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Estimation of Stock’s Fair Value Price Range

TIP Guy 13 May 2009 process, tools 19 Comments

monthly-dividend-portfolio-reviewIn my stock analysis process, I attempt to estimate the fair value of a given stock. I estimate the fair value range (instead of a one fair value). This estimation should be interpreted as the price I am willing to pay based on my risk profile and my investing objective. My fair value estimation does not necessarily attempt to determine the fair value based on value investing principles.

My process of determining the fair value captures the essence of “what is being priced by the market” and “historically what has been priced by the market”.

(I) NPV price based on 15 year DCF: I have discussed DCF based net present value pricing.

(II)  Average high yield price calculated based on past 10 years

I am attempting to estimate what would be current stock’s price based on its historical dividend payment standards. I measure this using yield. It is calculated as follows. Continue reading rest of this article…

Fair Value Estimate – Discounted Cash Flow Method

TIP Guy 2 May 2009 process, tools 8 Comments

monthly-dividend-portfolio-review1In my stock analysis process, among others, one of the methods I use to estimate fair value of a given stock is using 15 year discounted cash flow (DCF). At a fundamental level, what DCF does is, it uses future cash flow estimates and then discounts it to determine the present value. Let us discuss both of these parameters.

Future cash flow estimate: There are myriad of different ways to estimate future cash flow of any corporation. These are based of EPS, free cash flow, operating cash flow, net profit, pre-tax profit, etc. I am not qualified to judge or make any comment on the correctness or appropriateness of using any of above parameters. I believe based on a specific objective any or all could be correct. I look at DCF methodology from my own investing situation and objectives.

I am a long term dividend investor and hence, I use estimates of cash flow from dividends. In addition, I also include an estimation of cash I would receive from selling the stock after 15 years.

Discount Rate: This is the rate at which future cash flow is discounted to determine present value. The general practice is to use cost-of-capital that is available in any given market. I have observed that, typically, discount rate is in the range of 12% to 18% depending upon individual scenarios.

In my calculation, I tend to use 12% in most cases.  Continue reading rest of this article…

Estimation of Beta-Based Expected Returns

TIP Guy 16 April 2009 process, tools 9 Comments

monthly-dividend-portfolio-reviewI use Beta-based expected return to calculate and understand potential capital appreciate (or cash flow) from a given stock.

In today’s post, I am discussing the concept of stock’s beta value and how it helps us understand stocks expected returns.

What is Stock’s Beta Value?

In its simplistic form, beta is a measure of any individual stock’s risk (or movement) relative to the overall stock market risk (or movement). I measure Beta of any given stock relative to the S&P CNX NIFTY. Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns. We can calculate Beta either using daily return (i.e. daily pricing) or on monthly returns (monthly pricing). The results should be the same because it is the on relative basis.  Continue reading rest of this article…



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