Valuing Common Stock (Case study)

Résumé du document

The valuation of common stock has been a subject of broad interest for more than a century. If you buy a stock with an increasing trend, you will make profit. There is an obvious approach to buy stocks that can help you make money. Identify stocks that are undervalued. Then, buy these stocks in the expectation that the other investors will eventually realize the inherent value in the situation, and buy the stock causing it 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 the analysts in that domain have been trying to devise methods of identifying undervalued stocks for many years. A large number of methods have been devised. This paper will summarize some of the approaches. None of them has proven to be foolproof, but fools have applied all of them over the years.

Extraits

[...] He calls his clients and says, The 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? [...]

[...] This can be achieved in a variety of ways such as lowering production costs or increase market share in a static market. This suggests the second part of fundamental analysis, evaluation of the management of the individual companies involved in an industry. Both Ford and General Motors are involved in a less than attractive industry, auto production. In both cases, they have been loosing market share and money at an accelerating rate. The gains of Toyota in the world market place can be directly related to the loss of market share of the US producers. [...]

[...] Expectations are based in turn on “fundamental analysis”. Fundamental analysis involves research into the company and the industry in which it participates. The steel industry for example is not generally considered as a “growth industry”. For this reason, the stocks of companies that are steel producers are usually assigned modest multiples. It is considered unlikely that there will be large fluctuations in the consumption of steel by the world economy in the foreseeable future. Steel will certainly continue to be consumed by construction and auto production, but neither of these will grow or shrink dramatically in the next few years. [...]

[...] When one or a few of the institutions buy, a stock it is under accumulation. Their buying is enough incremental demand to make the price rise. When one or more institutions decide to sell, there is an opposite effect. Efficient market theory has to do with the acquisition and dissemination of information about the market, the economy, and individual companies. It is based on the efficiency of the market in reflecting all that can possible be known about a particular investment opportunity. [...]

[...] Identify stocks that are undervalued. Then, buy these stocks in the expectation that the other investors will eventually realize the inherent value in the situation, and buy the stock causing it 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. [...]