How do you determine a fair value for a company's stock?
I constantly hear the phrase "do your own research" and I believe that's very sound advise. But how do you do that without going broke paying for somebody else's analysis. In other words, how can I "do my own research"? What elements of data should I look at and analyze to determine the fundamental value (i.e., fair stock price) of an equity?
Best Answer
2183 points
ChaosNantuko answered one year ago …
I wrote an article about how i go about this a while ago. heres a link...
http://tycoonreport.tycoonresearch.com/articles/322616102/a-fundamental-look-at-growth-stocks
Answers
631 points
Creezy answered one year ago …
The same way you value a bond, you should value an asset - it's based on Discounted Cash Flow. Meaning, you take the future cash flows of a company (predicted cash flows, that is) and then discount them back.
The difficult part about doing this for a stock, as opposed to a bond, is that it requires a high degree of certainty in:
1. predicting the cash flow
2. using an appropriate discount rate
That's why you should only do this with a company that has a long operating history in a mature industry -- this helps with making accurate cash flow predictions.
And then the riskier the company, the higher the discount rate. But that's also why it's important to find companies with long operating histories in mature industries, so the discount rate won't be so high/volatile.
Guys like Warren Buffett and Benjamin Graham (the god father of value investing) go so far as to say that even after doing this calculation, they still won't buy a stock unless it's selling for AT LEAST HALF of that "fair value" number, because in their eyes, even their math can be wrong.
120 points
mario answered one year ago …
Personal I believe Fundamental Anaylsis can be a very broad subject. One that could be diffcult to sum and in a paragraph or two. So quoting what you said early "do your own research" there a ton of great info out there to get your hands on and wrap your mind around to begin to understand what makes up a fairly valued company. Benjamin Graham's book " The Intelligent Investor " will give you great insight one other book would be by Phil Town "Rule # 1". The focus in these books is value investing which in essance is buying shares of a company at an attractive price (fundamental anaylsis) Happy Reading!!
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699 points
7million7years answered one year ago …
As Warren Buffet will tell you Benjamin Graham and Warren, surprisingly, don't actually preach the same investing style:
BG advocated buying a company that was beaten down to less than book value i.e. if it was sold for its assets, you'd still make money ... sounds like some banks I know ;)
WB says that is unlikely, and simply buys a company at half its value on the assumption that it will continue to generate free cash that will continue to underpin the company's value for many years to come.
He calls this buying a company at less than its 'intrinsic value' ...
... being the cagey fox that he is, he doesn't say exactly HOW he measures this!
People have guessed what WB's proxy is for Intrinsic Value - Phil Town has a pretty good go at it in his book, Rule # 1 Investing ... only problem is, I am told:
1. Phil 'only' turned $1,000 into $1,000,000, and
2. He did it during one of the greatest Bull runs in history.
So, you take your chances ...
3943 points
MNSL answered one year ago …
Generally intelligent value investors buy stocks below fair value. If it goes beyond fair value and become over priced they sell stocks. Fair value of a stock is a price below which, you would buy a stock, and above which you would sell it.
General acceptance among value investors are not to purchase stocks that trade at high premiums to the intrinsic value of the business. Buying securities at over inflated levels can lead to serious loss of capital.
A simple method is to use the price-to-earning multiple, where the price of a company's stock is divided by the earnings per share of a company. But there are shortcomings in this method. That is why some use Discounted Cash Flow model (DCF) to compute fair value. This model says that the value of a stock is equal only to the future expected free cash flows, discounted back to the present. When you discount future income, you essentially adjust for the fact that a dollar in hand today is more valuable than a dollar to be received in the future because today's dollar can be invested elsewhere to generate a return. If a stock is said to be trading at fair value, it simply means that the market is pricing it according to the value it represents.
However there are limitations in DCF as well. How does the DCF model build in when a company is taken over by another, companies where revenues are growing at a rate and small changes in the amount of information available can bring about large changes in stock prices. Therefore investors must think carefully in terms of 'price' versus 'value'.
Price is not value. Price is what you pay. Value is what you get in return for owning stocks of a company.
379 points
dustbusterz answered one year ago …
ok everybody your answers are really great, but this guy wants to know where to look for this information. one good place to find information (mostly accurate) information is your government. they keep records on company earnings, who heads up the company and all sorts of great information to help you with your analysis. this information is completely free to obtain so you won't go broke trying to analyze a company. yes your right, lots of places want you to buy this information and the cost can vary widely. you might subscribe to one newsletter for 100 dollars a year while another company will charge 2or 3 thousand a year. start with the government resources , its got lots of information and like i said, its free to the public.
Read more from dustbusterz379 points
dustbusterz answered one year ago …
oh another way to get information as to how a company performs from quarter to quarter or year to year, is through their announcements to shareholders. i called one company to inquire about their stocks and they put me on their mailing list for a year. if you buy their stock , you'll be on their mailing list for as long as you own shares, but if you just inquire, they will freely send you any info you want for up to a year, so you can analyze this company from perspectives straight from the company
all free)....
