As consumers, we are all looking for a great deal. When it comes to stocks, we are looking for a stock that is undervalued. To find these undervalued stocks, we need to do our research.
In this article, you’ll learn how to research and value a stock so that you can find those great stock deals. Besides the stock valuation basics, we are going to show how to use current market conditions, and the company’s quarterly conference calls to verify your stock selection so that you give yourself the absolute best opportunity to profit. We will end with a real-world example to show you exactly how it is done!
You will be able to find all the information you need by following these simple steps. Best of all, you can use these tools for life and they will allow you to start growing your portfolio and you’ll never look back!
Let’s jump right into it.
What Is A Stock’s Intrinsic Value?
The intrinsic value of a stock is the actual value of the company. This is different than the market value, which is what you see when you look up a stock quote. The market value fluctuates based on supply and demand in the market. The intrinsic value is what the company is worth.
This is calculated by looking at the company’s financial statements and future projections. We then discount these cash flows to get to today’s dollars. This number can be different than the market value, which is why it’s important to know both numbers.
How To Research & Value A Stock
There are 4 main steps to this process:
1) Evaluating The Company’s Financial Statements
2) Evaluating The Company’s Future Projections
3) Discounting The Company’s Cash Flows
4) Comparing The Market Value To The Intrinsic Value
Let’s discuss each of these steps in detail.
1) Evaluating The Company’s Financial Statements:
The first step is to evaluate the company’s financial statements. These are usually available on the company’s website. I use Yahoo Finance which is an easy way to pull all of these numbers on one site.
The financial statements will give you all the information you need to calculate the intrinsic value of the stock. You will need the balance sheet, income statement, and cash flow statement and all of the key numbers from these statements are available on Yahoo finance.
The key metrics that you will want to consider are as follows:
PE: Price to Earnings Ratio
This is the current stock price divided by the earnings per share. This number can range from single digits to over 100. A higher PE ratio means that investors are willing to pay more for each dollar of earnings.
PEG: Price to Earnings Growth Ratio
PEG is the PE ratio divided by the expected earnings growth rate. This number will typically be less than 1.
PS: Price to Sales Ratio
PS is the current stock price divided by the revenue per share. This number can range from single digits to over 10.
PB: Price to Book Ratio
Price to Book Ratio is the current stock price divided by the book value per share. The book value is found on the balance sheet and is equal to total assets minus total liabilities. This number can range from single digits to over 5.
EV/EBITDA
Enterprise Value or EBITDA is Earnings Before Interest Taxes Depreciation and Amortization Ratio. This number is found by adding the market value of the equity to the market value of the debt and then subtracting out the cash. This number can range from single digits to over 20. It can give you a good idea of the value of the company as a whole.
Cash Position:
The cash position of a good company should be at least 10% of the total assets.
Debt:
The debt of a good company typically should be less than 3 times the EBITDA. This helps to ensure that the company can pay off the debt if needed. They should also be able to better withstand a downturn in the market for some time until the market recovers.
2) Evaluating The Company’s Future Projections:
The second step is to evaluate the company’s future projections. This can be done by looking at the company’s financial statements and other public information. You want to look at the company’s past performance and see if they are likely to continue doing well in the future.
You can also look at analyst reports and conference call transcript to see what they are projecting for the company’s future. This will give you a good idea of where the company is headed.
3) Discounting The Company’s Cash Flows:
The third step is to discount the company’s cash flows.
The discounted cash flow is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.
This is important because it tells us how much the company is worth today.
4) Comparing The Market Value To The Intrinsic Value:
The fourth and final step is to compare the market value to the intrinsic value.
This is done by looking up the stock quote and comparing it to the intrinsic value you calculated.
If the market value is lower than the intrinsic value, then the stock is undervalued and is a good buy.
If the market value is higher than the intrinsic value, then the stock is overvalued and you should wait for a better time to buy.
What Is Fundamental Analysis?
Financial analysis is the process of evaluating a company’s financial statements to make better economic decisions. The goal of financial analysis is to identify a company’s strengths and weaknesses, as well as opportunities and threats that may impact its ability to generate profits.
There are two types of financial analysis:
1) Fundamental analysis
2) Technical analysis
Fundamental analysis is a bottom-up approach that focuses on a company’s intrinsic value. This type of analysis looks at a company’s financial statements, as well as other public information, to determine its true value. It includes looking at the numbers that we just talked about in finding the intrinsic value of a stock.
What is Technical Analysis?
Technical analysis is a top-down approach that looks at the overall market trends to identify opportunities. This type of analysis uses charts and other data to identify patterns that can be used to make investment decisions.
Technical Analysis is based on the Following Three Principles:
1) All information is reflected in the price
2) Prices move in trends
3) History tends to repeat itself
Technical analysis is a quick and simple way to find investment opportunities. However, this type of analysis can be less accurate and may miss opportunities.
How to Use Technical Analysis For Stock Selection
1) Identify the overall trend
2) Look for support and resistance levels
3) Look for chart patterns
When using technical analysis, it is important to remember that no single approach is perfect. It is recommended that you use multiple approaches to find the best investment opportunities. So technical analysis is just an extra tool that can be added to your toolbox when researching and valuing a stock.
