruence with revenues, operating incomes and receivables on an annual basis. See Appendix “F” for data. In order to analyze the data the key ratios and red flags are converted to points. The points are given based on its performance against constraints1 for the factors. A 1 is given if it beats the constraint, a 0 if it matches the constraint, and a -1 if it does not meet the constraints. For example, the factor P/S has a constraint of being less than 2.5. EMS beats the constraint since it is 0.82, thus given a 1. The industry does not beat the constraint since it is 8.9, thus given a -1. The factors are then given weights2 based on the relevance to value investing. A multifactor analysis is performed to identify whether the chosen company is stronger than its represented industry. If the industry was to be stronger than the company, then the company would not be a reasonable investment. Another constraint used to ensure strong fundamentals is that the outcome must be greater than 100. In EMS’ case it is both stronger than its sector and greater than 100. This would mean that an investment in EMS would be reasonable.

1 2

For brevity of the paper the constraints are not listed. Weights are subjectively chosen using a judgmental system.

13

Individual Term Paper: Systematic Value Investing Strategy Determine Stop-losses There will be two stop-losses implemented with this strategy. One is intraday, used for preservation of initial capital. The other is end-of-month, used for capital gains preservation and change in trend direction. The intraday stop-loss is a point at which the stock has decisively moved against the position on an intraday basis and actions for preservation of capital should be implemented. The first task for determining an intraday stop-loss is to set a time horizon. The time horizon chosen for this model is 2 months1. This keeps volatility within a predictable timeframe. The intraday stop-loss for EMS is going to be set on a probability of it touching 1 standard deviation away from it current price. This would mean that there would only be a 16% chance that the downward move to $40.32 is due to monthly noise fluctuation. This is illustrated using a probability analysis chart as shown below:

Figure 9 (Probability Chart: EMS)2

With the intraday stop-loss being a standing order, a second stop loss used for trend direction and capital gains preservation is also to be determined. This is not a standing order. Instead it should be reviewed on an end-of-month basis. This end-of-month stop order is a trailing stop that shall be placed on a monthly basis if the price closes below the 10m EMA. This will preserve capital gains if a change in trend occurs. Determine Target 1

This timeframe also matches the price target timeframe. " Emergency Medical Services Corp (NYSE: EMS)." Probability Chart. Emergency Medical Services Corp (NYSE: EMS). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp 2

14

Individual Term Paper: Systematic Value Investing Strategy The target is not to be considered an expected return, but instead a point at which new decisions must me made. The target is a point at which the stock has decisively moved into a favorable position and not determined to be noise fluctuation. Once the target is hit, the stop should then be moved to a risk free position. The first task for determining a target is to set a time horizon. The time horizon chosen for this model is 2 months. As stated prior, this keeps volatility within a predictable timeframe. The target for EMS is going to be set on a probability of it touching 1 standard deviation away from it current price. This would mean that there would only be a 16% chance that the move to $58.40 is due to daily noise fluctuation. This is illustrated using a probability analysis chart as shown below:

Figure 10 (Probability Chart: EMS)1

While a buy and hold strategy could be implemented since fundamental analysis was used in determining an appropriate stock, our objective is to minimize draw-downs and match risk to the investor’s risk profile. In doing so, once the target of $58.40 is hit, a standing post-trade2 stop-loss order should be placed at the trade order price of $47.81. This preserves initial capital and creates a pseudo risk-free trade. Like the initial trailing stop, the end-of-month stop order shall be placed on a monthly basis if the price closes below the 10m EMA. This will preserve capital gains if a change in trend occurs.

1

" Emergency Medical Services Corp (NYSE: EMS)." Probability Chart. Emergency Medical Services Corp (NYSE: EMS). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp 2 This is not to be confused with the stop-loss orders set during the initial position opening. This position voids those orders, as the target has been met.

