Fundamentals-intrinsic stock value-what valuation methods really work?

This is a discussion on Fundamentals-intrinsic stock value-what valuation methods really work? within the Economic & Fundamental Analysis forums, part of the Methods category; I'm getting more and more confused with the so called intrinsic value in stocks, there's the old saying' a stock ...

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Old Nov 6, 2007, 6:49pm   #1
Joined Nov 2006
Question Fundamentals-intrinsic stock value-what valuation methods really work?

I'm getting more and more confused with the so called intrinsic value in stocks,
there's the old saying' a stock is worth as much as people are willing to pay to buy it


The fact is that the stock price simply represents how much people are willing to buy it
today, nothing much to do with the company's assets and underlying company value
lke most amateur investors think,
most people invest in the company they work for, buying tones of shares all at once,
at one price, one time spending their lifetime savings,mistekenly thinking it's their
duty to support the company employing them and help it expand, then comes the down turn and the price nevr recovers and the money is lost






I have seen valuations on stocks such as (mer) come true, as well as
bubble stocks such as (alks)



there are several different valuation methods which can tell the bubble from the real
deal but those still disagree and give inconclusive results sometimes.

Since they are using hypothetical and future data in those valuations how on earth
can we be confident that even a high quality company will have health ballance sheet
in the future?


currently I'm getting valuations from these guys here whose actual job is to
offer tax planning and tax avoidance advice to merchants and propererty
investors,
Varan financial services,

their stock valuation method seems to be based on ballance sheet
strict judgement , and has revealed bubble stocks in the past but they don't
do much on UK stocks

any comments/experience in fundamental analysis, please welcome

has anyone used vectorvest.com ?

and anyone know of a service for fundamental analysis of UK stocks
based on strict ballance sheet analysis??

Last edited by Lightning McQueen; Nov 6, 2007 at 7:03pm. Reason: removed email link
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Old Nov 6, 2007, 7:36pm   #2
 
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Joined Sep 2005
Quote:
Originally Posted by vergis92 View Post
and anyone know of a service for fundamental analysis of UK stocks
based on strict ballance sheet analysis??
CompanyREFS is pretty good (you can analyse by various criteria, including balance sheet metrics) but it's not cheap. DigitalLook provides a less good, but free, resource. Ultimately, for me, the whole point of fundamentals is that you can do it yourself (maybe after applying a simple CompanyRefs type screen).
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Old Nov 6, 2007, 8:18pm   #3
Joined Dec 2004
Obviously, fundamental analysis has value in determing when prices are out of line with value. The problem is the way you get to the value. No matter what approach you use there are some kinds of assumptions that must be made. That could be growth rates, or the discount rate you use, that the multiple you pick is the right one, that revenue is a good metric to base a valuation on, or any number of other things. The bottom line is that the best you can do is an educated guess.
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Old Dec 2, 2007, 8:19pm   #4
 
7 Posts
Joined Jun 2006
Lightbulb Graham's Intrinsic Value formula

Quote:
Originally Posted by Rhody Trader View Post
Obviously, fundamental analysis has value in determing when prices are out of line with value. The problem is the way you get to the value. No matter what approach you use there are some kinds of assumptions that must be made. That could be growth rates, or the discount rate you use, that the multiple you pick is the right one, that revenue is a good metric to base a valuation on, or any number of other things. The bottom line is that the best you can do is an educated guess.
This is true....intrinsic value is `fuzzy'. To establish a constant multiple of say net book value + goodwill + say 1 years discounted prospective earnings is unlikely to be realistic. The nearest `keeping it simple' approach to this dilemma may be Benjamin Graham's intrinsic value calculation that appeared in the 1973 edition of his `Intelligent Investor'. This also explained on the website; http://www.grahaminvestor.com/articl...c-valueFinding Undervalued Stocks 3 - Using Intrinsic Value as follows;-

In "The Intelligent Investor", Benjamin Graham describes a formula he used to value stocks. He eschewed the more esoteric calculations and kept his formula pretty simple. In his words: "Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the valuation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations."
The formula as described by Graham, is as follows:

Value = Current (Normal) Earnings x
(8.5 + (2 x Expected Annual Growth Rate)

Where the Expected Annual Growth Rate "should be that expected over
the next seven to ten years."

The value of 8.5 appears to be the P/E ratio of a stock that has zero
growth. It is not clear from the text how Graham arrived at this figure, but it
is likely it represents the y-intercept of a normal distribution of a series of
various P/E values plotted against corresponding growth figures.

