Value Analysis:- How to Determine Fundamentally Weak & Strong Stocks

dcraig1 said:
What do you do for stocks that don't pay dividends ?
Click to expand...

Hi dcraig1
Just to be clear here - I'm researching rather than knowing.
Perhaps others would care to do the same and make this a TT team effort ? This is not a simple topic with simple answers to all questions, and many approaches to fundamental evaluation have their critics as well as their proponents.

If you want to use the Dividend Valuation method when there is no Dividend, then you could look for a proxy for the dividend.
Whay is the company not paying a dividend ?
- Is it because they want to re-invest their capital ?
- Is it because they prefer to do share buy-backs instead as a way of returning shareholder value ?
- Is is because they don't have the cash to pay out, or are unwilling to take on debt in order to continue paying a dividend?
- Is it because investors are less interested in Dividends than they used to be ?

So for example using the stock buy-backs as a proxy for dividends.
Dividend proxy = Stock Buybacks / Net Income.
If buybacks are irregular then it is better to take the average of them over, say, 4-5 years.
Likewise if the company has long-term debt, then perhaps this should be included in the calculation:
Proxy = Stock buybacks / Net Income - Long-term debt / Net Income.

Glenn
 
Hi Raj

"But do you not feel that just CAPM alone is not sufficient to indicate if the stock is fundamentally strong? "
All I am doing is looking into the use of CAPM simply because that is what Grey1 says he has used. You are quite right in that there is a multitude of different approaches to FA; at the moment I'm inclined to stick to the direction in which we have been pointed.

"my reason is-being an 'effecient market' the stock price should most of the times reflect the values derived from CAPM (and other valuation figures e.g.NPV etc); using the CAPM calculator(attached a few posts ago) I find the current prices of the 'strong' stocks are already much higher......:("
Sorry Raj, not sure what you mean. Much higher than what ? The target ? Recent prices ?
I think that the use of FA in the context of what we are doing here is to identify those inefficiencies which can be exploited, which presumes that not everything is efficient. i.e. that some/all estimated stock values will be different to their current values.

"Now it would be interesting to know what other (publicly available) factors do the likes of Warren Buffet and other professionals (e.g.Grey1) consider to decide the future potential of a stock."
OK - I guess it all depends on whether you want answers on a plate (which I certainly don't have) or are prepared to do some research. If Grey1 does provide any information I think that it will be in his own good time. He has already said that the Weak/Strong list will suffice for quite some time and that the subject is complex, and that people should focus on using the list and getting used to the trading mechanics, and that he may provide some initial insights at some stage so I don't think we should expect any more at this stage.

Glenn
 
moreagr said:
Hi Glenn

very good post!

but as far as the risk free rate in many books and on the net they refer the Risk free rate to someting close to 3 month tres yield. or libor rates. not sure which one is better.
Click to expand...

Fair point and who is to say which is correct ?
I guess the underlying principle is to use whatever you consider to be the most risk-free.
I have only used the 30yr T-Bond because I have seen it referred to frequently in this context.
I would imagine that the libor rate is somewhat unreliable at the moment simply because of the way in which the banks have stopped lending to each other, so what does it represent in terms of risk ? Dunno.

Glenn
 
Hi Glenn,

As you say, this stuff ain't easy, especially when most mutual fund managers on the planet supposedly make their investment decisions based on FA. Efficient markets and all that sort of thing.

I'd be happy to contribute what I can, but I have zero training or expertise in this area. What I do have is a reasonably good and fast screening/backtesting engine handling both FA and TA (including sector analysis) and capable of combining TA and FA into single screens. So I can try out most things that can be readily calculated fairly quickly.

What I don't have is a decent historical database of fundamental data. I've got less than three months of Yahoo fundamentals, which is a bit thin to say the least for drawing too many conclusions. And I don't have every Yahoo FA field.

In a previous post, I mentioned using the Yahoo enterprise value divided by market cap to derive a valuation measure. Doing some further testing of this does seem to indicate some edge, though quite probably some other adjustments should be made to this value. I find myself questioning whether anything that we could come up here would be better than the Yahoo Enterprise Value figure which according to the web page footnote is drawn from multiple sources.
 
dcraig1 said:
Hi Glenn,

As you say, this stuff ain't easy, especially when most mutual fund managers on the planet supposedly make their investment decisions based on FA. Efficient markets and all that sort of thing.

I'd be happy to contribute what I can, but I have zero training or expertise in this area. What I do have is a reasonably good and fast screening/backtesting engine handling both FA and TA (including sector analysis) and capable of combining TA and FA into single screens. So I can try out most things that can be readily calculated fairly quickly.

