Quote:
Originally Posted by ItalianFX
My problem is just not understanding how to come up with a valuation. Do I read an annual report and then start punching numbers into P/B, P/E, etc?
Right now I'm looking at a company that is trading 35% off its Net Current Asset Value. It's up .44 since I found it. I just don't know if I should make an investment based on the NCAV regardless of their financial statements, or whether it's still a pass because they aren't exactly the leader in their industry.
I just don't have enough value investment market experience to feel comfortable making my own estimations.
Honestly, there are hundreds of books of pure rubbish on nearly everything. All you really need to do to put it in a sensible framework is to ask yourself some simple questions. These are off the top of my head and what goes on in my head when I think about a company:
1. (Financial) If I could buy the entire business at its market cap:
- How many years would it take me to earn my money back?
- What are the odds I won't get my money back, and why?
- What's the most that the business could grow?
- What are the odds of a much larger than expected return?
- Can I expect long term compound growth from this type of business?
P/E, P/B, etc, are merely numbers to help inform the answers the these questions. They have no meaning in themselves.
2. (Environment) What does the market look like?
- Is there much opportunity for growth for that company within the market? (Tesla vs Ford) Is the company expanding into a large area, or is it jostling for position?
- What are the trends in the market/sector?
- What risks are there in the sector? Is it dependent on the economy? Consumers? Marketing presence and cool? Businesses? Governments?
3. (Competitors)
- What competitors are there?
- How established are they?
- What flaws do they have?
- How could they disrupt your company?
4. (Edges) How does the company differentiate itself from others?
- What competitive edges does the company have?
- How stable and reliable are they? Are they enduring?
- Can these edges be grown into further value?
5. (Market) What is the market opinion of the stock?
- What is your best guess on what has driven the market to value the stock at its current level?
- If the story changes, what is upside/downside expectation?
- Are there news cycles which will drive buying or selling? Is the stock highly visible or more of a hedge fund pick (PRSC vs AAPL)?
6. Reality check & Fundamental Theory of Investing
- Why does the market not agree with your assessment? You better have a very compelling reason.
None of these are quantifiable into DCF or P/E or any pure math based approach, but if you can answer every question competently, you've got 90% of a solid valuation. What's more, you don't need complicated theories or math or books - you just need a brain and willingness to back your view. In many cases you can ignore many of these if a couple of the elements are very strong AND you have a good case for why the market isn't seeing it.