Appearances can be deceptive and none more so than in the stock market. Ever since our days of hunting and foraging in the jungles, our instincts were attuned to make judgments and decisions (sometimes life saving or life changing) on the spur basis appearances alone. Nature has often designed its ecosystem in a way that ensures that appearances form an integral part of survival instinct of all animals.
For example, frogs and caterpillars tend to come in variety of bright and strong colors with the increasing strength and brightness signifying increasing intensity of poison. On the other end of the spectrum came the emergence of camouflage that ensured that the animals did not appear at all to their predators.
Human beings too learnt to recognize danger on the basis of color and appearances. Those brightly colored mushrooms and berries? To be avoided as they lead to a painful end but those drab grey mushrooms? Absolute delicacy. This principle of visual appearance and camouflage often translates to various aspects of our daily life but none so than in stocks.
Stocks that are publicly traded do so at a certain price. That price fluctuates basis various parameters like company's earnings, cash flow, earnings growth rate, book value per share, future outlook of the company's business and supply and demand. The share price multiplied by the number of shares is market cap or the actual value of the company should one wish to buy the whole company.
However market cap is as they say an appearance and may not be indicative of real value of the company. Companies tend to trade at various prices basis how popular they or their businesses are. For example, Theranos, the now infamous blood test fraud was once valued at $10 billion without demonstrating any value in p e, p b or p e ratio. It fooled extremely smart investors promising high growth and splendid bottom line. Those investors lost money on their investment when the fraud came out.
Market capitalization is a portrait or a photoshopped image airbrushed by various external tools and techniques. One has to look at the actual picture to separate the wheat from the chaff. Real value of a company is its assets after liabilities are removed. The net asset value priced at actual market price is to be considered a real value of the company. For e.g. a sunglasses company may hold 1000s of $100 sunglasses pricing its inventory in millions and thus having its asset value in millions, however when it comes to a forced liquidation, those sunglasses might not sell for even $50, thus placing its real value far below the estimated value
Like an excellent mystery thriller, a stock requires serious effort and time to unravel. There are several aspects to valuations with red herrings and dead ends until you finally find the string that leads to the answer that you are looking for: how much should i be willing to pay for this stock?
At fairvalue-calculator.com we run you through some publicly available valuation methods as well as give our premium members access to our in house proprietary valuation formulae as well which take into account several factors while giving you valuation status.
P E is the most commonly known valuation ratio. Price to earnings as P E is known is explained in detail in our other articles and is a simple tool to gain an idea of whether the stock in consideration is undervalued or overvalued as compared to others. Cash flows also form an important aspect of company valuation. While other data including book value can be tampered with, cash flows tend to be immune to this tampering by their nature. True picture of a company is revealed via cash flows only.
Intrinsic value of a business is often independent of stock price. It requires a detailed analysis of company business and fundamentals above and beyond normal financial data and ratios. While ratios play an important role in valuing companies, it is the understanding of business that one must focus on to be able to determine real value of the company
Assets, asset structure, debt, dividends, dividend regularity, the industry it operates in, capital structure and underlying risks, business model, personal data, long term outlook, quality research and process all go into determining a sound business or company and then can its stock price be estimated.
The aim of this whole exercise is to acquire companies and business that are trading at a discount to their real value and therein lies the issue. Investing in the stock market requires fighting every natural instinct that we have developed over eons and making decisions that our ancestors would have never dreamt of doing in the same situation.
The biggest gripe of personal finance is that many investors enter the markets when valuations are trading at premiums to the real value of the investment. They also get scared out of their investment and investing in general when the markets eventually crash.
A period of bull rally will be followed by a period of corrections. That is the norm. It has been the past and will be the future. The key to becoming a successful investor is to fight your instincts and invest when stocks are available at a discounted rates which will happen during market corrections and sell them when they hit premiums to the real value.
This is a process that needs to be developed and trained for until it becomes second nature. At fairvalue-calculator.com we accompany you on this journey. We hold your hands and guide you through building a portfolio encouraging you to save cash when markets are at premiums and deploying it when markets correct allowing you to buy stock/stocks at discounted rates.
As with all projects, the first step starts with what one is looking for. Industry is the first step in the picture. Just look around you and ask yourself this question: Which industry is most likely to survive and grow in the future and which won't?
The pandemic may have turned the world upside down but it has also provided a good opportunity to look at things as they begin anew. It is obvious to some extent that cable TV and movie theaters are going down the blockbuster route. With tons of new streaming services and wide variety of content available without advertisements and at your own convenience, who wants to watch TV anymore.
For example, a normal TV show of 22 minutes is often extended to 35 minutes with ads. Additionally the next episode can be watched next week or sometimes after months if a break is to be provided. A normal movie going experience involves purchasing expensive tickets, driving to the cinema, purchasing overpriced food and drinks, dealing with nuisance like cell phone rings, people moving about in between the movie, chatting and other expenses. All of the same can be eliminated by ordering food in and watching the latest movie at your leisure and convenience in the comfort of your own home.
Theaters in several countries like India have already wound up shop and as such it is evident that this industry will have a hard time going ahead. On the other hand, the pandemic has seen a rise in demand for personal vehicles (bikes and cars) in several nations around the world that were erstwhile dependent on public transport.
Aided by shortage of computer chips, automobile demand has hit the roof and there are waiting periods of several months for delivery of cars. The side effect of this demand is the increasing demand for iron and steel and other metal related products which go into manufacturing cars.
Automobiles will always be in demand. People require a way to commute from one place to another. For example, the biggest gripe with automobile use is the consumption of fossil fuel and pollution caused by it. The introduction of Tesla proved that electric vehicles which were once thought of as science fiction are now actually a reality.
