Calculating value

Thrugelmir

Another_Saver said:

Bobziz said:

A fundamental question for those in the know, how do you go about calculating the value of an individual stock or fund etc ? 

For example, I've read posters recently stating that renewables are currently trading at a premium/high, and are therefore not an attractive option in the short term. Obviously if you look at the share prices of most of the companies in the sector, you can see that prices are at all time highs and have got there in a short space of time. However, how do you go about determining that the market price is high or low relative to what would be considered fair value (par?) ? 

I appreciate that value is not the only thing that drives share/fund prices, but I'd like to understand how members go about making their stock/fund picks when looking to buy low sell high. Any thoughts would be much appreciated.

I think what you're asking is about premiums/discounts in relation to investment trusts that hold renewable energy assets (e.g. Greencoat UK Wind plc etc.). In general, there are any number of ways to calculate the "value" of an asset. With this specific asset class, a "premium" is probably the price relative to the book value of the assets. Greencoat is priced based on what is shareholders think its wind turbines can earn in future (just google discounted cash flow model, or watch a video of Warren Buffett explaining it), which tends to be higher than the book value of the wind turbines. This is true of most companies - if wind turbines "market value" as an investment asset was less than their cost to build or buy one, such a business would not be viable, they would not have been able to raise the capital to buy the wind turbines in the first place.

Turbines have a limited lifespan. At the outset electricity prices were subsidised in the UK to promote investment.  Subsequently turbines have become cheaper to manufacture, install, have a larger output and are more efficient. Driving the cost of green energy electricity prices down. 

New entities have regularly listed onto the UK stock market . Recently TEEC, ORIT and DORE meaning that it's hasn't been neccesary to pay a high premium to obtain exposure to the sector. Old stalwarts such as TOTAL, RWE, SSE, IBERDROLA , EDP, ENGIE and potentially RDSB all offer entry points into what is a growing and competitive market. 

Bobziz

Another_Saver said:

Bobziz said:

A fundamental question for those in the know, how do you go about calculating the value of an individual stock or fund etc ? 

For example, I've read posters recently stating that renewables are currently trading at a premium/high, and are therefore not an attractive option in the short term. Obviously if you look at the share prices of most of the companies in the sector, you can see that prices are at all time highs and have got there in a short space of time. However, how do you go about determining that the market price is high or low relative to what would be considered fair value (par?) ? 

I appreciate that value is not the only thing that drives share/fund prices, but I'd like to understand how members go about making their stock/fund picks when looking to buy low sell high. Any thoughts would be much appreciated.

I think what you're asking is about premiums/discounts in relation to investment trusts that hold renewable energy assets (e.g. Greencoat UK Wind plc etc.). In general, there are any number of ways to calculate the "value" of an asset. With this specific asset class, a "premium" is probably the price relative to the book value of the assets. Greencoat is priced based on what is shareholders think its wind turbines can earn in future (just google discounted cash flow model, or watch a video of Warren Buffett explaining it), which tends to be higher than the book value of the wind turbines. This is true of most companies - if wind turbines "market value" as an investment asset was less than their cost to build or buy one, such a business would not be viable, they would not have been able to raise the capital to buy the wind turbines in the first place.

Thanks. It was Thrugelmir's comment about the sector that provoked my question about valuation, but I'm interested in learning more about valuing stocks and funds more widely.

I own a few units of INRG and there are few reasons why I choose to buy it, but it struck me that I have no idea what a premium or high price looks like for the fund other than knowing it's at an all time high. This feels far from satisfactory.  I'll likely hold it or similar for a good 10 years or more, so it doesn't really matter, but I'm keen to understand what overvalued looks like and why.

Another_Saver

Bobziz said:

Another_Saver said:

Bobziz said:

A fundamental question for those in the know, how do you go about calculating the value of an individual stock or fund etc ? 

For example, I've read posters recently stating that renewables are currently trading at a premium/high, and are therefore not an attractive option in the short term. Obviously if you look at the share prices of most of the companies in the sector, you can see that prices are at all time highs and have got there in a short space of time. However, how do you go about determining that the market price is high or low relative to what would be considered fair value (par?) ? 

I appreciate that value is not the only thing that drives share/fund prices, but I'd like to understand how members go about making their stock/fund picks when looking to buy low sell high. Any thoughts would be much appreciated.

I think what you're asking is about premiums/discounts in relation to investment trusts that hold renewable energy assets (e.g. Greencoat UK Wind plc etc.). In general, there are any number of ways to calculate the "value" of an asset. With this specific asset class, a "premium" is probably the price relative to the book value of the assets. Greencoat is priced based on what is shareholders think its wind turbines can earn in future (just google discounted cash flow model, or watch a video of Warren Buffett explaining it), which tends to be higher than the book value of the wind turbines. This is true of most companies - if wind turbines "market value" as an investment asset was less than their cost to build or buy one, such a business would not be viable, they would not have been able to raise the capital to buy the wind turbines in the first place.

