Do you guys do discounted cash flow analysis when you're researching stocks?

The one thing I'm having trouble with, coming up with an answer or having insight, is the actual (estimated) valuation of a business. I have some ideas on how to find potential investments, but when it comes to actually deciding value, I have no idea how to come up with a figure. I could say, "I think this company is worth $500," but that is purely a guess with nothing to back up that claim.

The average earnings multiple that investors are willing to pay can change by a lot over time. I think the best you can do is come up with a discount below average that you would like for the industry your company is in. For example if you are looking at a power company and the average PE for the industry is 15 you might want to set your target for 10, a 33% discount. Then perform the DCF and see if it works out for you. I don't think you need to do a ton of math here. Whatever inputs you use will turn out to be big guesses, so going through the full calculation might be more trouble than it's worth. If the rough estimates show a good value, go with it.

That's still something I don't know how to do. I've been trying to absorb everything I can get my hands on. I've been reading The Intelligent Investor (3rd attempt), I have Security Analysis sitting there waiting for me (hoping there is something in there that will make sense, but his constant bond analysis makes me sleepy), I've been watching Damodaran's webcasts, reading news, etc. and it just comes down to one thing - how to make a valuation prediction. How do I take what I read and turn it into a number?

The other day I heard this quote from Whitney Tilson, "The most important part of good investing is the ability to understand how to value a company and recognizing when market inefficiency is creating opportunity. Once those skills are in place, what differentiates the good investors from the great is controlling emotion."

So I'm trying to figure out what valuation is all about. Discounted Cash Flows? Options Pricing Model? Relative Value? (got those from Damodaran) Is it reading as much as I can get my hands on and then come up with a range of value, say between $200 million and 500 million and if it's trading at $175 million then I buy? I have no experience to tell me that my valuation is even remotely correct so I have no basis to trust myself.

My other alternative is to just follow the Magic Formula Investing strategy, which I have been doing in a sim account for the last year and 2 months. So far it has been working out pretty well.

This whole investing thing is one of those things that I'm having a hard time cracking, and I'm probably making it harder than it is.

What do you guys think of Tesla motors (TSLA)?

It's rising really fast, it has nothing but positive car reviews but I have never invested and don't want to goof too hard before pulling the trigger..

I`m pretty new myself but here is what I did:


1. I thought about the Industry I wanted to invest in and how the perspective of the Industry in my opinion is.

2. I created an Excelsheet listing the Top 3 companies of the Industry and the companies I wanted to invest in. Here I listed various Data:

P/E, P/S, P/B, Cash/Debt past earninggrowth etc.

I also look how the avg. opinion on the Stock is and how the past P/E-Ratio was(At what P/E people bought the Stock).

3. Reading trough the 10ks



How I decided to invest in my last Stocks:


I wanted to invest in the Biotechindustry, though I didn`t feel like buying a pharmacompany as the Variance there can be really high. So I decided that I´m going to buy a supplier(Specialty Chemicals).

I had in my excelsheet:

W.R. Grace, Hawkins, Brenntag, Sigma-Aldrich, Aceto and some other companies I can`t remember.

W.R. Grace was skyrocketing over the last years, though it was filing banktruptcy years ago and didn`t seem to be out of it. So I had no Idea how to valuate it and thus decided to stay out of it.

http://finance.yahoo.com/q?s=GRA&ql=0

Hawkins seemed quite solid overall, though it`s P/E seemed quite high compared to the others and overall I didn`t like their last quarterly Results I think(I can`t remember too good anymore). So I decided to stay out of it.

http://finance.yahoo.com/q?s=HWKN&ql=0

Sigma-Aldrich, I didn`t find anything that made me feel uncomfortable with that Stock. Everything seemed fine(P/E P/S etc all seemed quite low compared to the other companies in the industry). So I decided to buy it at 72(It`s at 80$ now, broke it`s all-time high).

http://finance.yahoo.com/q?s=SIAL&ql=0

Brenntag AG, it`s quite a while ago and the new Earnings are out and unfortunately I lost the excelsheet trough a crash of my Harddrive. But I`m quite sure that Brenntags PE was over 24 and I didn`t like the last quarterly Results. So I decided to stay out of it. It traded at around 130$ back then and the Earningsreport that just came out was negative and it fell to 118. I feel like it`s going to be a good buy soon again.

http://finance.yahoo.com/q?s=BNR.DE&ql=0

Aceto, I looked for every company in that Industry and stumbled across this smaller one. It has quite the low Marketcap, though I felt the Financials were really solid and it was quite undervalued. It seemed like a small gamble but I felt like it`s going to be a good buy as it`s P/E was really low compared to the other Companies. I bought it at 10$ and it trades at 11.14$ today. The Earningsreport was really really good and I feel quite good about it breaking it`s 52-Week high of 11.49 in the next couple days, maybe weeks.

http://finance.yahoo.com/q?s=ACET&ql=0


Obviously I might be totally wrong with my analysis but I felt like it was pretty ok.

