Company (share) value
- Thread starter Warren Buffet II
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I think WBII understands there is a difference between price and value. But I don't think he'll get what he wants maybe from people on this forum - I would say that most people here would not have an independant valuation (not price) on what their shares are worth (not price), as most here are TA types.
I like FA, but it has its flaws. Like market prices - fundamental value can change day to day depending on what sort of business it is (ie if its a resource company - its value is directly related to the price of its commodity - which also changes day to day, so now you have to do an valuation on the prospects of that commodity - is it over/under priced?? you can't do that).
DCF is a fundamental model for valuing a company by discounting its future cash flows, but any decent DCF model needs 5 + years forecast and when your forecasting that far its just pie in the sky stuff (note DCF does have its uses, you need to have some way to work out value for the purposes of takeover and mergers/aquisitions)
This is why I think decent FA investors (Buffet) put such a huge emphasis on the economics of the business model and more importantly the managers running the company. Essentially if you have good management, you are trusting them to make the right decisions when the economics of their business change - fundamentals can constantly change but if you have the best management they will be able to deal with this. I think Buffet essentially is really good at understanding microeconomics and PEOPLE.
I like FA, but it has its flaws. Like market prices - fundamental value can change day to day depending on what sort of business it is (ie if its a resource company - its value is directly related to the price of its commodity - which also changes day to day, so now you have to do an valuation on the prospects of that commodity - is it over/under priced?? you can't do that).
DCF is a fundamental model for valuing a company by discounting its future cash flows, but any decent DCF model needs 5 + years forecast and when your forecasting that far its just pie in the sky stuff (note DCF does have its uses, you need to have some way to work out value for the purposes of takeover and mergers/aquisitions)
This is why I think decent FA investors (Buffet) put such a huge emphasis on the economics of the business model and more importantly the managers running the company. Essentially if you have good management, you are trusting them to make the right decisions when the economics of their business change - fundamentals can constantly change but if you have the best management they will be able to deal with this. I think Buffet essentially is really good at understanding microeconomics and PEOPLE.
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One of the easier companies to fundamentally value is Listed Investment Companies. They have a whole lot of investments valued by the market, their day to day value is completely determined by their NTA per share, very little changes with these companies - their expense ratios and management do not change and yet they consistantly trade at varying discounts/premiums to their NTA ??? thats the way the market is....
I couple of months ago I significantly added to my Argo (LIC) portfolio when they were priced at 5.08 per share, their NTA was 5.41. Historically this was a wide gap so I thought it would close..... it did, mind you I didn't stay there all they way until they got to 5.41.... BUT and this is the big BUT ..... a sharemarket correction could have occured between me buying at 5.08 and waiting for it to rise - a correction could have sent its NTA to around 5.00 or even less... so now we have a new fundamental value.
This is the problem with pure Fundamental analysis..... you buy and WAIT for the price to get closer to its VALUE, but in the meantime that fundamental value CAN change. You may think that this scenario isn't relevant to all businesses, but an undervalued business can have any number of adverse outcomes that effect the value of its business at any time....
So why does Buffet care so much about managment? I think he does because buying an undervalued company is not enough - you have to trust management to deal with adverse effects and KEEP the fundamental value of its business rising or outporforming its peers.
Disclaimer - I think TA has FLAWS aswell, I tend to use both.
I couple of months ago I significantly added to my Argo (LIC) portfolio when they were priced at 5.08 per share, their NTA was 5.41. Historically this was a wide gap so I thought it would close..... it did, mind you I didn't stay there all they way until they got to 5.41.... BUT and this is the big BUT ..... a sharemarket correction could have occured between me buying at 5.08 and waiting for it to rise - a correction could have sent its NTA to around 5.00 or even less... so now we have a new fundamental value.
This is the problem with pure Fundamental analysis..... you buy and WAIT for the price to get closer to its VALUE, but in the meantime that fundamental value CAN change. You may think that this scenario isn't relevant to all businesses, but an undervalued business can have any number of adverse outcomes that effect the value of its business at any time....
So why does Buffet care so much about managment? I think he does because buying an undervalued company is not enough - you have to trust management to deal with adverse effects and KEEP the fundamental value of its business rising or outporforming its peers.
Disclaimer - I think TA has FLAWS aswell, I tend to use both.
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Before anyone shoots me down about ramping, I am not ramping LVL, but here is my undertanding of the value of shares in relation to the company. This chart was provided by LVL
June 30 2006 2007 2008 2009
NPAT 4.3m 8.6m 13.4m 15.4m
Expected p/e ratio 10X 11X 12X 14X
Market Cap. $43m $96m $161m $216m
Anticipated Share
Price ... $0.15 $0.33 $0.56 $0.74
I would expect the share price to be less, if more shares are issued or the market cap was not achieved or vice-versa...extra market cap or share buy-back would make the price go much higher.
Supply and demand factors would also come into play when dealing with the share price. eg.... I could safely say that most stocks dealing with Uranium mining are well over priced right now, due mainly to global demands.
Also note this is anticipated share price and would not take into account days on which annoucements were made that pushed the share price up or down due to market forces.
The full chart is provided in the Memorandum
Source "Information Memorandum for Private Placement" LVL
June 30 2006 2007 2008 2009
NPAT 4.3m 8.6m 13.4m 15.4m
Expected p/e ratio 10X 11X 12X 14X
Market Cap. $43m $96m $161m $216m
Anticipated Share
Price ... $0.15 $0.33 $0.56 $0.74
I would expect the share price to be less, if more shares are issued or the market cap was not achieved or vice-versa...extra market cap or share buy-back would make the price go much higher.
