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Intrinsic Value Formula

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September 14, 2009 – Comments (5) | RELATED TICKERS: NM , AFSI , RIG

Over the past few weeks I have managed to waste an extrodinary amount of time testing and playing with a formula to value a stock from some key fundamental variables that lead to profitablility of companies. I have found that it is an incredible predictor of undervalued companies and has found some small and micro cap stocks right before huge double digit moves. So without further adu:

 

=((0.3*(FY09 EARNINGS*15))+((0.25*(FY10 EARNINGS*15)))+(0.15*(CURRENT SHARE PRICE*(1+(EST SALES GROWTH RATE/100))))+(0.15*(PPS*(1/(0.9+(CURRENT BORROWING RATE (0 IF NO DEBT)/100)))))+(0.15*(PPS*((OPERATING CASH GEN/MARKET CAP)*(SHAREHOLDER EQUITY/MARKET CAP))))+((DIVIDEND YIELD/100)*PPS))

OR

=((0.3*(E2*15))+((0.25*(F2*15)))+(0.15*(B2*(1+(G2/100))))+(0.15*(B2*(1/(0.9+(H2/100)))))+(0.15*(B2*((N2/O2)*(P2/O2))))+((R2/100)*B2))

As it appears on excel.

 

The main point of the formula was to see if there was a way to rank under valued stocks which I thinkit does for the most part. I would also like to hear opinions of how the formula works for you and your opinion of whether it correctly or accurately predicts the underlying or intrinsic value of the company/stock.

 

The best buys I have found through the formula are ACY, TCX, NM, AFSI

 

The most interesting things about the stocks are insurance stocks tend to be undervalued or seem undervalued.

Small and micro cap stocks are more likely to be extremely under or over valued. 

Most interesting is ACY. I found this friday morning with the formula when it was trading at 12.50. I began to watch it climb 10% friday. Another 10% today. It now sits at a Margin of Safety of 100% (it is priced at less than half of its actual value). It trades at a P/E of 5. It has been earning steady profits for 3 years and has a nice niche without too much dependence on any company. I have a price target of $35-40 short term and possibly $50-60 in the next 2-3 years. This includes zero growth from the company and just continuing operations.

 I personally see those 4 companies double or tripling in the next 12 months. It will be interesting to watch my portfolio of "formula picks" (25 of them in all that have the required margin of safety) and seeing the performance.

Again please let me know any comments on the formula. I know the share value predicted changes with PPS (current share price) but I didn't know how else to create a formula without this. In the end I don't think you can have a concrete value because everything is relative. Any concrete value is ridiculous in practice because the value of assets is ever changing. 

 

5 Comments – Post Your Own

#1) On September 15, 2009 at 1:19 AM, Tastylunch (29.33) wrote:

Have you backtested it?

That's the first thing I would do to try and validate it.

Looks interesting

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#2) On September 15, 2009 at 9:36 AM, stocki711 (98.88) wrote:

I'm in the process now of testing. I'm not a big fan of and never have backtested although i would try it. I just don't know any sites.

I have a portfolio being watched on yahoo! finance. we'll see.

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#3) On September 15, 2009 at 9:45 AM, rtichy (29.64) wrote:

Huh?  "Over the past few weeks..." small and micro cap stocks... this may not be predictor of anything because those stocks are incredibly volatile anyway.  Try running it against things with a cap of $500 million or more and back test it against the S&P 500, too.

 

You might try getting a free trial subscription to Zack's software for backtesting for a month.  That'll let you suss out whether or not it predicts accurately.

 Good luck!

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#4) On September 15, 2009 at 11:11 AM, stocki711 (98.88) wrote:

It doesn't make sense to test S&P 500 companies if they don't stand out as buys from the formula. I guess I could test correlation of MOS and return but I am pretty sure there is positive correlation and it is probably strong. Although I will consider...

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#5) On September 15, 2009 at 2:08 PM, Tastylunch (29.33) wrote:

You can try

http://www.backtest.org/

I'm not a big fan of and never have backtested although i would try it. I just don't know any sites.

Well if you are going to use a formula to mechanically invest then I think you have to.

Theres no other way to know that your results aren't just random chance.

Incidentally your idea kinda reminds me of the Piotroski approach. WHich has been verfified to crush the market . You might want to check it out

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