Intrinsic Value of Stock

 Successful long term investors consider the intrinsic

value of stock before buying and when deciding to
sell.

http://www.profitableinvestingtips.com/stockinvesting/intrinsic-value-of-stock

 This approach to stock investing goes back to the

black days following the 1929 stock market crash
which ushered in the Great Depression.


 Benjamin Graham taught investors that they did not

need to play the market as though they were picking
numbers on the roulette wheel.


 Rather he taught investors to do fundamental

analysis of stocks in search of forward looking
earnings.


 At the same time investors learned to consider what

features of a stock provided a safety net in times of
trouble.


 This was the margin of safety that some stocks have

in the form of money in the bank, unencumbered
property, or products that are unassailable in their
market niche.


 Successful stock investing became a matter of

thoughtful analysis and not a matter of guess work.


What Is the Intrinsic

Value of Stock?


 Think of intrinsic stock value as the fundamental

value of the stock.


 Analyze the stock to determine its price based on

predicted future income and then subtract the
current stock price.


 Calculate expected company cash flow and then

discount to current dollars.


 Determining intrinsic value of stock is a discounted

cash flow valuation. The key to determining intrinsic
value of stock is getting a clear idea of the medium
and long term prospects of the business in question.


 Successful stock investors learn to judge how well a

company will manage its
assets, products, costs, R&D, and marketing.


 When the picture is clear an investor can make an

informed decision.


 If the market price is less than the intrinsic value of

stock it is time to buy and if one owns the stock and
the prices are reversed it is time to sell.


A Formula for

Calculating Intrinsic
Value of Stock


 Here is the original formula that Benjamin Graham

suggested as modified in 1962 and again in 1974.


Preceding twelve months earnings per share, EPS
A constant of 8.5 representing an expected price to earnings
ratio, P/E ratio, for a company that is not growing

g being an estimate of long term growth (five years)
A constant = 4.4, the average yield of high grade corporate
bonds in the early 1960 decade
Y = The current yield of AAA corporate bonds
V = intrinsic value


 The formula is as follows:
 V = (EPS x (8.5 + 2g) x 4.4)/Y


 Once the investor had determined the intrinsic value

of a stock he compares that number to the current
market price.


 Intrinsic value divided by current price is referred to

as the Relative Graham Value or RGV.


 . An RGV of more than one indicates a buy and an

RGV of less than one indicates that one should
ignore the stock or sell if it is already in one’s
portfolio.


Practical Daily Use of

Intrinsic Value Stock


 One needs to adjust the 4.4 value in the equation for

current treasury yields.


 In addition one needs to use a crystal ball to

determine when the Fed will cut back on its stimulus
program which will send treasury rates up.


 Inflation is accounted for in the equation by way of

treasury yields.


 To the extent that the Fed becomes far more

influential in driving inflation to avoid
deflation, devaluing the USD to promote exports, or
other politically motivated acts intrinsic value of stock
may be more difficult to predict.


 Nevertheless this is still a valid concept and along

with finding the margin of safety of a stock helps long
term investors make rational decisions in buying and
selling stocks.


Intrinsic Value of Stock

Recomendados

Recomendados

Mais conteúdo relacionado

Mais de InvestingTips

Mais de InvestingTips (20)

Último

Último (20)

Intrinsic Value of Stock