Supply and demand factors would also come into play when dealing with the share price. eg.... I could safely say that most stocks dealing with Uranium mining are well over priced right now, due mainly to global demands.
Also note this is anticipated share price and would not take into account days on which annoucements were made that pushed the share price up or down due to market forces.
The full chart is provided in the Memorandum
Source "Information Memorandum for Private Placement" LVL
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Damn, I typed the chart out nice and neatly then posted it and it turn out like crap! Ohh well.
Check the Company Announcement for LVL 11-Apr-2005
Information Memorandum for Private Placement pg. 10 and this may help!
Check the Company Announcement for LVL 11-Apr-2005
Information Memorandum for Private Placement pg. 10 and this may help!
Wysiwyg
Everyone wants money
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The fight or flight principle is a factor in stock markets that i was thinking about and is more evident at present.I haven`t seen this type of flight from market so closely before with stocks doing well financially and structurally sound being swept aside, effectively significantly reducing the share price but the value is still there.Euphoria in reverse.It is just crazy and in this modern era why can`t the `powers that be` control the overall situation better.
Why are financial institutions allowed to get out of hand? It would be advantageous and a win/win situation if a balance was kept instead of a huge swing one way and a huge swing the other way.
Are these financial institution individuals educated appropriately?Is this whole scene orchestrated to `control` a certain large country rise into the 21 st. century or even slow many countries growth this century?
While the flight principle is in play at the moment I wonder what the core driver is at this point in time.Something beyond what is being published.Any ideas?
WB,
I just read this thread (I'm a poet and I don't know it!). I understand what you were trying to get at by starting this thread and I also understand what everyone else is saying about it being fruitless to try to determine the future value of a stock because of all the variables involved.
I use tech analysis and trade short to medium term time frames but recently I decided to look into Fundamental analysis as a way to compliment my TA. I decided that if I could use basic FA to determine if a stock is "undervalued" or "cheap" and using by using TA, determine that the price has either started an uptrend or is in an uptrend, then both styles will validate each other to hopefully make a more successful trade.
Before everyone rips into me, I understand that, yes, in the short term, prices can do whatever, based on whatever is currently happening and that FA is based on long term trading.
But using FA to assist my short term TA I will hopefully stay out of trades that are more likely to go against me. If I see a downtrend and want to short it but the fundamentals say that the stock is undervalued then I won't short it but rather look for one that is fundamentally in trouble AND in a downtrend. I know that this will keep me out of a lot of profitable short term moves but I am using it as a final filter in trading selection.
I just read "One up on Wall street" by Peter Lynch and did some research on the net and I'll chuck in an example of a stock, that by using their formulas, is undervalued, which I interpret as meaning it has however much upside potential. I know it isn't a detailed fundamental analysis, just a ball park figure.
PEG ratio:
http://ezinearticles.com/?Understanding-a-Stocks-PEG-Ratio&id=45807
BHP: 17/03/08
Share Price: $37.50
2006 EPS: $2.254
2007 EPS: $2.75
therefore EPS Growth rate: 22.005
2007 PEG ratio = 37.50/2.75/22.005 = 0.619
According to that website a value under 1 means its undervalued.
So when it gives signals to buy using TA (as long as the Share price hasn't gone too high yet) then I will consider going long.
According to that formula (I know, it is extremely basic - but is based on earnings growth compared to price which means it has to have some value!) to get a PEG ratio of 1 (meaning it is at the correct value) the price has to go to $ 61 per share.
That leaves plenty of room inbetween for me to go long with short term swing trades.
I've only just started reading up on FA and its only a basic 'formula' but I thought I'd chuck that spanner into the works and see what responses I get.....
I just read this thread (I'm a poet and I don't know it!). I understand what you were trying to get at by starting this thread and I also understand what everyone else is saying about it being fruitless to try to determine the future value of a stock because of all the variables involved.
I use tech analysis and trade short to medium term time frames but recently I decided to look into Fundamental analysis as a way to compliment my TA. I decided that if I could use basic FA to determine if a stock is "undervalued" or "cheap" and using by using TA, determine that the price has either started an uptrend or is in an uptrend, then both styles will validate each other to hopefully make a more successful trade.
Before everyone rips into me, I understand that, yes, in the short term, prices can do whatever, based on whatever is currently happening and that FA is based on long term trading.
But using FA to assist my short term TA I will hopefully stay out of trades that are more likely to go against me. If I see a downtrend and want to short it but the fundamentals say that the stock is undervalued then I won't short it but rather look for one that is fundamentally in trouble AND in a downtrend. I know that this will keep me out of a lot of profitable short term moves but I am using it as a final filter in trading selection.
I just read "One up on Wall street" by Peter Lynch and did some research on the net and I'll chuck in an example of a stock, that by using their formulas, is undervalued, which I interpret as meaning it has however much upside potential. I know it isn't a detailed fundamental analysis, just a ball park figure.
PEG ratio:
http://ezinearticles.com/?Understanding-a-Stocks-PEG-Ratio&id=45807
BHP: 17/03/08
Share Price: $37.50
2006 EPS: $2.254
2007 EPS: $2.75
therefore EPS Growth rate: 22.005
2007 PEG ratio = 37.50/2.75/22.005 = 0.619
According to that website a value under 1 means its undervalued.
So when it gives signals to buy using TA (as long as the Share price hasn't gone too high yet) then I will consider going long.
According to that formula (I know, it is extremely basic - but is based on earnings growth compared to price which means it has to have some value!) to get a PEG ratio of 1 (meaning it is at the correct value) the price has to go to $ 61 per share.
That leaves plenty of room inbetween for me to go long with short term swing trades.
I've only just started reading up on FA and its only a basic 'formula' but I thought I'd chuck that spanner into the works and see what responses I get.....
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