Valuing Common Stock

Résumé du document

The valuation of common stock has been a subject of broad interest for more than a century. The reason is obvious. If you buy a stock that goes up, you can make profit, and if you can consistently select stocks that go up, you can become rich. There is an obvious approach to choosing stocks. It involves identifying stocks that are undervalued, and buying these stocks in the expectation that the other investors will eventually realize the inherent value in the situation, thus causing the stock prices to rise. Nothing could be simpler. Just identify stocks that are undervalued, buy them, and wait for the market to catch up. The only problem is that a lot of analysts and expert in that domain have been trying to devise methods of identifying undervalued stocks for many years. A large number of methods have been devised a lot of words have been written on the subject. This paper will summarize some of the approaches. None of them has proven foolproof, but fools have applied all of them over the years.

Extraits

[...] There is no direct linkage between the news and the stock “ticker”. They are connected only by the medium of human beings reading information on the one hand and taking actions that are reflected on the other hand. There is a further variance in that different individuals will react differently to the same information. For example, the analytical community has estimated that Company X will earn between and $ 1.05 per share for the current quarter. The company reports results of $ 1.07 for the quarter, slightly stronger than the consensus. [...]

[...] He calls his clients and says, company did do a little better than I expected, but they may have “borrowed” some earning from future quarters by reporting sales that will really be delivered in the next quarter and deferring some expenses. I think that it is a weak hold and you should probably reduce the size of your positions.” Both A and B are considered good analysts and offer conflicting advice, and both really believe that they are right based on the same news. Manager now has a decision to make, buy or sell. How efficient is the market really from his standpoint? [...]

[...] Gordon assumes a constant rate forever. This is unrealistic because as the company grows the absolute amounts by which it would have to grow would constantly increase to maintain the same rate of growth. Project the results of a fast growing company a few years, and absurd result is a company is larger than the industry it serves or that it owns the entire world. The underlying assumption that the earnings and dividends will continue to grow is not however absurd, only the element of a constant rate for more than a limited time is a problem. [...]

[...] Nothing could be simpler. Just identify stocks that are undervalued, buy them, and wait for the market to catch up. The only problem is that a lot of analysts and expert in that domain have been trying to devise methods of identifying undervalued stocks for many years. A large number of methods have been devised a lot of words have been written on the subject. This paper will summarize some of the approaches. None of them has proven foolproof, but fools have applied all of them over the years. [...]

[...] As this is being written, there is a competition in the acquisition/merger of international steel companies. A important amount banks have been merged or acquired by other banks based primarily on financial considerations and “economies of scale”. All of this is based primarily on pure financial analysis. A final factor must be considered in this age of energy shortages, greenhouse gasses, and the rapid consumption of natural resources. There are a variety of companies that have substantial assets that are not reflected in their financial statements, or whose value is greatly understated. [...]