A reasonable valuation of the stock price is the core of value investment.
common valuation methods, including stock price method, price-earnings ratio method, net value ratio method, yield method, PEG and free cash flow (dividend) discount method, etc. In fact, each valuation method has its application and inapplicability, and valuation is very subjective, and everyone thinks that the reasonable price is different. We try to explore these valuation methods from a different angle in the reverse direction and communicate with you.
stock price method
stock price method is the most intuitive valuation method. First, open the month line and look at the stock price changes in the recent and past decades. You can roughly understand the stock nature and volatility range of this company, which is quite intuitive. If the stock price fluctuates very little in the past, then the future will probably be the same; on the contrary, if the fluctuates very much, then the future may not be small. The disadvantage of the stock price method is that it only looks at the stock price and does not refer to the company's equity and profit status. Therefore, if the equity expands or shrinks, and the profit increases or decreases, it is impossible to simply know from the stock price, which may lead to misvaluation of valuations.
Misuse: Comparison directly without considering equity and profit factors
price-to-earnings ratio method
price-to-earnings ratio method We have discussed it many times in the past. There is generally no problem with the use of
price-to-earnings ratio method, but there is one problem worth thinking about. When valuing the price-to-earnings ratio, should we use the absolute price-to-earnings ratio multiple to treat all stocks equally, or should we value them according to the historical price-to-earnings ratio of individual stocks?
valuation using historical price-to-earnings ratio of stocks should be more appropriate, because this is the price-to-earnings ratio given by the market in the past, indicating that the market agrees with this price.
If we use the 12-fold price-to-earnings ratio as the standard for cheap prices, we will miss it like many growth stocks . The absolute value of the price-to-earnings ratio of
indicates the rate of return. This is based on the numbers, which is intuitive and reasonable. But this may not be the case when investing. The market is willing to give a higher price-to-earnings ratio, which means that the company has corresponding competitive advantages and moats. Buying with a low price-to-earnings ratio does not necessarily guarantee a higher rate of return, which is very important.
Some investment experts will combine the two. If you can buy it in the absolute price-to-earnings ratio is not high and is located in the historical low price-to-earnings ratio range of individual stocks, you have to think about it for yourself.
Misuse: Use an absolute number of price-to-earnings ratio multiples to value all stocks in an integrated manner. For example, less than 12 times is called cheap, more than 15 times is called expensive
net value ratio method
When investing in early stages, I often use the perspective of price-to-earnings ratio as the main point of view, but as my experience gradually increases, I find that there are more and more places that apply net value ratio valuation. Everyone knows that economic cycle revolving stocks are more suitable for valuation of net value ratio, and turnaround stocks may also be suitable for valuation using net value ratio method.
Let’s think about the perspective of thinking when valuing the net value ratio method. What does it mean to compare a company’s current net value with its current stock price?
If you believe in the core competitiveness of a company, and you also believe that the company's profits will sooner or later rebound to normal levels, then you will get a meaningful result with the current stock price compared to the net value. Simply put, based on the technology, assets, talents, business class, market position and competitive advantages that the company currently has, you believe that profits will rebound in the future, so it is very suitable for valuation using the net value ratio method.
Another thing to pay special attention to is that if the company is unable to make profits for a long time, the net value ratio may not be meaningful. After all, the stock price will be based on profit performance. Even if the net value ratio is low but no profit is made, the stock price may still remain unchanged.
Finally, the net value ratio is not suitable for directly ordering an absolute multiple and applying it to all companies in one piece. Each individual company has its own past historical data to compare, and the results obtained by comparison with itself will be more applicable.
Misuse 1: Apply to companies without core competitiveness and profitability
Misuse 2: Apply to all companies in one and in one absolute multiple, for example, below 1 times is called cheap
rate of return method
rate of return method valuation is a big hot topic. It cannot be denied that the rate of return method does have its applicability in some places, but there are also cases where it is not suitable for use. We must think about this question rationally... The question of
is here. How many% of the rate of return should we use as our valuation? Can we directly say that 6% is a cheap price, 5% is a reasonable price, and 4% is an expensive price? Of course not! This is related to the interest rate conditions at that time and the company's valuation.
