Calculating value

Bobziz

Thrugelmir said:

coastline said:

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

Vestas Wind Systems is a great company in many respects. I had no regrets in liquidating my entire holding at an average gain of 94% after holding for for just 8 months. Sometimes it's just to good to be true. Likewise Orsted. Which faces some challenges despite it's well founded status. 

Absolutely, but what information are you using to judge that it's too good to be true ?

Bobziz

NedS said:

I'm late to this thread so haven't fully read through, but I did find this video insightful:

https://www.youtube.com/watch?v=bO_JqQzn1lU

Thanks for sharing. Very interesting indeed. I note that the intrinsic value calculated is also very close to the 200ma too. I've heard a number of forecasts of where the s&p may get to by year end, which is about where we are now. Anyone tempted to sell and buy back after a correction ?

bowlhead99

Bobziz said:

Thrugelmir said:
Vestas Wind Systems is a great company in many respects. I had no regrets in liquidating my entire holding at an average gain of 94% after holding for for just 8 months. Sometimes it's just to good to be true. Likewise Orsted. Which faces some challenges despite it's well founded status. 

Absolutely, but what information are you using to judge that it's too good to be true ?

On a simplistic assessment-
 Orsted has doubled in price in DKK since January and gone up by over 60% since I last added six months ago (29 June it was £93 a share).

But you can't really say that since January, the revenue available from its total addressable market has doubled, or that its operational challenges or competitive threats to its profits have receded by half, or that the long term interest rate and financial market dynamics have changed such that its long term cost of capital over the next few decades has dropped so significantly that a sensible discount rate on future cashflows would produce twice as much profit in today's money from the same likely underlying revenues. 

So the company is simply being ascribed a higher value by the market, which seems something driven by trends and sentiment rather than underlying value creation by the company. The company's announcements, though sound, don't point to an unlocking of twice as much future value over the last year as could have been envisaged by an investor in January.

If that 'quick and dirty' assessment is your belief - i.e. that (a) the value put on the company by the market,  has grown faster than  (b) the fundamental 'worth' of a share in the company based on its likely future profits and assets ... then you could look at it one of two ways: 

- 1 - that the company was underappreciated by the market in January and was a screaming bargain as the market did not recognise its true potential. But in recent months the market has re-rated its potential and now it is changing hands for twice as much per share - at a share price that now at last represents fair value.

If you bought when the market gave it an unjustifiably low price, well done, you got a great deal... but as it is now only a fairly-valued stock facing the same types of challenges as others in its niche, there is no particular reason to hold more of it than you hold other companies. It would make sense to sell out and capture that re-rating in value as pounds in your pocket.

In other words if it's now fairly valued and 'nothing special', you no longer need to hold it, even though it had made a lot of sense to you to hold it when it was initially undervalued before the market started to take notice and the likely direction of share price was more up than down. Now the market has taken notice, so you've got the value you came for, and quite quickly. Having bought below fair value, someone is now willing to offer you its fair value.  So you can quit while you're ahead, as staying invested isn't particularly compelling if the share is now changing hands at a fair price and as likely to go down as up.

Or,
- 2 - the company was fairly valued in January for the potential it offered and was not a screaming bargain but and was just one with potential, in a sea of many. Even recognising lower interest rates and renewables-friendly political gestures, the company's fundamentals haven't changed significantly enough over the last year for the company to be inherently 'worth' twice as much money as it was 'worth' then, so if the price ascribed by the market at that time was 'fair', then the price being offered now would seem 'excessive' ; each share traded on the market must now be 'overvalued' rather than fair value.

If this is the case (shares trading at a premium to fundamental value) then just like in (1) above it makes sense to quit while you are ahead - you have successfully paid fair value for something and someone is now willing to buy it back off you for more than its fair value. Having doubled your money in a year it can be quite sensible (and lucrative) to recognise that such a gravy-train won't continue, and cash out.

With either of those viewpoints you would effectively be saying it is too good to be true for a company that is not 'twice as well positioned' as it was a year ago to be valued at twice as much money from the market, and that gain is not going to repeat in the same way next year... so no need to stay onboard: this is your stop, get off.

There is of course a third option, that the share is still in the process of being re-rated and its current price is still less than the fair value it should reach or the super-overvalued level it's going to reach. If that's the case, then to get off now means you would miss out on profits as it continues upwards to fair value; or super-profits as it continues beyond fair value to an overvalued price where you could jump off if you were lucky and quick enough to catch it.

But a bird in the hand is worth two in the bush. If long term gains from equities might be 5-15% a year based on fundamentals and you've been able to get 100%, you've done well and probably better than you expected.   You need some +100%s to cover the inevitable -50%s you'll come across in investing ; but if you've identified that a chunk of the +100% in a short space of time is down to improving market sentiment and opinion rather than outright improving company fundamentals,  you are effectively beating the market if you cash in those chips after a short-term market surge. 

Having written the above I think I will probably 'cash in some of my chips' from the Orsted table as I have a look at my pension portfolio for the end of the calendar year tomorrow.  Not much going on with new years eve parties to prepare for in these 'interesting times' so I may have a play around.

