I am a newbie in stock trading, and I am curious how seasoned trader calculate if a stock is undervalued or overvalued? Can someone explain to me if there's a formula to use or maybe direct me to a proper place that teach you how?
Thanks!
2007-03-23 10:26:04 · 8 answers · asked by pixelfreak 2 in Business & Finance ➔ Investing
There are dozens of possible calculations. The easiest is the P/E - price-earnings-ratio. How much does a company earn (gain) per share and year - and what's the relation to the stock value?
If comparing the P/E-ratio with companies of the same branch, then those with a lower ratio are rather undervalued.
But you need to know, that stock exchange is all about expectations and not really values! It's what you expect the rest of the market to expect of the future development of a certain share price...
2007-03-23 10:36:19 · answer #1 · answered by swissnick 7 · 0⤊ 1⤋
To re-iterate what Jelly Roll said...P/E is not a calculation of "fair value" of a stock. It is a calculation of the "current value" of a stock. It is a comparison between the stock's current price with its current earnings (or forward-earnings in the case of PEG).
Use the formula Jelly Roll gave, or something similar. You're basically looking at earnings growth, sales growth, debt, ROI, etc...
2007-03-23 13:46:50 · answer #2 · answered by Spheres of Influence 3 · 0⤊ 0⤋
There are several methods including math formulas which only give you an opinion. That's why you might see two different opinions from three or more companies (such as Morningstar) that rank stocks.
One simple formula is to look at the PEG ratio on Yahoo's finance section.
http://www.investopedia.com/terms/p/pegratio.asp
2007-03-23 21:08:34 · answer #3 · answered by gregory_dittman 7 · 0⤊ 0⤋
One common practice is to value the company based upon earnings.
Add assets to (earnings X5) divide by number of shares outstanding.
If you don't have access to financials, check the trends and "published market value" see where the trends go.
Most successful way to pick stocks.....buy a monkey and some darts.
2007-03-23 10:36:32 · answer #4 · answered by Jeff A 2 · 0⤊ 0⤋
compare the price to earnings to other companies in it's sector. one site is http://moneycentral.msn.com/home.asp. for example say i have the toy company Hasbro(HAS). Currently Hasbro's price to earnings is 24.10. Another toy company is Mattel(MAT). It's price to earnings is 18.60. Going by the numbers, Mattel is a cheaper buy than Hasbro. Don't just look at their current prices. There could be a stock that is cheaper than another, but the more expensive one may have more accelerated growth in their stock
2007-03-24 10:10:07 · answer #5 · answered by Jason H 2 · 0⤊ 0⤋
I prefer discounted cash flow (DCF) modeling. This allows me to see the net present value of the company's estimated future free cash flows - this is the real way to value a business, and anyone using P/E, forward P/E, or PEG is kidding themselves.
Basically, the formula is the sum of (CFn/(1+D)^n)+...
where CF is cash flow, D is the discount rate, and n is the year.
If you have questions, feel free to email me at research@valuestockreports.com
2007-03-23 12:45:42 · answer #6 · answered by Anonymous · 1⤊ 0⤋
Usually, people use multiples of earnings, cash flow, or sales. A slightly more compliucated measure is the PEG ratio (price-earnings ratio divided by expected earnings growth).
2007-03-23 11:35:10 · answer #7 · answered by Anonymous · 0⤊ 0⤋
Look at the price. In a free, fair and efficient Market, the price IS the "fair value"...
2016-03-29 01:20:36 · answer #8 · answered by Anonymous · 0⤊ 0⤋