How to judge if the stock is over priced or under priced?.. How do i evaluate its real price if i want to buy?

Answer 1

You can find a "fair value" for the stock which is basically what price the stock "should" be worth when compared to other similar stocks. Then compare the actual price to that fair value price.

There are many different ways of calculating a Fair Value. Some people run a discounted cash-flow model to find the Fair Value and project the Fair Value out 1 year.

One simple (but fairly accurate) way is to compare to a benchmark (one that is similar to the stock you are interested in) and again make a projection. You could do this using the PEG ratio for example. This works well for mid and large sized companies. Currently the S&P 500 has a PEG ratio of about 1.3 (if you include dividend yields in your growth numbers - you will see 1.5 reported but this ignores dividends and therefore tends to over value Growth stocks and Undervalue Value stocks).

For Example - take a company that you are interested in BUYING [lets use Google for an example] and find the Expected EPS next year ($14.25).

Multiply expected EPS that by the expected 5-year growth rate plus the dividend yield [all times 100 to convert the %s] (32.5 for this case - 32.5% expected growth rate and 0% dividend yield)

Then multiply by the market PEG (which is the current value the market is giving for each $1 earned and % of growthrate expected) [currently 1.3]

$14.25 x 32.5 X 1.3 = $602.06

Therefore one could easily justify a 1 year target price for Google to be $602. Today the stock is trading at just $464.93, therefore you could say it is UNDER PRICED.

One note of caution is that the PEG of the market does change and is not always 1.3, and you can't trust the reported PEGs that you see. Most will incorrectly report the S&P500 PEG as 1.5 (because it ignores dividends). As stated before, this will cause you to overvalue Growth stocks and undervalue High Yielding Dividend stocks. The good new is that it doesnt change too much in a relatively short period, therefore you would be safe to recalculate every Quarter.

If you dont want to do it yourself, you can trust the analysts estimates (price targets) found on Yahoo! Finance http://finance.yahoo.com/q/ao?s=goog...

PRICE TARGET SUMMARY GOOG
Mean Target: 570.28
Median Target: 585.00
High Target: 650.00
Low Target: 415.00
No. of Brokers: 29

The average and median are below my $602 so perhaps the average analysts does not agree with the 32.5% growth rate and are using a lower number or these used a different analysis with different assumptions. But you'll see my estimate is not outside of the range and therefore could be considered realistic. Who is actually correct we wont know until Feb 27th 2008 ;-)

Answer 2

It depends if your want to invest or speculate in stocks. An investors horizon is 10 to 20 years. What the price is today is of little importance.
Investors, however, study the cash flow and free cash the company generates rather than earnings. Earnings can always be fudged. Cash flow cannot. If you find a company that is a cash machine and is generating 10% or more in free cash, it hardly matters what the current price of the stock is.
Short term prices of stock, 5 years or less, are driven by panic or elation. Once you buy a stock that is a money machine, you don't even follow the daily stock price. You just keep track of the cash flow.

Answer 3

You are going to get a whole lot of advice on this one, but I will go with Jesse Livermore. The price of the stock is the current price of the stock. The idea that it is somehow connected with the company's business statistics is correct to a degree, but the price of the stock is determined by what people THINK it is worth. And, that is its real price. I, personally, am very skeptical about using fundamental data to figure the price of a stock because absolutely the only source of fundamental information is from the company itself. There is no second, independent source. Enron looked super right up till the last minutes. FNMA cooked its books so its executives would get big bonuses. But, the price never lies. It is what it is. Am I suggesting that you get some books on technical trading? Yep.

Answer 4

If you do not want to be misguided or sent along wrong directions don't ask Investment questions on the Internet forums.Always trust your banker to do the work for you. Alternatively, invest in a Mutual fund scheme or equity based capital gains scheme.The Banks will give you sound advice for a small fee.

Think of managing your investments independently only after you have earned enough from the Mutuial funds. Then also, begin with small investments and gradually go up, as you gain confidence.

Answer 5

If you can buy Coca-Cola AND Pepsi or if you can buy Nike AND Adidas or if you can buy General Motors AND Ford with the same money than the company you are buying then it's overpriced.