-
8/3/2019 Keeping Stock Valuation Simple
1/9
Keeping ValuationAnalysis Simple
Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
2/9
Section 1:
The S&P 500
Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
3/9
The S&P 500 Valuation Range(Forward Price / Earnings)
Normal TimesBad Times Good Times
10x
15x
20x
Analysis: Over the decades, the S&P 500 has generally
fluctuatedbetween 10x and 20x forward price/earnings. There have
been years wellabove and well below these levels, but they were
short-lived aberrations.In most scenarios, these are good
guideposts to use when analyzing the
markets valuation. Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
4/9
Section 2:
Individual Stocks
Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
5/9
Individual Stocks Trade in a Range: Learn the Cycle
Average15x
Peak20x
Trough10x
Business fundamentals are verystrong; revenue and earnings
growthaccelerating. Sector in favor.
Business fundamentals are weak,slowing or declining earnings
growth.
Sector out of favor.
Business fundamentalsare stable. Nothingout of the ordinary.
Know where the stock iswithin this cycle to betterassess if
valuation andbusiness fundamentals are
aligned.
Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
6/9
P/E
Reasonable Forward P/E Based on Earnings Growth Rates
~10%Growth
Declining EPS 30%+Growth
5x
10x
35x
~5%Growth
8x
~15%Growth
15x
~20%Growth
20x
Analysis: You should be willing to pay more for
faster-growingcompanies. Generally, paying 1.0x the companys EPS
growth rateis acceptable. Some experts think that paying up to 2.0x
EPS
growth is o.k.
Note: Paying more than 50x EPS is extreme in any scenario
andwill ultimately burn you.
Earnings Growth Rate
Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
7/9
Or You Can Think About Your Stock Relative to the Market
The S&P 500 inNormal Times
15x
Relative P/E
-3x
12x
If your company isbelow-average quality
The S&P 500 inNormal Times
15x
Relative P/E
+3x
18x
If your company isabove-average quality
Analysis: Most companies are average, but a good management
team, a unique valueproposition (product), and attractive industry
may be reasons for an above-average valuation.
The reverse is true for below-average. Investors Mosaic,
Inc.
-
8/3/2019 Keeping Stock Valuation Simple
8/9
Section 3:
Establishing a Price Target
Investors Mosaic, Inc.
-
8/3/2019 Keeping Stock Valuation Simple
9/9
Regardless, Always Establish Price Targets So You Can
beDisciplined When to Buy or Sell
Target Price in
Base Case
$15.00
Target Price inDownside Case
$12.00
Target Price inUpside Case
$18.00
EPS Multiple Price
Downside Case $1.00 12x $12.00
Base Case $1.00 15x $15.00
Upside Case $1.00 18x $18.00
Analysis: You canfurther refine thescenario analysis
byestablishing a differentEPS expectations for allthree cases (in
additionto varying multiples).This adds complexity to
the analysis, but is alsomore realistic since yourdownside
scenario isassociated with anegative sentiment in themarket, which
can bedriven by a poor macro
environment.
Investors Mosaic, Inc.