Thanks. It was Thrugelmir's comment about the sector that provoked my question about valuation, but I'm interested in learning more about valuing stocks and funds more widely.

I own a few units of INRG and there are few reasons why I choose to buy it, but it struck me that I have no idea what a premium or high price looks like for the fund other than knowing it's at an all time high. This feels far from satisfactory.  I'll likely hold it or similar for a good 10 years or more, so it doesn't really matter, but I'm keen to understand what overvalued looks like and why.

INRG is an ETF that holds listed equities in the renewable energy industry. It aims to perfectly track the value of the stocks it holds, its value can/should not be different from what it holds and iShares make sure this doesn't happen.

Investment trusts can have a premium because it is a company that started with say, £1bn of capital, bought some stuff with that £1bn but doesn't accept new money in. The price of the trust can wobble above or below the fair value of the assets within the trust.
This is because of the difference between open (mutual funds, unit trusts, OEICs, ETFs) and closed (investment trusts) ended funds (https://youtu.be/jp7Pcs_Vk9E).

This is different from the concept of valuing an asset.
For INRG, you could look at the valuation measures in portfolio characteristics - price to earnings ratio, price to book ratio and dividend yield and compare these with a global index tracker to see that is valued more highly than average global companies. This is because of the optimism around renewables energy, the fact that around half these companies are infrastructure/utility companies and are seen as very safe, the growing amount of investor money that is broadly "green", among other factors. Whether the extent of the relative difference between INRG's valuation measures and those of a global index fund means INRG is materially overvalued (or undervalued even) is entirely debatable. You can get decent explanations of these three ratios from Investopedia.
To give an example, I personally think the UK is materially undervalued, and I prefer index funds. I ended up with a portfolio that is mainly 1/3 FTSE 100 tracker, 1/3 FTSE 250 tracker, 1/3 global trackers. I bought 4 Tesla shares pre-split as a dabble because I believe in the company, but I've sold my gains down to one. I bought Berkshire Hathaway because I believe in the company and to upweight the less hyped parts of the US in my portfolio. I bought 100 Carnival plc shares during the dip in March because it was a bargain and just the shareholder perks will pay it off in a few years if the company makes it through covid.

Others will have their own portfolios for their own reasons. When you look at things one way, it seems that all investing is really just value investing - buying something you think is worth more than its price in order to grow your wealth. But many people look at investing for income or growth or wealth protection or a family legacy or security or just something to do with their savings.
If you're interested: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=667507

coastline

Bobziz said:

Another_Saver said:

Bobziz said:

A fundamental question for those in the know, how do you go about calculating the value of an individual stock or fund etc ? 

For example, I've read posters recently stating that renewables are currently trading at a premium/high, and are therefore not an attractive option in the short term. Obviously if you look at the share prices of most of the companies in the sector, you can see that prices are at all time highs and have got there in a short space of time. However, how do you go about determining that the market price is high or low relative to what would be considered fair value (par?) ? 

I appreciate that value is not the only thing that drives share/fund prices, but I'd like to understand how members go about making their stock/fund picks when looking to buy low sell high. Any thoughts would be much appreciated.

I think what you're asking is about premiums/discounts in relation to investment trusts that hold renewable energy assets (e.g. Greencoat UK Wind plc etc.). In general, there are any number of ways to calculate the "value" of an asset. With this specific asset class, a "premium" is probably the price relative to the book value of the assets. Greencoat is priced based on what is shareholders think its wind turbines can earn in future (just google discounted cash flow model, or watch a video of Warren Buffett explaining it), which tends to be higher than the book value of the wind turbines. This is true of most companies - if wind turbines "market value" as an investment asset was less than their cost to build or buy one, such a business would not be viable, they would not have been able to raise the capital to buy the wind turbines in the first place.

Thanks. It was Thrugelmir's comment about the sector that provoked my question about valuation, but I'm interested in learning more about valuing stocks and funds more widely.

I own a few units of INRG and there are few reasons why I choose to buy it, but it struck me that I have no idea what a premium or high price looks like for the fund other than knowing it's at an all time high. This feels far from satisfactory.  I'll likely hold it or similar for a good 10 years or more, so it doesn't really matter, but I'm keen to understand what overvalued looks like and why.