Graham's formula takes no account of prevailing interest rates; at the time
he last updated the chapter, around 1971, the yield on AAA Corporate Bonds
was around 4.4%. We can adjust the formula by normalizing it for current
bond yields by multiplying by a factor of 4.40/{AAA Corporate Bond Yield}. Bond yields
can be found on Yahoo!

Lets take a real-life example, using IBM. According to Yahoo!, the expected
growth rate for IBM over the next 5 years is 10% per annum (note data is
only available for 5 years ahead rather than the 7-10 years Graham states, but
this should not make a significant difference). EPS for IBM over the last 12
months is $4.95. Taking these values and plugging in the 20 year AA Corporate
bond yield of 5.76% (AA Bond yields are higher than AAA so will give a more
conservative estimate of IV) in our adjustment gives:

Intrinsic Value = 4.95 x (8.5 + (2 x 10) x (4.40/5.76) = $107.77

IBM is currently trading at around $91, so it is currently slightly undervalued.

We can also do the same calculation for IBM's average expected 2005
earnings of $5.62 in order to give some idea of what IBM's price should
be if it meets those earnings estimates:

Intrinsic Value = 5.62 x (8.5 + (2 x 10) x (4.40/5.76) = $122.36

Of course this calculation is somewhat subjective when considered on
its own. It should never be used in isolation - we must always take into
account other factors such as debt/equity, cash flow, management
effectiveness, prevailing economic conditions, etc. Investors should seek
some qualifying criteria such as a PEG (Price Earnings Growth) ratio of
less than 1 in additon to the stock being undervalued based on trailing and
forward intrinsic value. Be aware that PEG itself is also based on future
expectations, so we have to have some degree of certainty that the
company will meet those expectations. We can do this by looking at the
last 5 years growth rate and Earnings figures.

I've found that Graham's formula can provide quite interesting results when used with low capitalisation companies too, as long as their earnings are fairly consistent over the previous 5 years and even better; if their dividends (if any) show this consistency too.

Regards BS
http://www.journals.aol.co.uk/spcdesign/BargainIssue
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Old Aug 11, 2008, 3:19pm   #5
Joined Feb 2008
Vectorvest Dissapoints Uk Client!

--------------------------------------------------------------------------------

VectorVest System Not Ready For The Uk Market

--------------------------------------------------------------------------------

I thought that anyone considering using the VectorVest UK service may be interested in my experience of the product as it has not been all together satisfactory.

I have had two major problems with the Vector Vest system that, in my opinion renders it totally and utterly useless for all but a few UK clients. I will outline the problems separately below and ask you to read through ALL of this thread before making your own decision on whether or no to spend your hard earned money on this system.

I can send you all of my emails that I have sent to validate my complaints if you wish. However once the trial period was over and I had paid my subscription the email support totally dried up. That is why I am writing to warn others of the major shortfalls of this system. I have been waiting for over TEN DAYS for a reply, despite re-sending the emails, several times, from two addresses to make sure that they got through to VV. I don't like to be ignored when I am a paying client!

Please bear in mind that there is NO UK BASED SUPPORT, just a USA email or telephone support system so one has to accept the time zone difference when using email or pay for expensive phone costs.

In the first instance the trial downloaded to my home PC using a landline broadband connection and seemed to work fine. It then stopped working, VectorVest stating that I could only use the trial period once and as I had used it before they were stopping the service. Well it was my first time! It took a quick email and about 24hrs to remedy their mistake. The support, this time at least getting back to me fairly quickly.

I delighted in experimenting with all the data on my home PC. but it was not too long before I realised that setting up and back testing my portfolio was impossible. After a couple of hours struggling I thought perhaps I was entering my information incorrectly so sent off an email to support as follows,

“One problem I have found is in setting up a portfolio in GB pounds. When I put in the actual price I paid the system changes the values for commission. If I try and enter a manual figure for the cost basis ( edit total cost ) the system changes the price I have entered for the price/share. If I use the (your vv) feature to select the price on the day ( I presume based on the average for the day ) then the total cost that is automatically placed in the cost basis is wildly inaccurate. e.g. getting the pricing information from your system gives a price of 276.00 ( perhaps it should be reading 2.76) x number of shares = £90537.40 and it should be £905.28.”

I suggested that the support in USA checked this out and two days later got this reply;

“I was able to duplicate the issue you outlined. I will report it to our developers, and will continue to see if there is a quicker resolution. Thanks in advance for your patient.”
Not a solution but it offered hope that they would solve this very important problem that UK clients were having. After all they do, rightly, advertise their back checking and portfolio management system as being an important consideration when choosing their product above others.

I did remind them of the problem just before my five week trial ended, (4 weeks after first pointing out the problem to them), I had the response;

“Thanks for the follow-up. I will need to check for the resolve to the currency question. I do not see where it has been resolved. Since it is after hours at the time of my reply, I will need to wait for to confirm whether the issue has been addressed. Thank you for your patient.”

