There are many ways (eg. FA, TA, PA, Optimism) to define a stock fair value or price, depending on the strategies. From only FA (Fundamental Analysis) perspective, there are 2 main strategies:
1) Asset Approach (Undervalue Stocks)
– Buy a stock at price below the good asset value (eg. cash and property), waiting patiently for the recovery of share price, sell when price is above the asset value.
Recent acquisition of Wheelock Properties is a good example. The offer of acquisition requires major shareholder to pay about $600 millions cash. If successful, the company has about $900 millions cash of asset (excluding other assets such as properties), therefore the buyer actually would get $900M – $600M = $300M in return. This is similar to shopping in stock market, paying $6 cash and getting $9 cash in return.
There are 3 major constraints for this strategy:
– Assets should be high quality, in the form of cash or property
– The investor should be patient as the asset owners are usually for longer term investing, could hold the assets for years or even decades at undervalue share price.
– The company should make money with increasing asset value, otherwise the undervalue asset (eg. Price to Book ratio, PB<1) could become a value trap, buy cheap and get cheaper due to declining business.
2) Cashflow Approach (Growth Stocks)
– Buy a stock with business which assets could generate consistent cashflow each year. If the future total cash value, discounted to current value is more than the current stock price, it is a good buy. The Discounted Cashflow (DCF) model is frequently used to evaluate growth stocks.
There are 2 major constraints for this strategy:
– Cashflow generation should be consistent in future for years or even decades, therefore the economic moat should be wide.
– The company could have different growth rates, eg during IPO high-growth stategy, then slower growth, matured business or even declining one day. So, assumption of single growth rate in DCF model may not be reliable.
Optimism strategy is easier to evaluate a stock fair value or price, buying at unfair price, selling when overprice. The Optimism Strategies could be integrated with Fundamental Analysis (FA), Technical Analysis (TA) and Personal Analysis (PA) with Level 1-4 integration (business, sector, country, world) for short term / medium term / long term positioning.
Readers in Singapore may attend 4hr free stock investment course by Dr Tee, learning integrated strategies of Optimism + FA + TA + PA to evaluate a stock fair value.