As chart patterns go the performance of INRG this year can only be described as parabolic. Google " parabolic chart " to see images. Who knows what happens next .
Forget tech, solar and clean energy is the hot sector in 2020 | Shares Magazine

Apodemus

coastline said:

For years many commentators used P/E values as one guide but they can vary a fair bit.
...
Two good examples of quality below with prices going in the wrong direction.
 Unilever (ULVR) | The Share Centre
Astrazeneca (AZN) | The Share Centre

While stock market sentiment can ignore business fundamentals for surprisingly long periods, it can't do so for ever and p/e values are still a good means of making comparisons across a sector. So, I am with you on ULVR (p/e around 23) but I can't see AZN as value when its on a p/e of 92, compared to GSK on 14!

coastline

Apodemus said:

coastline said:

For years many commentators used P/E values as one guide but they can vary a fair bit.
...
Two good examples of quality below with prices going in the wrong direction.
 Unilever (ULVR) | The Share Centre
Astrazeneca (AZN) | The Share Centre

While stock market sentiment can ignore business fundamentals for surprisingly long periods, it can't do so for ever and p/e values are still a good means of making comparisons across a sector. So, I am with you on ULVR (p/e around 23) but I can't see AZN as value when its on a p/e of 92, compared to GSK on 14!

I'm looking at forward P/E's not historic. 2020-2022 are improving but aren't cheap I agree .
ASTRAZENECA PLC : Financial Data Forecasts Estimates and Expectations | AZN | GB0009895292 | MarketScreener
UNILEVER PLC : Financial Data Forecasts Estimates and Expectations | ULVR | GB00B10RZP78 | MarketScreener

Apodemus

While I would be relaxed about basing investment decisions on anticipated future earnings, and hence future profitability and potential dividend, it's surely a bit of a leap to calculate a future share price and hence a future p/e?  Indeed, if anything, does the AZN p/e forecasts in your link not suggest a return to a more normal sector p/e ratio and hence less of an upside to share price - just as might be predicted from the current high p/e?

MaxiRobriguez

Bobziz said:

Another_Saver said:

Bobziz said:

A fundamental question for those in the know, how do you go about calculating the value of an individual stock or fund etc ? 

For example, I've read posters recently stating that renewables are currently trading at a premium/high, and are therefore not an attractive option in the short term. Obviously if you look at the share prices of most of the companies in the sector, you can see that prices are at all time highs and have got there in a short space of time. However, how do you go about determining that the market price is high or low relative to what would be considered fair value (par?) ? 

I appreciate that value is not the only thing that drives share/fund prices, but I'd like to understand how members go about making their stock/fund picks when looking to buy low sell high. Any thoughts would be much appreciated.

I think what you're asking is about premiums/discounts in relation to investment trusts that hold renewable energy assets (e.g. Greencoat UK Wind plc etc.). In general, there are any number of ways to calculate the "value" of an asset. With this specific asset class, a "premium" is probably the price relative to the book value of the assets. Greencoat is priced based on what is shareholders think its wind turbines can earn in future (just google discounted cash flow model, or watch a video of Warren Buffett explaining it), which tends to be higher than the book value of the wind turbines. This is true of most companies - if wind turbines "market value" as an investment asset was less than their cost to build or buy one, such a business would not be viable, they would not have been able to raise the capital to buy the wind turbines in the first place.

but I'm interested in learning more about valuing stocks and funds more widely.

You can be as detailed as you want. There is no hard and fast rules about how to value a stock. Traditionally many investors relied on P/E or CAPE ratios (smaller = better "value") but lower P/E's might be indicative of businesses expected to underperform and are thus not cheap, but crap. There has also been a capitulation from many value investors in recent years as growth has outperformed significantly. 

However if you are looking to introduce some value stocks then a combination of: P/E, CAPE, Dividend yield, dividend cover, ROA, ROI, profit growth over past few years, debt changes over past 5 years.... all give some indication of the financial strength of the company. Add a little note to check the management and check the sector risks and that should give you enough to have some confidence to hold your investment. Whether or not it makes a good investment is anyone's guess and requires a healthy dose of hindsight.

MaxiRobriguez

Apodemus said:

While I would be relaxed about basing investment decisions on anticipated future earnings, and hence future profitability and potential dividend, it's surely a bit of a leap to calculate a future share price and hence a future p/e?  Indeed, if anything, does the AZN p/e forecasts in your link not suggest a return to a more normal sector p/e ratio and hence less of an upside to share price - just as might be predicted from the current high p/e?

Future P/E's uses the price as it is today to calculate the ratio. It helps some investors justify paying out for growth stocks. For example one of my stocks Boohoo has a current P/E of 40 but a future P/E in a couple of years as 23.

Apodemus

MaxiRobriguez said:

Future P/E's uses the price as it is today to calculate the ratio. It helps some investors justify paying out for growth stocks. For example one of my stocks Boohoo has a current P/E of 40 but a future P/E in a couple of years as 23.

Thanks. That makes sense - but I still struggle to see any value in the figure!