That would be a great post if you were trolling.. The best advice I could give you is to wait for a pullback in Tesla. If you can find it around $50 per share and you believe in the company over the long-run then you've probably got something that you'll like to own. I think there's a lot of risk that you're buying when you buy stocks for the long-term, but a couple company specific risks for Tesla are 1) keeping the current CEO running the company, if you lost Elon Musk then you lose a lot of your future value. Also, 2) whether or not Tesla can get electric cars priced down to "affordable" ranges of say 30k per car and become a big hit, if they can do that in 4-5 years then that would be a very positive catalyst for the company and the stock.

There is no one correct way to determine value. Most of the great value investors take differing approaches. I think Discounted Cash Flow models are at the core of the idea, but there is no rule.
There are over 10,000 stocks, so you need to have a filter before you even begin your valuation work. Try this:
1. Determine the universe of stocks you want to follow (based on industry, market cap, or some other metric)
2. Determine which valuation calculation(s) you plan to use (DCF, P/E, relative value)
3. Run your numbers on a few of the stocks in your universe and then do internet searches for the analysis done by others (individuals on forums) or by pros (mutual fund managers).
4. Compare your results and adjust.
Good luck.

dcf is bascially bull****. you can mess with the inputs to get whatever answer you want. pe and ev/ebitda comparables are generally the best way to go.

in reality, valuation is much more art than science. you look at how much free cash the company is throwing off, then the qualitative stuff. Is it a safe reliable business? Is it growing and will it continue to grow for the forseeable future? Does it have a moat? All qualitative.

Agreed. Way too sensitive to terminal growth rate and discount rate. DCF is useful for testing assumptions and backing into what the market expects the company to grow at though.

DCF valuation certainly has some drawbacks, as do most methodologies. I think though if you've never performed one you will be doing yourself a diservice by simply dismissing them on that basis; they can be useful analyses to perform in terms if familiarising oneself with a businesses' drivers and sensitivities, and in making comparisons between businesses. Just be cognisant of common pitfalls as highlighted above in order to avoid a garbage in garbage out scenario. You can always conclude later that they are not adding value / too time intensive or w/e.

if as you say you have no idea on how to estimate a valuation then there are lots of recommendations in the books sticky.

you could also take a look at the valuation section of http://www.buffettfaq.com/

Its a bit light on specifics, but from the discussion its clear that he considers cash flow projection and discounting an important part of business valuation, alongside other qualitative factors mentioned above.

bye bye YHOO, bye bye ORI -- it's been really good knowing u.

Hello LACO (again). (i've been building a position here over the last month). They have some nice catalysts ahead -- although i think it's more in months and years rather than days .

oh and Hello Tesla....







Not the stock -- the car -- I should be getting mine delivered in late July.

The last time I looked at LACO a few years back, I came to the conclusion that they were dead money until 2015-2016, when they were finally going to get that new casino going (forget where). Did that change?

Thanks, guys. Interesting stuff. I'm going to continue reading as much as I can. I haven't been ignoring the thread since I posted, I've just been working nights and don't have a lot of free time in between the nights that I'm in.

My Magic Formula sim account has been doing incredibly well so I'm half considering just doing that since it takes the guess work out of it. On the other hand, I think I would really enjoy scouting out my own picks and learning and being rewarded that way.

My two favorite purchases I ever made was Pixar before they were bought by Disney and Sands Regent (a casino), which I ended up making over 100% on before I sold it. I researched both of them myself, but that was back in the day before I got onto foreign currency and day trading.

I mostly look for profitable companies trading >20% discount book and preferrably >20% discount to NCAV that have upcoming catalysts. If they work out, then at least book value should be realized, if they don't, then the loss is limited because they're already discounted from book.

So far it seems to be working out okay.

I actually bought it originally under $2 (LUCKY SOB) and sold it slightly under $3 a share (almost 50%) -- but have bought back.

Sum of the parts worth way more than their market cap.

They own 10% of Rock Gaming's portion of horsehoe cincinatti, horseshoe cleveland and thistledown race track -- which translates into an 8% position in these enterprises. Cleveland opened in 2012, cincinnati march 2013/and thistedown 2013. This asset is on the balance sheet for $20 million -- which is what they had to put in -- worth a ton more than that -- and there is no income flow through until the casinos start issuing dividends -- but are currently reinvesting cashflow back into the business.
Cleveland has a very favorable tax rate of 33%for the casinos.

last year they purchased a golf resort in Maryland and are converting it into a casino/golf resort it shoudl be opening shortly.

Last year they wrote off a 57 million dollar note with the Jamul tribe -- basically they were never going to be paid back unless another company built a casino with the jamul tribe. (this is what drove the company's stock under $2 a share when a large investor sold out of his stake -- the company is illiquid). NOw Penn gaming is going to open a $360 million dollar casino on the jamul property -- while the note will be subordinated to senior debt they'll start getting their 4.25% once the casino is open. Also -- asssuming the casino is open Penn will likely buy form LACO a piece of land laco owns for $7 million -- it's carried on the books for under $1 million.

