I got as far as the P/E ratio but now I’m stuck with how to get the actual stock value if no dividends are paid.
I also know that the ROE is going to be my required rate of return for the same reason. I just am not able to generate an actual stock value like I would be able to using the dividend growth model. Am I missing something here?
Please help.
As far as PE is concerned, what you probably want to ask yourself is, what good is knowing the PE of a stock? There are no emphirical formula that calculates what band of PE constitutes overweight or underweight. PE gives you a very crude and somewhat uncomparative figure that attempts to say whether a stock is "expensive" or not. However, the thing is, being "expensive" does not mean that it will drop in price one day. It has already been proven from the LTCM disaster that the "Mean Reversion" theory do not stand at all.
It is like looking at a Bentley as having a high PE and a Honda as having a low PE… does that mean that the Bentley is about to go on sale and that a Honda will one day cost as much as a Bentley? Certainly not.
PE ratio, like many other fundamental indicators, are merely a representative of facts and figures that are openly available. It always tell a more meaningful tale when combined with other fundamental and technical analysis methods.
Personally, I retired at 28 years old by trading the stock markets and still trade today for the past 11 years and I have never once included PE in a decision making process. I take an occassional glance at it just for fun but never allow that to govern the decisions that I make nor the actions that I take.
As for trying to value a stock using EPS and ROE, you probably want to know that neither EPS nor ROE forms the basis of the price of a stock on an exchange.
There are 2 main components to the value or prevailing price of a stock:
1. The Par value. By par value, it means the value of the company based on its current assets and its income ability right now. It is the raw value of a company factored into the individual share prices. Usually, this is a minor component of a stock value. It is like a bottle of coke costs $1 at par value.
2. The Perceived Value. By perceived value, it means that on top of the par value of the stock, people think it is worth more than that and continues to buy the share at higher and higher prices up to where they think it should be worth… this is usually much much higher than the par value. This is like that same bottle of coke selling at $3 at a major league game.
There is no real way to calculate the par value of a stock and the only emphirical measure of the par value of a stock is by the exchange on the very moment it is announced to be listed. The moment the stock goes on list, it is immediately affected by the percieved value and usually soars skyhigh on its first listing day. After that, its par value has very little significance as the value of the stock continues to soar or drop based on the way people see it. That is why calculating the "Fair Price" of a stock or the "True Value" of a stock is something that simply cannot be done easily and even if it is somehow achieved, you will always find yourself in a situation where the list price is far far far higher than the "true value" as perceived value forms the biggest part in the price of a stock.
Hope this helps.
http://www.mastersoequity.com
http://www.optiontradingpedia.com
.
p/e is meaningless unless you know the expected growth rate of the company’s earnings!
When I buy a stock, I look at what a share of stock is worth if the company closed it’s doors for business today! The closest we can get to that [on an acid test] is by looking at the book value per share.
Then I use ANALysts estimates for the future earnings. This gives me a short term potential growth rate. Using the future value/present value method, I project into the future what that share will be worth in, say, about ten years. Then I discount it to the present at a fair discount rate, for example, the thirty or ten year note.
ROE is a report card on how well the management is controlling cash flows.
References :
As far as PE is concerned, what you probably want to ask yourself is, what good is knowing the PE of a stock? There are no emphirical formula that calculates what band of PE constitutes overweight or underweight. PE gives you a very crude and somewhat uncomparative figure that attempts to say whether a stock is "expensive" or not. However, the thing is, being "expensive" does not mean that it will drop in price one day. It has already been proven from the LTCM disaster that the "Mean Reversion" theory do not stand at all.
It is like looking at a Bentley as having a high PE and a Honda as having a low PE… does that mean that the Bentley is about to go on sale and that a Honda will one day cost as much as a Bentley? Certainly not.
PE ratio, like many other fundamental indicators, are merely a representative of facts and figures that are openly available. It always tell a more meaningful tale when combined with other fundamental and technical analysis methods.
Personally, I retired at 28 years old by trading the stock markets and still trade today for the past 11 years and I have never once included PE in a decision making process. I take an occassional glance at it just for fun but never allow that to govern the decisions that I make nor the actions that I take.
As for trying to value a stock using EPS and ROE, you probably want to know that neither EPS nor ROE forms the basis of the price of a stock on an exchange.
There are 2 main components to the value or prevailing price of a stock:
1. The Par value. By par value, it means the value of the company based on its current assets and its income ability right now. It is the raw value of a company factored into the individual share prices. Usually, this is a minor component of a stock value. It is like a bottle of coke costs $1 at par value.
2. The Perceived Value. By perceived value, it means that on top of the par value of the stock, people think it is worth more than that and continues to buy the share at higher and higher prices up to where they think it should be worth… this is usually much much higher than the par value. This is like that same bottle of coke selling at $3 at a major league game.
There is no real way to calculate the par value of a stock and the only emphirical measure of the par value of a stock is by the exchange on the very moment it is announced to be listed. The moment the stock goes on list, it is immediately affected by the percieved value and usually soars skyhigh on its first listing day. After that, its par value has very little significance as the value of the stock continues to soar or drop based on the way people see it. That is why calculating the "Fair Price" of a stock or the "True Value" of a stock is something that simply cannot be done easily and even if it is somehow achieved, you will always find yourself in a situation where the list price is far far far higher than the "true value" as perceived value forms the biggest part in the price of a stock.
Hope this helps.
http://www.mastersoequity.com
http://www.optiontradingpedia.com
.
References :