Intrinsic Value

[Lewie]

G'day.
I understand i'm new here but after browsing around i couldn't find any answers specific to my question, or find any rules stating that this is improper, so apologies if it is.
I have been reading and trying to learn about the stock market for about a year or two now, (im 18) and ive been thinking of investing now that i finally have some disposable income.
I was curious if i could maybe scab off the knowledge of some more experienced investors.
My idea was to invest in a wide range of businesses that i have some degree of knowledge about, I've read the intelligent investor, the rest of benjamins grahams books and pretty much anything on warren buffet, so im trying to invest on the basis of fundamentals as opposed to speculation.
As such my first "filter" was going to be an intrinsic value calculation, the more mainstream of them (using average growth rate to extrapolate the free cash flow, discounting that and dividing by shares outstanding to get the intrinsic value per share)

Using this method a lot of companies that seem to do relatively well, come out with a negative result and a lot of companies seem to hugely fluctuate in comparison to public opinion for example, it seems as if people think telstra is overvalued whereas using the DCF calc it says that telstra is actually worth double its current stock price (6.9$)

I thought that the free cash flow extrapolation method of calculating intrinsic value would be quite a strong tell of a companies health? Since it essentially represents profitability, so i guess one question is: Is it common to get extremely differing results in these calculations (in regards to a companies general opinion e.g. telstra? and if not would anyone be willing to help me out/ check over my methods?)

I was also wondering if this method of trading is advisable?
1) use the intrinsic value calc described above to screen for undervalued companies
2) Apply more financial calculations to the business's statements e.g. whether they've been buying back stock, whether their cash from operating activities is growing and whether theyre paying off debt
3) perform a more speculative analysis, see the generals opinion, invest when the generals opinion might be low or the companies image tarnished etc.

Im sorry for this lengthy paragraph, and i thank anyone in advance who takes the time out to read and/or respond to this.
I think it might be proper just to elaborate on a few things since i'm a new face. i'm not investing in the hopes to get rich (although that would be rather nice) however i do hope that If i continue on this path of enriching my financial fluency and investing i might be financially free at a fairly young age, I understand this is easier said then done, but it is my goal nonetheless.
Thank you again.

 

[rederob]

G'day.
I understand i'm new here but after browsing around i couldn't find any answers specific to my question, or find any rules stating that this is improper, so apologies if it is.
I have been reading and trying to learn about the stock market for about a year or two now, (im 18) and ive been thinking of investing now that i finally have some disposable income.
I was curious if i could maybe scab off the knowledge of some more experienced investors.
My idea was to invest in a wide range of businesses that i have some degree of knowledge about, I've read the intelligent investor, the rest of benjamins grahams books and pretty much anything on warren buffet, so im trying to invest on the basis of fundamentals as opposed to speculation.
As such my first "filter" was going to be an intrinsic value calculation, the more mainstream of them (using average growth rate to extrapolate the free cash flow, discounting that and dividing by shares outstanding to get the intrinsic value per share)

Using this method a lot of companies that seem to do relatively well, come out with a negative result and a lot of companies seem to hugely fluctuate in comparison to public opinion for example, it seems as if people think telstra is overvalued whereas using the DCF calc it says that telstra is actually worth double its current stock price (6.9$)

I thought that the free cash flow extrapolation method of calculating intrinsic value would be quite a strong tell of a companies health? Since it essentially represents profitability, so i guess one question is: Is it common to get extremely differing results in these calculations (in regards to a companies general opinion e.g. telstra? and if not would anyone be willing to help me out/ check over my methods?)

I was also wondering if this method of trading is advisable?
1) use the intrinsic value calc described above to screen for undervalued companies
2) Apply more financial calculations to the business's statements e.g. whether they've been buying back stock, whether their cash from operating activities is growing and whether theyre paying off debt
3) perform a more speculative analysis, see the generals opinion, invest when the generals opinion might be low or the companies image tarnished etc.

Im sorry for this lengthy paragraph, and i thank anyone in advance who takes the time out to read and/or respond to this.
I think it might be proper just to elaborate on a few things since i'm a new face. i'm not investing in the hopes to get rich (although that would be rather nice) however i do hope that If i continue on this path of enriching my financial fluency and investing i might be financially free at a fairly young age, I understand this is easier said then done, but it is my goal nonetheless.
Thank you again.

Welcome to the forum.
Hopefully someone will answer your specific issues.
30 years ago I read a lot about company metrics etc and, after dabbling in investing, discovered that it seldom meant much to how it affected comparative performance.
Might I suggest a quick exercise for you....
Use what you have learnt so far and test it on the following companies:

1. CSL
2. Transurban
3. BHP, and
4. Woolworths

After you have done that, check each company's chart performance over the last 5 years and, from that, try to work out how any of the metrics you considered would have helped you invest in the best performing of the four.

Most of us regularly posting have been on long journeys, either investing mostly, or trading mostly.
You will discover some excellent threads.
"Dump it here" is probably blessed with the most wisdom and I suspect better value than anything you have so far read.
Good luck.

 

[Knobby22]

Yes, let us know how you go with those 4 companies then I will provide feedback.

 

[galumay]

It took me years of work to develop the process i use to identify a range of value for businesses. It also took years to gain conviction about the application of the processes. I also have continued to revisit, challenge and refine how I arrive at a range of fair value. It was an enjoyable journey for me and I hope it is for you too - that makes the financial rewards much more satisfying IMO.

A couple of things i noted in your post, you said,

using average growth rate to extrapolate the free cash flow

I think projected growth rates need to be thought through and calculated individually for the specific business, eg I would probably use a very low growth rate (if I even believed there would be any growth), for a business in decline like Telstra.

Also you don't mention a risk free rate or hurdle rate that you are discounting the projected FCF by, typically I have thought about that in terms of 10 year treasury bond rates or an equity risk premium - again you have to be very careful in the low interest world we live in now and think about how you are going to set that rate very carefully.

Overall I believe an investing strategy and process needs to be articulated, documented and generally followed. It needs to be a strategy of parts, the final part of which is probably the calculation of a range of IV, to see whether the price is attractive enough to warrant an investment. I try to avoid reading other people's research or opinions as part of the process, I want to own the decision 100%. My process involves identifying small and microchip businesses that are profitable, largely debt free, history of stable growth in revenue & earnings, illiquid, founder involvement and well managed.

I turn over a lot of rocks looking for investible businesses, occasionally I find something interesting, very rarely I find something that ticks all the boxes and is cheap!

I believe its a very personal pursuit, there are many different strategies and processes that you can use, all of them will have a small % of proponents who outperform the market consistently over a long time. I suspect part of the reason for outperformance in a chosen approach is discipline to follow the approach and conviction in it. Good luck with your journey!

 

[qldfrog]

I can not help as this is not the way i went investing wise, but value your dedications and thoughtful approach.i am sure you will find some helping hands.good luck and good learning..it is a journey, not a destination: always be aware along the path: the ups the downs and the never ending learnings
All the best