What is the Difference Between Fundamental And Technical Analysis?
Both fundamental and technical analysis have their pros and cons. Fundamental analysis is a more comprehensive approach that looks at a company’s financial health, as well as its overall business prospects. However, this type of analysis can be time-consuming and requires a deep understanding of financial statements.
Technical analysis is a quicker and simpler approach that looks at overall market trends. However, this type of analysis can be less accurate and may miss opportunities.
What Are Qualitative Stock Fundamentals?
Qualitative Stock Fundamentals take into account all the news, earnings releases, rumors, etc. that a company puts out. They also look at analyst reports and conference call transcripts to find out what is going on with a company.
Some of the things that qualitative stock analysts look for are:
1) Changes in management, management focus and their ability to deliver
2) New products or services
3) Expansion
4) Industry and competitive landscape
5) Business model
6) Growth prospects
7) Risk factors
How Should You Use Quarterly Conference Calls To Evaluate Stocks? 
You should use quarterly conference calls to evaluate stocks. This is because these calls allow you to hear from the company’s management directly. You can get a better understanding of the business.
In addition, you can also listen to the questions that other investors are asking. This can give you some insight into what they are thinking and what their concerns are.
Overall, quarterly conference calls are a great way to get more information about a company and its prospects.
Should Current News Be Taken Into Account When Valuing A Stock?
Yes, current news should be taken into account when valuing a stock. This is because current events can have a major impact on a company’s prospects. For example, if there is a new regulation that will impact the company’s business, then this should be factored into the valuation.
Should Current Market Conditions Effect Stock Selection?
Yes, current market conditions should be taken into account when making investment decisions. This is because the stock market is constantly changing and evolving. Certain stocks may do well in certain market conditions and poorly in others.
For example, growth stocks tend to do well in bull markets and value stocks tend to do well in bear markets.
The current interest rate environment should also be taken into account as well when deciding to weigh your portfolio more towards growth or value stocks. Growth stocks tend to do well when interest rates are low and value stocks tend to do well when interest rates are high. So you will want to transition to more value stocks when interest rates are rising. This is what the large institutional investors do and where the money flows. So it makes sense for the small investor to do the same.
Current market conditions should be considered when making investment decisions, however, they should not be the only factor. You should also look at the individual stock and see if it is a good long-term investment.
Should Geopolitical Issues be taken into account in stocks?
It is very difficult to try and time the market and sell before a big geopolitical event happens. For example, it is hard to know when to sell before a terrorist attack or a natural disaster. These events can have a big impact on the stock market, but they are very difficult to predict.
That being said, you should always be aware of current geopolitical issues and how they may impact the stock market. This will help you make more informed investment decisions.
In general, it is best to stay diversified and not put all your eggs in one basket. This way, if there is a big geopolitical event, it is less likely to have a big impact on your overall portfolio. Also always stay small and have safety money on the sidelines. This way you can buy the dips when these events occur.
Example Research And Value Of A Stock
Let’s take a look at Anheuser-Busch ticker symbol BUD.
BUD is a large brewer with a market cap of over $117 billion. The company has a long history dating back to the 1800s. The company’s products are sold in over 100 countries.
In taking a look at the company’s Summary Profile on Yahoo Finance, we see that the PE Ratio is 25.42 which is in line with the industry.
The EPS Earnings Per Share is 2.28 which is a healthy 3.9% dividend. And the current $57.95 share price is near the 52-week low.
The company has a strong history of dividend growth and has increased the dividend payout for 26 consecutive years.
Analysts have a 12-month average target price of $73 which would be a 21% return from the current share price.
We can look at the Income Statement, Balance Sheet ,and Cash Flow Statement numbers on the Statistics Tab on Yahoo Finance and find some of the key metrics that we want to consider.
The company has $12.47B in cash and 88.8B in debt and an operating cash flow of S14.8B. So the company is in a good financial position.
Looking at valuation measures further, we see that the Forward PE, Price/Sales and Price/Book are all at favorable lows.
On the Income Statement, we see that the company has reported consistent revenue and earnings growth. The company’s EPS forecast is $3.21 for 2023 which is a 12% earnings growth.
Sales growth is expected to continue in 2023 at a modest 5.5% for 2023.
We can look at the conference call transcript which is available online and understand all kinds of information that is critical to the company’s growth. Here is snippet from the call showing the CEO answering a question and indicating that volumes were at all-time highs in 2021 and that BUD is well-positioned in 2022. He also indicates that the category is growing which tells us that the entire segment is expected to continue to do well.
Overall, BUD appears to be a good long-term investment at the current share price. The company has a strong history, is diversified, and pays a healthy dividend. The expected earnings growth looks solid and analysts have a 12-month target price that would provide a nice return.
Based on these numbers and this information, we believe BUD is a good stock to buy and hold for the long term.
Conclusion
You can spend an endless amount of time evaluating stocks. However, at some point, you need to make a decision and invest. The more information that you have, the better-informed decision you can make.
Always do your homework and check all of these items you will not go wrong. For more stock and financial information, please check out our other resources at OptionsFinanceProfits.com.