Bobziz

coastline said:

For years many commentators used P/E values as one guide but they can vary a fair bit. Look at the US market it looks high and tends to direct the rest of the world. There's no point waiting for value to appear as you'll probably miss out on huge gains. So regarding fund investing all you can do apart from invest in one go is drip feed and buy the dips. 
Ept_5ZQXMAcw0CW (679×391) (twimg.com)
This link has some good reading .
UK Value Investor — For defensive value investors
Single stocks are volatile so you'll either have to be patient or buy when they are slightly out of favour. Two good examples of quality below with prices going in the wrong direction.
 Unilever (ULVR) | The Share Centre
Astrazeneca (AZN) | The Share Centre
I don't buy anything without looking at a chart and indicators which I accept won't get any recommendations on here. AZN and ULVR are both on my watch list as forward earnings are going in the right direction according to the forecasts in the link. If there were problems I'd leave them out. How I buy them is another one which is pointless posting as my ideas won't be accepted.
What I've learnt is get rid if there's a profits warning as you don't know what will happen next. Look no further than Tesco a few years ago. Price was rising in a growth phase and P/E value was a heady 20 at one point. Supermarkets in the past traded nearer 10 than 20. Profits warning then slump. So I suppose Amazon must keep going to some extent otherwise it'll be in half if it doesn't. 

AZN, ULVR & GSK potentially now looking like even better value. Are they still on your watchlist or in your portfolio ?

Thrugelmir

If you would like some broad exposure to the better quality UK large caps. The investment trusts such as MUT and DIG maybe of interest.  A good counterbalance to the more stretched valuations found in some international shares currently. 

Alexland

I suggest people sell MUT to drive the price down before I buy more at the end of the month

Bobziz

Alexland said:

I suggest people sell MUT to drive the price down before I buy more at the end of the month

Ha, yes I do quite like the look of it. DIG is a little heavy on financials for my taste. Not convinced that the recent upturn will be sustained, and I'm not clear on the impact if any of Brexit on the sector yet. More research required.....

coastline

Bobziz said:

coastline said:

For years many commentators used P/E values as one guide but they can vary a fair bit. Look at the US market it looks high and tends to direct the rest of the world. There's no point waiting for value to appear as you'll probably miss out on huge gains. So regarding fund investing all you can do apart from invest in one go is drip feed and buy the dips. 
Ept_5ZQXMAcw0CW (679×391) (twimg.com)
This link has some good reading .
UK Value Investor — For defensive value investors
Single stocks are volatile so you'll either have to be patient or buy when they are slightly out of favour. Two good examples of quality below with prices going in the wrong direction.
 Unilever (ULVR) | The Share Centre
Astrazeneca (AZN) | The Share Centre
I don't buy anything without looking at a chart and indicators which I accept won't get any recommendations on here. AZN and ULVR are both on my watch list as forward earnings are going in the right direction according to the forecasts in the link. If there were problems I'd leave them out. How I buy them is another one which is pointless posting as my ideas won't be accepted.
What I've learnt is get rid if there's a profits warning as you don't know what will happen next. Look no further than Tesco a few years ago. Price was rising in a growth phase and P/E value was a heady 20 at one point. Supermarkets in the past traded nearer 10 than 20. Profits warning then slump. So I suppose Amazon must keep going to some extent otherwise it'll be in half if it doesn't. 

AZN, ULVR & GSK potentially now looking like even better value. Are they still on your watchlist or in your portfolio ?

Looking more at ULVR but I see TSCO has 2023 forward earnings of 21p and a yield over 4%. P/E of near 10 at 220p. More like old value years ago that.
Tesco (TSCO) | The Share Centre
select Financials tab here.
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sirarthur

Ha, yes I do quite like the look of it. DIG is a little heavy on financials for my taste. Not convinced that the recent upturn will be sustained, and I'm not clear on the impact if any of Brexit on the sector yet. More research required.....

I've asked this question before (as an inexperienced investor) but is there a scenario where it makes sense to hold DIG and MUT? They seem to have very similar weightings in sector (not withstanding the 5% or so heavier on financials for DIG) and there is a lot of crossover in holdings. Would a person looking to hold 10% of their portfolio in such a fund look to split it between the two or are they 'much of a muchness'?

Thrugelmir

sirarthur said:

Ha, yes I do quite like the look of it. DIG is a little heavy on financials for my taste. Not convinced that the recent upturn will be sustained, and I'm not clear on the impact if any of Brexit on the sector yet. More research required.....

I've asked this question before (as an inexperienced investor) but is there a scenario where it makes sense to hold DIG and MUT? They seem to have very similar weightings in sector (not withstanding the 5% or so heavier on financials for DIG) and there is a lot of crossover in holdings. Would a person looking to hold 10% of their portfolio in such a fund look to split it between the two or are they 'much of a muchness'?

Depends on the entry price paid. I often own IT's where there's a cross over between holdings. Bought at different times there's the fluctuating discount which can be played upon. Over the past 6 months there's been opportunities to buy into both of these stock at attractive levels. Nothing like a sector being out of vogue.