What I don't have is a decent historical database of fundamental data. I've got less than three months of Yahoo fundamentals, which is a bit thin to say the least for drawing too many conclusions. And I don't have every Yahoo FA field.

In a previous post, I mentioned using the Yahoo enterprise value divided by market cap to derive a valuation measure. Doing some further testing of this does seem to indicate some edge, though quite probably some other adjustments should be made to this value. I find myself questioning whether anything that we could come up here would be better than the Yahoo Enterprise Value figure which according to the web page footnote is drawn from multiple sources.
Click to expand...

Hi dcraig1
If you are trying to emulate the calculation of targets as they were back in September then yes there is a problem if the data isn't available.
If the Enterprise value approach has merit using current data, then it should be producing more up-to-date targets - have you tried that ?

The other aspect of the posted targets is that, for some stocks, there is more than one target. i.e. the calculations were projections into more than one timeframe in the future. I have no knowledge of any projections along these lines in the sense of similar projections of earnings etc, unless insider info is available.

If we are trying to produce an Enigma machine then maybe we have so far only produced an Abacus - lol.

Glenn
 
Glenn said:
Hi Raj


"my reason is-being an 'effecient market' the stock price should most of the times reflect the values derived from CAPM (and other valuation figures e.g.NPV etc); using the CAPM calculator(attached a few posts ago) I find the current prices of the 'strong' stocks are already much higher......:("
Sorry Raj, not sure what you mean. Much higher than what ? The target ? Recent prices ?
I think that the use of FA in the context of what we are doing here is to identify those inefficiencies which can be exploited, which presumes that not everything is efficient. i.e. that some/all estimated stock values will be different to their current values.

"Now it would be interesting to know what other (publicly available) factors do the likes of Warren Buffet and other professionals (e.g.Grey1) consider to decide the future potential of a stock."
OK - I guess it all depends on whether you want answers on a plate (which I certainly don't have) or are prepared to do some research. If Grey1 does provide any information I think that it will be in his own good time. He has already said that the Weak/Strong list will suffice for quite some time and that the subject is complex, and that people should focus on using the list and getting used to the trading mechanics, and that he may provide some initial insights at some stage so I don't think we should expect any more at this stage.

Glenn
Click to expand...

Hi Glenn-

For the first point-well to explain my question a bit more clearly- the following link gives a CAPM calculator and if you can then put the past eps it gives the fair value of the stock price-

CAPM (Capital Asset Pricing Model) Calculator

Now what I'd meant was -a) how would you use CAPM to decide that the stock is strong as the figure basically indicates the expected return out of the stock based on the inherent risk of the same (correct me if I'm wrong).

b) if you see the fair value of a (presumably strong) stock from the calculator you might find that the stock current price is already greater than the price calculated from the calculator. e.g. ANR (one of the strong stock from the list) fair value is $8.48 but the stock is currently trading at around $35 mark; (having said that I must add that I have made money on ANR-thank you Iraj)
another eg.- ALDA- the calculation puts the figure at $10.96 but the current price of the stock is around $17.

So the question was -obviously, there are other factors also in play here and my intention was to throw an open ended question (not to you but to all the readers of the forum) with a view to know various points of view on how to use CAPM to decide a stock's strength amongst 1000's of stocks (i.e. while we wait for G1's answer)

(although the thought of 'getting it on a plate' is very exciting :cheesy: )

Raj
 
Glenn said:
Fair point and who is to say which is correct ?
I guess the underlying principle is to use whatever you consider to be the most risk-free.
I have only used the 30yr T-Bond because I have seen it referred to frequently in this context.
I would imagine that the libor rate is somewhat unreliable at the moment simply because of the way in which the banks have stopped lending to each other, so what does it represent in terms of risk ? Dunno.

Glenn
Click to expand...

yes you are correct libor would not be a good figure especially with the financial issues going on... GOOD OBSERVATION!! GLENN. but I would have to say that risk increases with time that is why the spread deltas between 3 month T and 10 or 30 T years is wider most of the time.
 
rajibde said:
Hi Glenn-

For the first point-well to explain my question a bit more clearly- the following link gives a CAPM calculator and if you can then put the past eps it gives the fair value of the stock price-

CAPM (Capital Asset Pricing Model) Calculator

Now what I'd meant was -a) how would you use CAPM to decide that the stock is strong as the figure basically indicates the expected return out of the stock based on the inherent risk of the same (correct me if I'm wrong).

b) if you see the fair value of a (presumably strong) stock from the calculator you might find that the stock current price is already greater than the price calculated from the calculator. e.g. ANR (one of the strong stock from the list) fair value is $8.48 but the stock is currently trading at around $35 mark; (having said that I must add that I have made money on ANR-thank you Iraj)
another eg.- ALDA- the calculation puts the figure at $10.96 but the current price of the stock is around $17.

