Stock valuation technique

Message

   In this forum i am trying present my thoughts on stock evaluation. Hoping that it will attract senior members in Investing field to comment and advise if i am wrong anywhere. Though i have greatly benefited so far using this simple technique as of now.  Note that it's never been multibaggers but returns were dec ent i.e. 20-30% per annum. 

There are follwoing aspects to be considered:

1) Qualitative aspect - Its based on pure understanding of business fundamentals. Sheer judgment is entirely based on one's knowledge of the associated macro factors like scalability, moat, Mgmt quality etc. Best way is to read and read and read more to be judgmental here. 

2) Special situation - Like present TATA Steel, Jet airways, infrastructure companies. I find these are pure high risk calculated bets. One must put a small % of portfolio not to exceed >5-10%. Again evaluation of these companies is very tricky, yet unable to find a logical way to evaluate them , quantitatively one can but not qualitatively as again its very subjective issue.

2) Quantitative aspect - Good metrics like high RoE, Low Debt, Increasing profit margin etc to be consdered. But if we consider the business which is old and consistant in average earning (Marioco, Brittania etc) then following method helps, Brittania is considered below: 

Mar '04
Mar '05
Mar '06
Mar '07
Mar '08 

EPS
47.33
62.26
61.26
45.02
79.92 

CAGR %
13.99%

P/E by 2012
15

EPS Growth rate
10%

2009
2010
2011
2012

EPS
87.912
96.7032
106.3735
117.010872

Prise by 2011
1755.16308

Current Prise
1435

CAGR
6.94%

Target/Buy Prise
1150

CAGR
15.13%

P/E - FY12
9.82814657

In above method its assumed that past data can be correlated to future growth (Biggest wekness of this method but works with seasoned companies well).

So if i buy Brittania at target cost of 1100-1150 then i am buying it at P/E of 9.8 in FY12 which is by any means a cheap as Brittania is assumed be never go so low in PE and it assumed to maintain its very realistic worst case EPS growth rate of modest 10% which is 4% less than last 5 yrs CAGR.

How above workes? Read below:

In past one year 

52wk H/L (Rs)
1519.85 - 991.25

So if i buy Brittania at 1100-1150 and sell it when P/E shoots to unrealistic high of 25+ then i guess i am not loosing the money.

I find above simple and pretty neat to estimate fair prise with inbuilt safety. Only thing is it fails with small cap which is exploding in P/E by 80-90% per annum like TITAN. 

Moreover above investment is considered with a horizone o 3 yrs (or as rightly said short term failed investment is long term investment ).

Edited by manish_okhade - 09/Apr/2011 at 11:35pm