Concept: Concept to evaluate future movement of stock prices of companies on the basis of the change of Price Book Value (PBVx) and Price to Earnings (PERx) ratios over a period of time.
Methodology Price Earnings (PERx) and Price to Book Value (PBVx), ratios of sample companies are calculated and plotted on a graph, X Axis representing PBVx and Y Axis representing PERx respectively. Market capitalization is depicted as the size of the circle.[/size]
Sample Data: Actual market and financial information of 4 listed companies of the Colombo Stock Exchange has been used as sample data for the purpose of this study.
- Study found that Stocks move horizontally from East to West or vice versa (From Lower PBVx to High PBVx) when book values are halved or doubled without changing other variables.
- Study also found that Stocks move vertically from South to North (From Lower PERx to High PERx) when Earnings are halved or doubled without changing other variables.
- Study also found that Stock tend have a span effect on its movement when share prices are doubled or halved without changing other variables. This facilitate investors to determine the movement of share prices in between quarter's when all variable such as EPS and Book Vales remain static.
- Centre Point where 1x PBV crosses the 4 x PER is considered as the the equilibrium in which stocks are considered as fairly valued. Similarly any stock that remain in close proximity to the centre can be considered as attractive in terms of valuations.
- It is also found that equilibrium PERx determines the period in which investors would recover their investment in full. However the applicable PERx is depended on the opportunity cost of Investments. eg. prevailing FD Rates.
Valuation of companies and price of issued shares can be determined by closely monitoring the movement of PBVx and PERx over a period of time. Based on the analysis of the past movement the future share prices can be predicted. According to findings the North to South, vertical movement indicate more under value position whilst West to East, horizontal movement indicate more under over valued position. Also Companies that move close to the equilibrium or the centre indicate fair valuations and its future potential to span North East before having its natural downward trajectory.
This methodology of stock valuation and analysis to be termed as the Astro analysis and Stock Planet Research LLC to implement this methodology to predict and determine future stock prices of companies on best effort basis. Stock Planets Research is the sole owners of the intellectual rights relating to Astro Analysis, its methodology and process.
Read more: https://www.stockplanets.com/white-paper