Hi @Bear77, the ‘Macquarie Only’ Fund is an interesting idea and there is a lot of bullish sentiment out there for Macquarie Group. It also looks cheap compared to its 2 year high of $215.

I’m going to be the devil’s advocate and put forward a different point of view.

I think the Bull thesis for Macquarie is resting on its past performance. Over the last 9 years Macquarie has done incredibly well for shareholders. This makes it very tempting for us to extrapolate earnings growth and historical PE ratios forward.

However, most analysts are not expecting Macquarie to grow earnings at the same rate over the next 3 years as they have over the last 5 years (3% CAGR compared to 14% CAGR).

As you might expect, I am going to lift the bonnet and take a look at the GRUNT under there (the ROE). Over the five years from 2013 to 2018 Macquarie turned the business around improving ROE from 7% to 17.5%. Then for the 3 years to follow (2019 to 2021) ROE was c. 13%, and in 2022 it was back up to 17.4%.

If the analyst earnings forecasts turn out to be correct, Macquarie’s future ROE is likely to be just over 13% for the next 3 years. I think a business with ROE of 13% is OK if you can get it for the right price. But what is the right price? It all depends on what rate of return you expect on your invested dollars. If you were expecting an annual return of 13% and Macquarie’s ROE is 13%, then you shouldn’t be paying any more than book value ($77.50).

However, in this case we are talking about an annual return of 10% plus franking. Using McNiven’s Formula, assuming 50% of earnings are reinvested (historical) at an ROE of 13.5%, franking of 40%, and Required Return of 10%, I get a valuation for Macquarie of $132 per share.

Given Macquarie and it’s millionaire factory seem to have an uncanny ability to pull a rabbit out of the hat when you least expect it, I will give them the benefit of the doubt and bump future ROE up to an average of 15% for the next 5 years. Leaving everything else the same I get a valuation of $155 for at a 10% required return (including franking credits).

I know most Macquarie investors with think these valuations are crazy, but I can’t see any reason to pay a PB multiple of over 2x for a businesses with ROE forecast to be just over 13% for the next 3 years.

Now I’ve said that, just watch how Macquarie pulls a rabbit out of a hat and the share price climbs back over $200 per share! :)

Having recently put in a buy order for Macquarie at $167.10 only to watch them open at $172 and jump to $175+, this is the kind of post I need to keep FOMO at bay. Thanks @Rick

Having said that, they'll probably moon from here!

@Bear77 im a (reluctant) subscriber. i didnt even finished reading this blurb, from padley, couldnt believe it.

they have so many portfolios and strategies i cant keep up, and probably wont. the stock box is useful.

my cynical view is if you have so many strategies some will work that you can crow about.

pretty unimpressed really, the problem with old brokers is, they are old brokers cant stop fiddling, running up the brokerage its in the genes.

disc hold MQG and paying no attention to the one stock portflio.

@Rick maybe i will write a longer rebuttal at some stage. i was hoping that the banking issues would rattle the MQG share price a bit and give an opportunity to add. as the GFC and C19 gave great buying oppty's. the proviso is that MQG have kept their exposures and risk controls as conservative as they have in the past. once the market becoems convinced of thsi the shares usually respond.

be careful in teh use of some of the numbers above. eg when ROE=cost of capital shares trade at Bv, also marginal roe analysis has some big steady state assumptions which can influence the results. note also MQg has significnat excess capital that lowers ROE, raised capital at market highs recently. so can invest this.

fianlly MQG relies on soem extent on asset realsiations that are lower in bear markets so the low earnings analyst outlook. MQg are conservative in their forecasts.

maybe i will get around to writing more, i had a notion to make MQG my largest posiotn in this bear market, if it gets wobbly, could still happen, my buy numbers are around your FV estiamtes. could be wrong.

It would be really good to see some more views on valuation for MQG @Solvetheriddle. Feel free to poke holes in my assumptions. I see what you are saying about excess capital and how that affects ROE and can also provide a war chest for acquisition opportunities.

cheers

Rick

That's the results of Marcus' MOP (Macquarie Only Portfolio) at the 1 month (or 31 day) mark. Has returned 5%, being +1.4% above the ASX200 Index (XJO) which returned +3.6% over the same period. He isn't using a "buy and hold" strategy with this MOP, he's planning to trade in and out of MQG, so will sometimes be in cash and at other times be fully invested in Macquarie, as explained in my previous post about this portfolio in this thread. It's a leveraged play on the ASX200, using MQG only. So far, it seems to be working, but it's very early days obviously...

So the whole idea is pretty much MQG has a higher beta than the market so will be long MQG when its risk on and out of MQG when it's risk off. Could do the same with almost any high beta stock - you're just hoping you're right on your market calls.

Nice he doesn't have to worry about tax or transaction costs either.

@Mujo you are right, i think they sit around trying to think of something new to say. old brokers are old brokers, ie cant help fiddling and trading , imo

Waiting patiently on the sidelines doesn't sell subscriptions either!