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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » The Importance of Valuing A Stock

The Importance of Valuing A Stock

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1The Importance of Valuing A Stock Empty The Importance of Valuing A Stock Sun May 29, 2016 2:24 pm

EquityChamp

EquityChamp
Moderator
Moderator

A great insight from an article written on Wall Street. Speaks about a different angle of for what you should buy a stock. Read it.


Arguably the world’s greatest investor, Warren Buffett says that you should value a stock as you would value a private business. In the private sector, P/E means nothing. In fact, earnings mean nothing. The only thing that matters in buying a private business is the amount of cash that it can generate-its free cash flow.
When you buy a stock, you are buying the company’s net worth and a right to the cash that the company can generate in the future. Earnings and revenue are numbers reported on the company’s tax return and mean nothing to a business owner or investor. You can’t spend earnings to grow the business-you can only spend the cash that makes it to the bank after all expenses are paid.

If you know the net worth of the company (the Shareholder Equity) and you can reasonably estimate the future cash of the business with a degree of confidence, you can quickly figure out the true value of a business. Once you know the value, you should insist on buying the stock at a discount to its value. (The discount is a Margin Of Safety so that you still earn attractive returns if the company does not produce as much cash as you had expected.)
Only when the stock price is at or below your Margin Of Safety should you consider investing. Interestingly enough, investing in this way produces three unbelievable results:

  1. It would tell you to buy Johnson & Johnson at $62.33 a share in 2007 – right around the price at which Warren Buffett was buying earlier this year;
  2. It would have protected you from the Lucent, Enron, and Worldcom scams because free cash flow is hard to fake – even when earnings and other tax return numbers are growing; and,
  3. It will allow you to invest with confidence and check in on your stocks once a year. Buying businesses as a business investor gives you the confidence and comfort to know that you own wonderful companies at attractive prices and that you do not need to concern yourself with the daily silliness of the stock markets because, over time, as your company’s value grows, its stock price will have to follow.

2The Importance of Valuing A Stock Empty Re: The Importance of Valuing A Stock Sun May 29, 2016 3:08 pm

VALUEPICK

VALUEPICK
Expert
Expert

"If you know the net worth of the company (the Shareholder Equity) and you can reasonably estimate the future cash of the business with a degree of confidence, you can quickly figure out the true value of a business."
 
Once you know the value, you should insist on buying the stock at a discount to its value."
 
We are looking for EPS for every quarter and then we are trying to analyse stocks accordingly. I don’t think any company or industry can make above average earnings almost every quarter or every year due to short term industry issues.  For example some sectors such as hotels can have higher earnings in some quarters and low earnings in some quarters. We cannot judge performance of a company by following few quarters or years. At least we should have idea about five years. 
 
There are companies that they can build strong cash flow despite some lean period. Similarly major uptrend in a stock is more important than daily, hourly or monthly indicators. Those indicators can change suddenly and instantly.

How about applying above criteria in the CSE?  There are companies that they can generate more cash than other companies from their core businesses during next five years and beyond. In addition, we can find some best money mangers and best cost managers as well. If we find mangers having all these skills in a company, we should not hesitate to grab part of their business (stocks).  

3The Importance of Valuing A Stock Empty Re: The Importance of Valuing A Stock Sun May 29, 2016 3:38 pm

charith666lk


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Thanks EC. and VP. Both of you doing great job here.

4The Importance of Valuing A Stock Empty Re: The Importance of Valuing A Stock Sun May 29, 2016 7:36 pm

ramm


Stock Analytic
Stock Analytic

Thanks alot guys! Useful tips. :*

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