How Do You Unlock the True Value of Your Stock Pick?

Valuing Your Stock Pick: Finding the Price Your Stock is Worth

You’ve picked a few stocks that you think might be good investments, but you’re not sure if they would be a good buy or a bad buy. It would be nice to figure out how much the stock is worth before you buy it! Once you’ve screened them, it’s time to dive deeper.

Understanding the Company

Start by looking at the profile of the stock on sites like Yahoo Finance or Morningstar. Read what the company does and get to know it inside-out. Connect with the company, believe in their upper management team, share their passion, and understand the industry. This is all part of fundamental analysis, which will help you evaluate if the company is worth investing in.

Analyzing Financials

Once you’ve done your initial research, get up-to-date information about the company by reading their newly published quarterly and annual reports. This is where you get real numbers, not opinions. The idea of “I think that company is great because of [theoretical reasons]” ends here. This is also how some fund managers research before investing in a company.

Valuing Your Stock vs. Current Price

Value investors believe that a stock is worth a certain price and go through methods of valuing that stock. Valuing a stock means finding out how much it is worth, not in theory but in numbers. If you know how much a stock is actually worth and how much it is trading at, you can see if it’s undervalued (a good buy) or overvalued (not a good buy).

Valuation Methods

There are many different valuation formulas, techniques, and methods, but ultimately this is where the rubber meets the road. Running various valuation formulas can show great disparity, but it’s still important to run them and use other means to forecast its true value. This way, you get a base point and a good range. If this sounds foreign to you, don’t worry—I will walk you through the entire valuation, step by step.

Finding the Data

The information and data to value a company can be found on many sites, starting with your broker’s site. These sites derive their values from annual and quarterly reports reported by the companies. If the sites don’t provide the data you need, you can usually find these reports (10-K or 10-Q) on the company’s website under investor relations.

Key Metrics

In a nutshell, you want to find out if the company is making a profit after all expenses are paid. If the company can keep good profits year after year, it is growing and can reinvest that money to grow further or pay shareholders in the form of dividends. Here are some key metrics to consider:

1. Owner’s Earnings
2. Discounted Cash Flow

Conclusion

Valuing your stock pick is crucial to making informed investment decisions. By understanding the company, analyzing financials, and using various valuation methods, you can determine if a stock is worth investing in.