15

Individual Term Paper: Systematic Value Investing Strategy

Positions Sizing Our objective in this section is to open a new long position in EMS. The main “position sizing” task is broken down into three subtasks as illustrated below: Determine Risk Tolerance  Determine Portfolio Beta  Determine Position Size When devising the position size certain assumptions are made. This paper assumes the following: • • • • • • • • •

That the portfolio performance will not be benchmarked1; instead it will adhere to the investors risk tolerance profile. The investor is adding to a current portfolio. To preserve capital the investor will not place an initial position with a size greater than 10% of the total portfolio. Available cash for investment equals $10,000. Once a position is opened, no rebalancing of the position shall take place to maintain weights. The portfolio consists only of equities. Non-round lot sizes are acceptable The portfolio is not required to be fully invested. It will not use the Capital Asset Pricing Model (CAPM) to project expected returns due to the unreliability of predicting expected market returns one year out. While Beta within itself is designed to predict future volatility of a security or

portfolio in comparison to the total market and is dynamic and unreliable; used in conjunction with other constraints it becomes useful, thus used in designing this portfolio. Determine Risk Tolerance In order to create a functional portfolio, the investor’s risk tolerance should be identified. There are six main types of profiles as follows: Cash, Conservative, Moderate Conservative, Conservative Growth, Moderate Growth and Aggressive Growth. Betas2 are then assigned to the profiles as in the following table:

1 2

The total U.S. stock market is used as a benchmark against risk, but not performance. Betas are subjectively chosen using a judgmental system.

16

Individual Term Paper: Systematic Value Investing Strategy

Risk Tolerance Cash Only Conservative Moderate Conservative Conservative Growth Moderate Growth Aggressive Growth

Desired Beta Weighted Portfolio 0 0.25 0.50 0.80 1.00 1.30

Table 3 (Risk Tolerance – Beta Weight)

Being that the objective of this paper is to add a position into an existing portfolio, it will be assumed that such questionnaire has been assessed. The resulting assessment will be that the investor is conservative growth with a desired beta of 0.80. This means the investor wishes to be correlated with the market, but slightly less volatile. Determine Portfolio Beta The beta weighting of the existing portfolio should now be calculated. This is needed to determine what the existing portfolio beta is in relation to its desired beta. When adding the new position to the existing portfolio, it should rebalance the portfolio beta to the desired point. Below is the table of the current holdings in the portfolio along with their respective sizes, betas and weighted betas: BP = (B1)( $Position 1 /$Portfolio ) + (B2)( $Position 2 /$Portfolio ) + (Bn)( $Position n /$Portfolio )

17

Individual Term Paper: Systematic Value Investing Strategy Holdin g WMT XOM ADP UPS TRC JOE CTO IEP RX INTC Total

Position Size

Beta1

$12,000 $14,000 $12,000 $10,000 $10,000 $9,000 $13,000 $9,000 $10,000 $9,000 $108,000

0.24 0.46 0.57 0.80 1.00 1.13 1.31 1.12 1.06 1.16

Weighted Beta 0.03 0.06 0.06 0.07 0.09 0.09 0.16 0.09 0.10 0.10 0.86

Table 4 (Existing Portfolio)

Determine Position Size Since the portfolio beta is 0.86, our goal would be to add EMS to the portfolio in such a manner that our beta would gravitate towards 0.80. Our other constraint would be that the position not be larger than 10% of the new portfolio size. For this paper the investor has $10,000 to ideally add into the portfolio. Thus the new size should be the lesser of 10% or cash-on-hand. Since $10,000 is less than $18,0002 the new position should not exceed $10,000. To determine the required weighted beta for EMS the following calculation is performed: WEMS = (BEMS)( $Position EMS /$Portfolio ) BEMS = Beta for EMS WEMS = Weighted Beta for EMS By plugging this formula into the excel table and leaving EMS’ position at zero it forces WEMS to be zero. This gives an initial portfolio beta of 0.86. Then the max position size of $10,000 is entered for EMS’ size, which yields a portfolio beta of 0.78. EMS’ size is then decreased in $1,000 increments to force the desired portfolio beta of 0.80. The resultant size for EMS is $8,000 with a weighted beta of 0.03. This also

1 2

See Appendix “G” for betas ($108,000 + $10,000) x 10% = $18,000

18

Individual Term Paper: Systematic Value Investing Strategy changes the weighted beta for each of the existing holdings since the portfolio size is now $116,000. Holdin g WMT XOM ADP UPS TRC JOE CTO IEP RX INTC EMS Total