Normal investment products must have lower risks and lower yields, while the higher the risk and higher the yield. Many construction stocks have a yield of more than 8%, which reflects the uncertainty of construction stocks and the risk discount given by the market. It may not be able to issue dividends next year, or the dividends will become smaller.
The reasonable rate of return valuation of each company is different. There is no way to value all companies in an absolute numerical manner. This concept is the same as the price-to-earnings ratio valuation.
For example, the interest rate of mature industries is higher, so the yield rate is also higher, while the interest rate of rapid growth stocks is lower, so the yield rate is also lower. Can you say that fast-growing stocks are more expensive because of their low yields? Some companies need to invest and burn money, and some companies need a lot of marketing expenses because the interest rate is also low, but it is difficult to directly use the yield rate to say that these companies are relatively high in valuations, but they only need to use money, so the interest rate is low.
We need to think about how dividends come about?
company makes money, or does capital reserve send it?
If a company reduces dividends with a major investment, but its profitability and competitiveness are not affected, should it reduce its valuation at this time?
The dividend actually issued by a company is directly related to the cash level at that time and whether there are major investments in the future. If the company discovers a good investment opportunity and decides to reduce dividends for investment, then even if the profit conditions remain unchanged, should we reduce its valuation? What if you can earn more in the future because of this investment?
dividend is not related to valuation to some extent, and it can be used as a reference value. Of course, most companies that can allocate cash dividends stably are good companies, which means that the company is well managed and there is no need to say that dividends can increase year by year.
Misuse: We can't say that 6% is called cheap, 5% is called reasonable, and 4% is called expensive. Each stock market is different and cannot be applied in one piece.
The concept of dividends can be regarded as the lowest expected value for long-term holdings. If you are unfortunately trapped due to the overall environment, you can at least have dividends to receive.
Another concept of dividends was proposed by John Neff, "Eat side dishes before the main meal". The main meal is the ultimate profit, and the side dishes are dividends. In fact, dividends are just red envelopes that you take away normally when investing and judging.
When we evaluate stocks, the most important thing is the company's long-term competitiveness and future profit prospects.
PEG
PEG = Estimated Principal Earnings/Compared with Estimated Growth Rate
For example, the estimated growth rate is 25%, the estimated P/E ratio is 10 times, then PEG=10/25=0.4, wow! Very low.
mentioned in the book "Zulu Law" that the PEG does not exceed 0.75, preferably below 0.66, and is more useful in the growth rate of 12.5% to 17.5%. PEG is suitable for use in growth stocks, and there is basically no problem. As long as you pay attention to the price-to-earnings ratio and growth rate used, they are all "estimated" rather than historical data.
Free cash (dividend) flow discount method
Discount method has the biggest problem with the assessment. In fact, when conducting an evaluation, it is difficult to estimate the surplus in the next year, let alone the estimate for the next few years or even more than ten years?
The use of discount rate is also quite subjective, and the valuation calculated under different discount rate conditions is far different.
Charlie Munger said, "Although we think this is the most reasonable way to calculate intrinsic value, we have never seen Buffett calculate." We think discounting method is a useful concept, but it is difficult to use it on the battlefield with it. Therefore, there are not discussions here. There are quite a few articles about discounting method on the Internet. Interested friends can check it out by themselves.
Conclusion
valuation method is quite subjective, and the reasonable prices that everyone can accept are different. Price assessment can be carried out more reasonably through appropriate valuation methods.
The most important thing is that the stock price reflects the future after all. No matter which valuation method is used, you must have a certain degree of understanding of the company you buy and have a preliminary assessment of the future prospects, so that there will be no situation where the pre- and post-evaluation will be too far apart.
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