I feel that on hindsight I was being palmed off with a feeble excuse, and so I was, as it is still impossible to enter data for UK equities in GBP, our own currency!

TO THIS DAY, SOME TWO AND A HALF MONTHS LATER, UK CLIENTS CAN NOT SET UP OR BACK TEST PORTFOLIOS FOR UK EQUITIES.

How do I know this, Well I went on and paid my subscription, yes foolishly, in the hope that the TWO MAJOR INADIQUICES WITH THE UK VECTOR VEST SYSTEM WOULD BE RESOLVED.

The Second problem, and one very important to me was I am unable to use the system on my laptop. I trade all overt the place; on my boat, on the train, in the City of London, in Devon, in fact wherever the fancy takes me! I connect using the very common Huawei e220 broadband USB dongle and can connect through either the T-Mobile or 3 services. I have tested this problem on three different laptops, all to no avail.

My initial email to them went thus;

“Another problem I am having; Whilst trying view VV stock viewer, research and my saved watch lists from my laptop I can not access any of the mentioned. Whilst out and about my laptop is connected to the internet via a Huawei E220 USB modem. ( Whilst at home using the same laptop it has a wireless connection to my normal ADSL router modem and there is not a problem). Using windows XP pro on a 1.4GHz Pentium m. I have removed then re-installed VV to no avail. I get the error messages 13, 91 and 2147467259. It is important to my purchase of VV that I can use all the facilities whilst connected to the internet using a HSDPA usb modem, away from home, as I trade in the most peculiar of places!Many thanks for your attentions to this matter.”

Quite simply it has been impossible to access data, watch lists, strategies and searches that I have set up on my home computer whilst using my laptop. These being the crux of the product, I wonder what exactly I am paying for. As I have absolutely no issues using any other product, Java or not, on my laptop I was a little perturbed to get he response that it was due to my ISP using data compression? Well if other software works then why is it that Vector Vest do not re-write some coding in their product and get it to work rather than blaming my ISP,s. Again I feel palmed off. Vector Vest “support” did reply twice to help me but when their suggestions did not work they have TOTALLY GIVEN UP OFFERING ANY FURTHER HELP to the extent of ignoring me all together, not a good move from VV!

Its not often that we British take the time and trouble to complain. This has taken me the best part of two hours to warn others that this software does not work properly for the UK and about the absolutely dismal so called support from Vector Vest. The product itself looks useful but it is NOT IN ANY WAY READY FOR RELEASE ON THE UK MARKET. It should be withdrawn until it is properly tested.

If anyone does have any answers or has experienced the same problems please do let us all know, perhaps we can enlighten the "experts" (LOL) at VectorVest.

UNTIL THEN

It is your money and your decision, but I would not recommend this product to anyone.
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Old Feb 15, 2009, 10:33pm   #6
 
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Joined May 2008
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Quote:
Originally Posted by vergis92 View Post
I'm getting more and more confused with the so called intrinsic value in stocks,
there's the old saying' a stock is worth as much as people are willing to pay to buy it


The fact is that the stock price simply represents how much people are willing to buy it
today, nothing much to do with the company's assets and underlying company value
lke most amateur investors think,
most people invest in the company they work for, buying tones of shares all at once,
at one price, one time spending their lifetime savings,mistekenly thinking it's their
duty to support the company employing them and help it expand, then comes the down turn and the price nevr recovers and the money is lost






I have seen valuations on stocks such as (mer) come true, as well as
bubble stocks such as (alks)



there are several different valuation methods which can tell the bubble from the real
deal but those still disagree and give inconclusive results sometimes.

Since they are using hypothetical and future data in those valuations how on earth
can we be confident that even a high quality company will have health ballance sheet
in the future?


currently I'm getting valuations from these guys here whose actual job is to
offer tax planning and tax avoidance advice to merchants and propererty
investors,
Varan financial services,

their stock valuation method seems to be based on ballance sheet
strict judgement , and has revealed bubble stocks in the past but they don't
do much on UK stocks

any comments/experience in fundamental analysis, please welcome

has anyone used vectorvest.com ?

and anyone know of a service for fundamental analysis of UK stocks
based on strict ballance sheet analysis??
dont bother with balance sheets, noone seems to really know how to price the assets that later appear on these statements. Focus on volatility in stock prices, where they cluster together.

best regards
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Old Feb 16, 2009, 3:53pm   #7
Joined Apr 2006
The following link leads to a website that shows valuations (for U.S. companies) based upon discounted cash flow:

ValuePro
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