There's also the Red hawk casino -- but I've gotta run. THis should be a good starting point for anyone who's interested.

Hey guys, is the well-known Ben Graham book still a good primer to value investing, or is it obsolete now?

This I knew about when I was tracking it, though I think Cleveland was not doing well at the time, so I was not expecting anything from Cinci. Judging from a very quick look at their results thus far, it looks more or less the same, as is Red Hawk (rather low profitability), unless I am missing something.

Now that is interesting, especially since I have now read through the earnings call transcripts of the last two quarters. I might go look into this again, so I would be interested in what you expect is going to happen. Maybe they issue a dividend?

It is a good book, but rather basic if you already understand the concepts of EV and risk management.

They are unlikely to issue a dividend. The Ohio casinos while not doing amazing -- are still quite valuable and worth significantly more than they're worth on the books at LACO. Cleveland after a year is avg about 22 million in net revenues a month while not amazing -- it's not bad. The cleveland casino has 2100 slot machines, but will be allowed over time to increase this # to 5000. They are already considering expanding using only the current cash flows to finance the deal. Remember as opposed to say Pennsylvania which charges it's casinos 55% cleveland only taxes the casinos at a 33% rate. LACO book value is really understated. And while management has made mistakes in the past -- they are highly aligned with us shareholders. Berman own 25% of the company.

Re: the Jamul tribe casino. $60 million + 7 million is not insignificant when dealing with an $84 million market cap company. Also they have another note that may start paying out in the next few years as well -- search Dania Entertainment LAcO . gl

up from $3.77 to $5.16 as of today, with none of the catalysts happening yet. Still gaining ~40% (minimum) between now and a week after trail data is released in mid-August.

I'm as in tune with this stock and company as just about anyone, so if you have any questions feel free to ask and I'll do my best to answer them.

I looked at pretty much every Biotechstock and Mannkind is just a huge gamble. They don`t have any revenue and if the Drugtrials fail then gg money.

did you look at furiex?

Right about not having any revenue. But such is the case for any most early stage biotechs. The survival of the company is almost certainly tied to not only Afrezza, but this latest FDA submission. If MNKD gets a 3rd CRL the company will likely fold. However, they are funded through NDA submission and probably approval. Also, a partner (not a buyout) is likely to be signed before the NDA submission per their latest conference calls.

Approval is as close to a sure thing as you'll find for a speculative biotech. Safety has never been an issue, and even in the first two CRLs the FDA never questioned Afrezza's safety. Both CRLs were primarily due to using a new inhaler than what was used in the trials. An avoidable blunder from management, sure, but the newest inhaler, Dreamboat, is easier to use, more efficient (so higher % of absorbed powder), and smaller. Much more marketable.

But the real benefit of Afrezza is not the delivery method, but it's a better form of insulin. Their Technosphere powder is an ultra-rapid acting form of insulin that closely mimics how a human pancreas works. The best insulin on the market peak at 90 minutes and stay in the blood for 5-7 hours. Afrezza peaks at 13 minutes and stays in the blood for 2.5-3 hours. Much easier to be compliant on Afrezza compared to current insulin. Also makes it basically impossible to have a hypoglycemic event. No weight gain or insulin resistance.

Trial 1 targeted at Type 1 diabetics: need to show non-inferiority in reduction of A1C vs rapid acting insulin and against the old device. The old device already proved superiority against rapid acting insulin. The new device is better in every way compared to the old device so non-inferiority should not be a problem. Also the FDA approved the trial as treat-target forced titration which will help even more.

Trial 2 targeted at Type 2 diabetics: FDA guided to expand market potential - need to achieve .5% reduction in A1C, similar to other completed trials in which Afrezza hit this goal.

Trial 2

Lyle berman owns 25% of the company -- he's in his 70s. He never sells any shares --but he's starting to talk about monetizing assets during the CCs -- I like hearing that. But at some point -- I expect that they will monetize the assets..

Unfortunately I can`t remember the name but most likely did. It probably just didn`t shine trough specifically.

Three companies I can remember really well were:

Mannkind because it`s hyped a lot, it even feels like a pennystock getting hyped.

Vertex. FML, wanted to buy didn`t as I bought two other Stocks. Skyrocketed a bit later.

SPPI , misslead investors and took quite the dive. Though I was/am sure that it`s going to regain a lot(up 15% since then).


In the end my knowledge about Biotech is really limited, I probably don`t know anything you guys don`t. Mannkind is hyped a lot and there are a lot of warningsigns, I`m not interested in a gamble at the moment as the market feels really good at the moment.

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SIAL still doing well, I think I sell it around 90 if it keeps going up.

ACET still slighty below 52wk high and bouncing regulary off it(Yesterday at 11.47 , 52 wk high is 11.49).