Position Size $12,000 $14,000 $12,000 $10,000 $10,000 $9,000 $13,000 $9,000 $10,000 $9,000 $8,000 $116,000

Beta

Weighted Beta

0.24 0.46 0.57 0.8 1 1.13 1.31 1.12 1.06 1.16 0.39

0.02 0.06 0.06 0.07 0.09 0.09 0.15 0.09 0.09 0.09 0.03 0.80

Table 5 (New Portfolio)

Once a position size is determined, the required stock shares needed may be calculated. This is performed by dividing the position size by the price per share. For EMS it is as follows: $9,000 / $47.81 = 167.33 ≈ 167 shares.

In Summary Using this strategy the value investor, with conservative growth tolerance, would purchase 167 shares of Emergency Medical Services Corp (NYSE: EMS). The investor would expect less volatility than the stock market as a whole and would be proactive in managing risk. The investor should expect to lose a maximum of $1,250.831 if the position goes completely against him. This would be an expected portfolio drawdown of 1%2.

1 2

$1,250.83 = ($47.81 - $40.32) x 167 1% = $1,250 / $116,000

19

Individual Term Paper: Systematic Value Investing Strategy Appendix A (Correlation between VTI & VEU) Historical Prices for VTI. Yahoo! Finance. Web. Nov. 2009. http://finance.yahoo.com/q/hp?s=VTI

20

Individual Term Paper: Systematic Value Investing Strategy Appendix B (EMS’ Bearish Break-out) " Emergency Medical Services Corp (NYSE: EMS)." Chart. Emergency Medical Services Corp (NYSE: EMS). Thinkorswim. Web. Nov. 2009. https://www.thinkorswim.com/tos/client/index.jsp

21

Individual Term Paper: Systematic Value Investing Strategy Appendix C (Correlation between EMS & XLV) Historical Prices for EMS. Yahoo! Finance. Web. Nov. 2009. http://finance.yahoo.com/q/hp?s=EMS

22

Individual Term Paper: Systematic Value Investing Strategy

Appendix D (NPV of EPS) "Price Check Calculator." Price Check Calculator. Smart Money. Web. Nov. 2009. http://www.smartmoney.com/pricecheck/?story=worksheet&nav=dropTab

23

Individual Term Paper: Systematic Value Investing Strategy Appendix E (NPV of FFCF) Cash Flows. Value Pro. Web. Nov. 2009. http://www.valuepro.net/cgi/valuate.pl

24

Individual Term Paper: Systematic Value Investing Strategy Appendix F (Key Fundamental Ratios for EMS) Key Ratios: EMS. MSN Money. Web. Nov. 2009. http://moneycentral.msn.com/investor/invsub/results/compare.asp?Symbol=EMS TICKER Date P/E P/S P/B P/CF ROE D/E CR Red Flag #1 Red Flag #2 Red Flag #3 CQ Total Revenue PQ Total Revenue CQ Op. Inc. PQ Op. Inc. CQ Receivables PQ Receivables Red Flag #1 CQ Red Flag #1 PQ Red Flag #2 CQ Red Flag #2 PQ

EMS 11/29/2009 20.2 0.82 3.2 12.2 17.8 0.71 2.7 Red Flag Good Good 665.06

Industry 37.8 8.9 7.53 38.4 21.4 0.31 2.4

EMS Alt1 -1 1 0 1 1 -1 1 -1 1 1

Industry Alt2 -1 -1 -1 -1 1 0 1 0 0 0

235

-135

Weights 50 60 70 80 60 70 70 85 85 85

379.33 55.47 54.88 464.24 552.8 8.34% 14.47% 69.80% 145.73%

25

Individual Term Paper: Systematic Value Investing Strategy Appendix G (Portfolio Betas) Investing Stocks. MSN Money. Web. Nov. 2009. http://moneycentral.msn.com/investor/research/newsnap.asp

26

Individual Term Paper: Systematic Value Investing Strategy

27

Individual Term Paper: Systematic Value Investing Strategy

28