So the question was -obviously, there are other factors also in play here and my intention was to throw an open ended question (not to you but to all the readers of the forum) with a view to know various points of view on how to use CAPM to decide a stock's strength amongst 1000's of stocks (i.e. while we wait for G1's answer)

(although the thought of 'getting it on a plate' is very exciting :cheesy: )

Raj
Click to expand...


Raj,

nice link thanks!!
 
rajibde said:
Hi Glenn-

For the first point-well to explain my question a bit more clearly- the following link gives a CAPM calculator and if you can then put the past eps it gives the fair value of the stock price-

CAPM (Capital Asset Pricing Model) Calculator

Now what I'd meant was -a) how would you use CAPM to decide that the stock is strong as the figure basically indicates the expected return out of the stock based on the inherent risk of the same (correct me if I'm wrong).

b) if you see the fair value of a (presumably strong) stock from the calculator you might find that the stock current price is already greater than the price calculated from the calculator. e.g. ANR (one of the strong stock from the list) fair value is $8.48 but the stock is currently trading at around $35 mark; (having said that I must add that I have made money on ANR-thank you Iraj)
another eg.- ALDA- the calculation puts the figure at $10.96 but the current price of the stock is around $17.

So the question was -obviously, there are other factors also in play here and my intention was to throw an open ended question (not to you but to all the readers of the forum) with a view to know various points of view on how to use CAPM to decide a stock's strength amongst 1000's of stocks (i.e. while we wait for G1's answer)

(although the thought of 'getting it on a plate' is very exciting :cheesy: )

Raj
Click to expand...

Hi Raj
OK I see what you mean now.
What I have been doing is to pick up on the clues which Grey1 has given and explore in that direction.
When I saw your calculator and what it did with EPS I thought that this was not the way to go because of the clues. i.e. Dividends etc.
I can't explain why the Strong stock targets you are getting have already been exceeded, except to assume than when the recent bottom was reached people piled in and pushed the price up.
You may have also noticed that there can be more than one target for given stock.

Glenn
 
moreagr said:
yes you are correct libor would not be a good figure especially with the financial issues going on... GOOD OBSERVATION!! GLENN. but I would have to say that risk increases with time that is why the spread deltas between 3 month T and 10 or 30 T years is wider most of the time.
Click to expand...

Hi moreagr
I think you have a sound argument there for using the shorter term.
Having looked around some more, I agree with you.
Glenn
 
Dudes, some great and interesting posts here, but for us lesser clever people who need a more simple approach, I came accross the following website:

ValuePro

even I can use it, probably is to basic though but would be interested in others comments
 
wheezergeezer said:
Dudes, some great and interesting posts here, but for us lesser clever people who need a more simple approach, I came accross the following website:

ValuePro

even I can use it, probably is to basic though but would be interested in others comments
Click to expand...

I tried to value a few stocks from a screen I am working on and it came up with a value of $0 eg OFG, XIDE, CWEI

It values IRM at 12.67 but its currently trading at ~ $34. Yahoo enterprise value suggests > $50

Hmmm .... looks a bit rough to me.

These would have been nice stocks to have bought 3 weeks ago, and any screener that can't value them at all would not be my first choice.
 
For anybody looking for free historical fundamental data for US stocks, try

Morningstar

There is 10 years data for many US stocks and probably most if not all "tradeable" US stocks.
 
Here is another free screener - both technical and fundamental - that might be of interest to some members.

> Market News

I havn't run the thing, but it looks fairly comprehensive from the web site.
 
You must log in or register to reply here.

Similar threads

C
Program Trading: Strong/Weak Stock Selection
2 3
Replies
51
Views
2K
A_B
A
Jack B. Maverick
  • Article
Equities Psychology Efficient Market Hypotheses: Weak, Semi – Strong and Strong
Replies
2
Views
9K
Trader333
Trader333
Justin Kuepper
  • Article
Equities Fundamental Analysis Analyzing Stocks Using Fundamental Analysis
Replies
0
Views
3K
T2W Bot
T2W Bot
Yuppie
Where to start with fundamentals?...
2 3
Replies
47
Views
1K
Yuppie
Yuppie
V
Fundamentals-intrinsic stock value-what valuation methods really work?
Replies
7
Views
6K
giorgio193
G
Top