Winner and loser stocks August 2019
September 1, 2019
Income Heroes Update August 2019
September 15, 2019
Nothing more annoying than when your stock rushes south just after you bought it. Unfortunately, you can’t always prevent such a negative experience. But you can reduce the probability to a minimum by thinking about the valuation of the stock before buying it. Such thoughts can be exhausting and time-consuming if, for example, you want to implement and maintain your own valuation model in Excel.
The Video: Apple, Amazon, 3M & Co. Finding undervalued stocks the easy way
In this video, I show the fair value calculation in more detail by also checking the current valuation of 3M, Amazon and AT&T:
Fortunately, quality stocks are quite easy to value thanks to their stable development of profits and dividends. Just have a look at the historical valuation. What P/E and P/C ratios and dividend yields has the stock been valued with in the past and how high is the current valuation compared to this? Provided that the company has not changed its profit character, this valuation approach gives a very realistic insight into the valuation of your stock. And thanks to the implementation on DividendStocks.Cash, the valuation is also easy to understand and executed very fast.
The Valuation Period
The selected valuation period is important for the fair value calculation. The average ratios and dividend yield must be representative of today’s company. Otherwise, the calculated fair values lack validity. Let’s take the Apple stock as an example to see how it works.
Fair Value Calculation of Apple Stock
For the last 20 years Apple can be divided into three phases of profitability. In the “crisis” until 2003, the “liberation from the crisis” from 2004 to 2007, and the subsequent “success phase” from 2006 to today. The market multiples of the stock varied in all three phases. In the “liberation” phase, Apple is listed with an average P/E ratio of over 30, while in the current phase it is slightly above 15.
Apple’s fair value calculation based on current phase beginning in 2007
After selecting the current phase from 2007 to today, Apple’s fair value for the entire period is calculated, displayed and compared with the actual historic stock price.
Backtesting the Fair Value Calculation
Doing a simple visual check between the historic stock price and the fair values of the past, you see immediately whether the calculated fair values are valid. That’s the case if stock price and fair values evolve in a similar way. Phases of over- and undervaluation are not uncommon. However, there should be a clear tendency over time for the stock price to return to its fair values after each phase of over- or undervaluation. This is the case for Apple’s fair value calculation:
Over- and undervaluation of Apple Stock
Current and Future Fair Values
Backtest all right. However, you will primarily be interested in the current valuation of the stock and its future price performance. You get an idea if the stock is rather expensive or a bargain by comparing the current stock price with the fair values either based on the last four quarters or alternatively the next estimate of earnings and cash flows. For the dividend, the fair value is even calculated on a monthly basis.
The chart shows the fair values you can use to compare the current stock price to know whether the stock is currently overvalued or undervalued:
Current overvaluation of Apple stock
In addition, you can even simulate a stock purchase and calculate your expected yield by connection the current stock price with any fair value or valuation line. This way, you get a solid impression what to expect from your investment in terms of capital gains and dividends.
Total return calculation for Apple stock
Conclusion: Fair Value Calculation the Easy Way
With the right tool, the fair value valuation can be carried out quickly and easily. This type of valuation makes particularly sense for quality stocks with stable long-term profit-growth. And it is precisely this type of stock in which you should invest in order to profit from growing capital gains and dividends. If you like to know more about fair value calucation consult this list of undervalued stocks with further explanation.
The Video: Apple, Amazon, 3M & Co. Finding undervalued stocks the easy way
In this video, I show the fair value calculation in more detail by also checking the current valuation of 3M, Amazon and AT&T:
