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Valuing a stock
Scottino
Posted: 18 January 2012 07:55:35(UTC)
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Joined: 09/01/2012(UTC)
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Since the yield gap between gilts and shares has reversed I wonder what investors use to evaluate shares. For example I used undated gilts as my discount rate and projected dividend growth for 'x' years to arrive at a fair present value. I do not use PEG as it is mathematically naive and does not explain zero growth or potential dividend cuts.
Growth shares make most sense but what rating? One can have a multiple of earnings or dividend but at what rating would you cap a 10% growth stock? A crude rule of thumb was to add 10 points to the PD ratio. Thus if undated gilt is 25x dividend the 10% growth stock should be worth 35x its dividend. The conundrum also is that if you figure 10% growth perpetually then the share price approaches infinity.
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Guest on 03/02/2012(UTC)
Chart Trader
Posted: 18 January 2012 09:10:20(UTC)
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If you use a multiple of earnings, it is not much use looking at the current earnings you need to be looking at the forward earnings or fcast earnings. The easiest way is to look at the pe, if we use CNA as the working example:

the current pe is 6.7 but the projected pe is 11.06, by looking at these two numbers we can tell CNA is fcast to make less profit in 2011 than in 2010.
Now CNA looks value trading at a pe of 6.7 but not so great value at 11.06. If we do the maths
fcast eps 26p x projected pe 11.06 = 287p where the share sits today. Of course there are variables, the market might still value CNA at 6.7 earnings and if it did the price would fall to around 175p or the company could do better or worse than the fcast.
We know the market looks ahead so if it values CNA at a pe of 11.06 x 2012 fcast 27.7p we get a target of 306p, doesn't look worth taking the risk for such meagre returns, remembering the figures are all variables and the market may value CNA higher than a pe of 11.06.
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Guest on 03/02/2012(UTC)
Chart Trader
Posted: 29 January 2012 09:35:35(UTC)
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Let's compare two house builders Telford Homes and Persimmon, we will use the pe ratio, housebuilders are valued on net assets also so no one should be encouraged to buy from the following research.

If we compare the current pe of both companies

PSN 12.31
TEF 26.06

both shares have a good run lately and comparing the figures u would think PSN offers the better value and wonder why the market has bid TEF so high. U may even think that the market might bid PSN to the same pe which would mean the price could double.

The pe's shown are historical, based on the last published accounts. To see what the market thinks may happen in the future we need to look into the fcasted pe's.

PSN

2010 actual 42p eps > pe 12
2011 fcast 34p eps > pe 15
2012 fcast 42p eps > pe 12

By looking at the fcast pe we can tell that the market expects PSN to make less profit this financial year than last and looking at the fcst eps this confirms that.

PSN has traded in the past on a comfortable pe of around 15, so if we look into later this year, the market may value PSN 42p eps x pe 15 = 630p
May be more as they have traded on a higher pe or less because they have traded on a lower pe.
One thing to consider, when they reached their recent high it meant everybody who had bought since June 2008 was in profit so profit taking was to be expected sooner than later.
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Guest on 03/02/2012(UTC)
Chart Trader
Posted: 29 January 2012 09:47:29(UTC)
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Let's look at TEF


2011 actual 3.55p eps > pe 26.06
2012 fcast 3.6p eps > pe 25.69
2013 fcast 11.2p eps > pe 9.32

so if the market values TEF at a pe of 15 late this year or next year we get a target of
139p. Of course the figures are all fcasts and therefore any target is an assumption.

Let's look at what the company has to say


Headline: DJ Telford Homes Profit Falls, Sees FY Similar To 2011
Date/Time: 01/12/11 07:29:10-GMT ▼


LONDON (Dow Jones)--Telford Homes PLC (TEF.LN), a property developer, Thursday reported a fall in half year pretax profit and said it is on target to achieve a full year profit similar to 2011, while 2013 will see a significant increase.

MAIN FACTS:

-Revenue for the six months ended Sept. 30: GBP58.6 million (2010: GBP58.2 million)

-Operating profit GBP2.5 million (2010: GBP2.4 million)

-Pretax profit GBP1.5 million (2010: GBP2.0 million)

-Diluted earnings per share 2.1 pence (2010: 3.3 pence)

-Adjusted gross profit margin 18.2% (FY11: 15.1%)

-Interim dividend 1.5 pence per share (2010: 1.25 pence)

-Net debt GBP45.7 million

-Shares closed Wednesday at 74.5 pence valuing the company at GBP37 million.

