WHY ARE THERE STOCK WITH SKY HIGH PRICES WHILE OTHERS ARE LIKE WORTHLESS LIKE PENNY STOCKS?
The purpose of valuations is to calculate the value of firms and their corresponding stock prices. Everything has value, and stocks are not an exception. The price of stocks such as Apple (AAPL) could go up to more than $150 per share, and another stock, Google (GOOG) could go well beyond its price level on Nov 2017, which is around $1000 per share. As a business grows or shrinks, so is its stock price, suggesting a correlation between the two. Valuation methods are used in order to estimate the value of firms and other financial assets in order to predict where the stock price is headed.
In terms of stock prices, between Google and Apple, it appears that the former has the upper hand. However, it does not necessarily mean that Google is not worth around 10 Apple firms combined. Rather, the markets perceive a ‘potential’ for the firm to reach such a status, even if the stock is already being traded way above its book value. The price of a stock does not only depend on the firm’s current financial situation, but as well as how the market i.e. individual traders and investors expect it to be in the future. But what explains this huge difference? Is Google or most other “blue chip” stocks worth that much or too expensive to buy? This is the purpose of performing stock valuations. Determining the value of the company depends on this potential to bring profits to its shareholders in the future. If the company can generate $1 billion in profits today, it means that the company is worth at least $1 billion in value today. Thus, if the company is estimated to grow in profits in the future, its value will be worth more than $1 billion. Likewise, if the company is estimated to earn lesser profits in the future, the value will be less than $1 billion. Meanwhile, if that company decided to give out $500 million to its shareholders in the form of dividends, the value will not be worth at least $1 billion today. Rather, it would be reduced to $500 million.
The number of shares outstanding should also be included in the stock valuation. If the stock has 10 million shares on the market, then each share would be worth $500 million (current market capitalization) divided by 10 million shares, which is $50 per share. Due to the reduction in value, the stock price will definitely drop at least by the amount of dividend distributed. This is the reason why some stocks can go as high as $1000 per share. The earnings it can provide to its shareholders are as much as $1000, in proportion to the quantity of the shares outstanding for the stock.
For more information, see this article on Value Investing – Click here
Value investing is derived from the ideas on investment that Benjamin Graham and David Dodd began teaching at Columbia Business School in 1928, which was condensed on their 1934 book entitled Security Analysis.
Proponents of value investing often involve high-profile personalities, such as Warren Buffett, chairman of Berkshire Hathaway. They argue that the essence of value investing is in buying stocks at less than their intrinsic value. This discount in the market price relative to the intrinsic value is what Graham coined as the “margin of safety”. The intrinsic value is the discounted value of all future distributions.
Warren Buffet, a student of Graham, is regarded as one of the world’s greatest investors. Using company valuations based on discounted cash flows, Buffett later came up alongside other high-profile proponents of value investing.
Valuations was also taught by Professor Aswath Damodaran at New York University. Valuations are also taught in other university in its curriculum on Corporate Finance. The valuation involves a calculation method to determine whether a firm should undertake a particular project or not. The calculations use discounted cash flows, and are quite similar to the method used by Warren Buffett in picking stocks. However, Buffett’s method only looks for the cash flows of stocks with the most stable growth rates, which greatly limits the selection to a small list of stocks to possibly invest into. On the other hand, Professor Damodaran’s method of valuation is more flexible, allowing the trader or investor to apply it not just on stocks, but on other financial assets as well, such as real estate, business startups, and banks.
Valuations calculation involves the use of historical figures from financial statements. Firms are required by law to produce these financial statements quarterly and annually. To derive the value, an estimate on future growth rates is determined, along with the required rates of returns as well as the current free cash flow in relation to equity (FCFE, termed as owner’s earnings by Warren Buffet). Historical figures are useful because past performance is often indicative of future success. For example, if a cake shop has been making $1 million in annual profits for the past 10 years, it is reasonable to expect that the cake shop would continue to make $1 million in the next year if market conditions do not change.
WHAT ARE THE SOLUTIONS? (COMING SOON)
You can learn my strategy ABSOLUTELY FREE at this current website you are surfing now. On my website you can learn about valuations as well as technical analysis. Not only you can learn but I will share with you my real experience with real money trading on these strategies.
Alternatively, there are other options such as the following:
You can also attend my 3-5 day course at a cost of SGD$1888. The course venue will be at Singapore only. This course not only teaches you valuations, you will also learn about many other technical analysis methods like candlestick reversal pattern as well as swing trading. Save your time reading books or some other website. I have spent a few years to read up on various books as well as other websites. And that’s not all: you will also learn the different kinds of financial products including derivatives like options and Contract for Differences (CFDs). You can also save the hassle of comparing brokerage firms in terms of fees, available features, etc… What’s more, if you attend this course, you will be able to ask questions through email and priority will be given to you. Express your interest now by filling up the contact form below and title it as Seminar interest and if there are sufficient participant, you will be informed to make payment through PayPal and the date and venue will be provided to you.
Once payment is received, there will be no refunds. If you are unable to make it because of some urgent things, you will be set for the next course date.
You can subscribe to my daily trading ideas. This subscriptions gives you the values of few thousands stocks traded on the United States. The calculation is according to what is taught from the book ‘Investment Valuation’ by Ashwath Damodaran. It will be sorted out according to the best safety margin with the best valuations. Not only you can view the valuation, calculation on Altman Z score, Beneish M score, Piotroski F score as well as Joan’s Non discretionary and Sloan accrual are also done and sorted. You can view this information on different industries, and the industries are sorted the best to the worst. And by combining CANSLIM letter M with Altman Z score, you get to know which directions the market is trending. The best part is that valuations are updated quarterly once the financial statements are released. The data are trailing twelve months (TTM) which means that data from the past four quarters are used. Imagine how much time you save with few thousands of stocks traded in United States. This is all for the price of USD$58 per month with a minimum subscription of 4 months.