So we have some confirmation of the figures, DYOR, check all figures for yourself, and remember to always ask this question
If the pe is low, why is the market giving me such a wonderful opportunity to buy this share cheap ? Remember momentum, it is no use to u if u are the only person to have discovered the bargain share it can sometimes mean a long wait until the market catches up with you.
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Guest on 23/11/2012(UTC)
Scottino
Posted: 29 January 2012 15:38:41(UTC)
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Thanks Charttrader. I do know about the crux of your example. My thought was what someone such as yourself would pay or what criteria you would use if most evidence suggested that a share would most likely grow by 10% per annum for 5 years.Thus current eps 10p but pretty sure it will go 11p, 12.1p, 13.2p, 14.4p and 15.8p. A super confident guy may pay 10x year 5 at 158p, someone else pay not be confident and go for 110p. The market is a mix of these types and the price may bounce between these levels. If 10% could be had in perpetuity then 158p is a bargain. Tesco is a good example of 10% growth and the price plummeted because holders of the stock hauled in the horizon for growth.
Likewise if one can find it how would you price a 5 year 20% grower versus a 10% grower? At what level would you prefer the 10% er over the 20% er? Say my 20% share goes 10p, 12p, 14.4p, 17.2p, 20.6p, 24.7p. The key is also to maintain a rating, and the higher the rating the more difficult it is to maintain it.
By the way out of builders group Bovis is perplexingly overvalued and Taylor Wimpey looks cheapest But all take good recovered results as a done deal,; they certainly have improved margins and ASP. At least Persimmon pays a div but they have maxed at 500p+.
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Guest on 23/11/2012(UTC)
Chart Trader
Posted: 30 January 2012 11:48:30(UTC)
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scot,
u will normally find the market has arrived at the conclusion long before u so if u compare a share that the market thinks the will grow at 10% or 20% the share showing the higher growth will already be trading at a higher pe.
If u can find a share that u think will grow at a steady rate and u are correct as long as u hold it for long enough u will end up in profit, of course we all want the best entry point possible.

If we look at DOM, a share that has shown steady eps growth with the fcast showing the growth to contiune.

If we compare the approx pe against the year
03 > 16
04 > 24
05 > 18
06 > 26
07 > 30
08 > 24
09 > 16
10 > 23
11 > +30

If we take the earnings per share for 03 x 2.5p against this years fcast 21p and multiply by a pe of 20
50p > 420p, u can see it would not matter where u bought. Now if u had identified DOM as a share u would like to buy and been brave when the pe fell below 20 those would have been two excellent entry points.

A couple of shares I wouldn't trade ARM pe 90, IMG 78, one I may research but doubt if I would trade MONY 90.9 but the projected pe falls to 18.
Obvioulsy there are plenty of traders who will trade the tech shares at high pe's otherwise they wouldn't be the price they are, guess it's down to the trader.
regards

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Guest on 23/11/2012(UTC)
John @ UKValueInvestor.com
Posted: 01 February 2012 12:40:28(UTC)
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I don't look at gilt yields because it's one more variable over which I have no control or knowledge of what it's going to do in the future. Discount rates are also dangerous in many cases because you can create whatever valuation you like by fiddling with it.

On a more positive note I agree with your basic premise that stock valuation is mostly about dividend growth and the underlying earnings which support it; although I will say that there are a million and one ways to value a stock, but dividend growth is one of the big ones.

You mention that you're talking about a stock where you're pretty sure the growth will continue, like Tesco for example, so I guess we're talking about a selection of stocks that have a proven history of growth (again like Tesco?). I think that's a pretty sensible starting point.

One way to do this is to use 10 year data - so you'd look at 10 year earnings and dividend growth and how stable and progressive they've been.

Once you find those kind of stocks the next question is the question you started with - Exactly how do you value them?

Again there are a million and one ways to do it, but a couple that I like are:

PEGY10, which is basically PE10 / (G10 + Y), where PE10 is the 10 year PE ratio, G10 is the 10 year growth rate and Y is the current yield.

I think that's a reasonable starting point, but of course it doesn't create a £ value of the stock but rather a ratio to compare one to another (or perhaps to compare against the FTSE 100 index to make sure it's worth taking the extra risk of investing in a single company).

Another approach that I like which is quite a bit more complex is to rank those 3 factors for the whole universe of stocks and then combine the ranks which gives a similar but more stable comparator than PEGY10. But like I say this is a bit more complex and time consuming to put together. You then just exclude all the stuff you're not interested in until all that's left is the quality dividend growers sorted by this multi factor rank.

Or more simplistically, just compare long term growth, long term PE and current yields between different companies that you're interested in and also compare them against the index.

Hope that's of some use.
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Guest on 03/02/2012(UTC)
veselka todorova
Posted: 20 November 2012 12:39:48(UTC)
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Joined: 12/06/2012(UTC)
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Dividend Income investor.com
Posted: 21 November 2012 10:09:42(UTC)
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When are shares really cheap?

As a Dividend Income Investor, I would say shares are really ‘cheap’ when high quality dividend paying companies’ share prices are historically undervalued.

The flipside of this is that their dividend yields are ‘high’ based on business activities which support increasing free cash flows in most situations which allow for sustainable and growing dividend payments that can match annual inflation rate.

Unfortunately, based on our proprietary valuation screens, there are currently very few FTSE350 companies that fit our bill.

Some people are of the opinion that with the FTSE100 on a forecast P/E of less than nine or ten, now it’s definitely time to be buying some of these “bargains” without having a view whether these companies will be able to sustain their dividends. Some people say that this market is offering excellent opportunities. Others are of the opinion that we’re even past the "worst".

At Dividend Income Investor.com our proprietary valuation and financial strength screens allows us to confidently time our entree and exit levels for certain individual high quality dividend paying shares. As a result, we are only interested in relatively few companies.
rishav raina
Posted: 16 December 2012 12:43:11(UTC)
#10

Joined: 16/12/2012(UTC)
Posts: 1

Hi all, as an value investor stocks are cheap when they are undervalued means the value of the stocks is comparable with the net asset value and is a penny stock. Then it could be a value investment
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