With conventional automobile manufacturers also introducing their own lines of electric cars and bikes, the growth rate of the industry is expected to remain strong. This also translates well to earnings growth rate which in turn will contribute to valuations. Earnings per share form an important part of this valuation and Tesla has demonstrated that it can grow it continuously at high growth rates.
Similarly, with a booming population around the globe, there will always be the need for houses to home them and offices to provide working space. Taller and larger skyscrapers will soon be the norm and not an exception. The automobile boom combined with the housing demand and we are looking at a huge boom in demand for steel.
Industry leaders tend to remain in leadership position by the virtue of their size and strength especially in commodity businesses. Unlike service based businesses which tend to be disrupted by startups offering alternative tech solutions, commodities have no such scope for improvement. Steel remains steel, be it of yesterday or 50 years ago. There is not much improvement in steel technology, just in mining the ore better or in manufacturing end product better.
Industry leaders who have built the scale required to meet increasing demand will do better. Large scale also translates into lower costs and better margins which smaller players will be unable to meet. China tends to dominate steel segment with the world's largest steel company by output being China Baowu Group (Source: https://www.worldsteel.org/steel-by-topic/statistics/top-producers.html)
However the second largest company, Arcelor Mittal is listed and it is to that we take a look at. Arcelor Mittal is one of the world's leading integrated steel and mining company with it being the largest steel producer in Americas and Europe. It has a global reach operating in 17 countries allowing it to meet demands all across the globe.
The company has an end to end integrated business model free of supply constraints as it handles mining to final refining. It has a target customer base of major automobile and appliance manufacturers across the world. The company also invests heavily in research and sources almost all of its raw material from its own mines.
It is up to the company to determine whether it wants to source completely from its own mines and looking at it from financial point of view, it makes sense to develop long term sourcing abilities from one's own mine. Reduces the risk of price fluctuations as well.
A thorough analysis shows that the company has a leading market share in automobiles with it maintaining close to 17% of worldwide automotive steel per year with consistency. This leadership has allowed it to scale ensuring that it can offer premium quality at a discount retaining customers and keeping competitors out. They have also managed to keep investors happy.
This is of paramount importance while selecting companies for investment but which is often overlooked by investors. A thorough analysis is required of all current and potential legal trouble that the company might face in the future.
ArcelorMittal by the virtue of being a mining company is often subject to additional scrutiny then say a social media company like Facebook or Twitter especially by environmental authorities and activists. Any legal case that threatens to blow up might take the company down.
For example, a mining company facing several lawsuits about pollution and waste management must be looked into. Read court judgements and proceedings and look at news and other historical articles to see how the company has dealt with them. If the company has been proficient in dealing with these issues without much fanfare or hassle, it is worthwhile to invest in. If the issue has dealt blows to company image, it is better to steer clear.
Now that we know that automobiles are going to be in high demand going forward, by extension, steel industry too, especially those that cater to automotive industry will experience elevated demand as well. This bodes well for their cash flow/cash flows and also for their earnings growth, intrinsic value and stock price.
We now have to look at their financial data and build a model to calculate the value of their assets after subtracting all liabilities from them. The values recorded on the balance sheet are often book value which is the price at which the assets were acquired and then subsequently adjusted for depreciation. The market value might be different.
It is often difficult to do so for large companies with acres of land and hundreds of plants across the globe. For the diligent investor with lots of free time his/her hand, they can do this analysis but for most of us with jobs and other responsibilities, such a detailed analysis is out of the question.
Let us give you a sample of how this analysis will take place before giving you the easy way to do it. The company has strong earnings per share and has maintained a decent growth rate. It has paid out frequent dividend and its dividends history has been decent as well.
The company's assets have grown subsequently as well. The company deploys its profits and capital towards maintaining, replacing and building new assets.
Data shows that the company has billions in assets divided between land, machinery and equipment and other divisions. One of the methods to conduct valuations exercise of these assets at their actual market price is to do some googling.
Let us have a look at the locations that Arcelor Mittal is present in.
Wow, that are a lot of locations. This is zoomed out data. If you were to zoom in, the data would only increase as additional locations came up. I can already see the problems coming up. Now you will have to pick each individual location, google and determine the going price of such land in the area, the cost of actual properties in those area and possible discount on a fire sale if any.hat is just one location. You have to do this for all the locations and sum them to get the value of land and properties. Machinery is whole different scenario. Since complete details of machinery is often not available, the best possible thing to do is a guesstimate using data from online sellers of steel manufacturing machinery. This is now becoming an immensely burdensome task.
How about we solve this problem for you? At fairvalue-calculator.com, you get access to various calculators, free and premium that allow you to calculate real value of the stock in question. Growth and growth rate/ growth rates per share, earnings per share, dividends and dividend history, historical data, research and analysis, company's future outlook, debt levels, graham number, stock real value calculator, financial ratios, investment factors, investing guidance.... phew, i am tired just listing down the stuff that is available.
As a premium member, we do all of the hard work for you allowing you to determine what is the real value of the company in question. Let us look at the Price to book ratios.
One can see that the P/B ratio is 0.68. This means that the company is trading at less than the value of its net assets. For example, if a company has a stock price of $10 and a net asset value of $10, it is said to have a price to book ratio of 1. Using this process, we can safely say that ArcelorMittal is undervalued.
Valuing companies using fairvalue-calculator.com is extremely easy and immensely satisfying. Instead of spending hundreds of hours undertaking research and analysis of just one company, you can finish with research and analysis of your entire portfolio and that too in a fraction of the time required.
Of course, price to book is just one ratio, there are several other valuation ratios that one must look at to arrive at an accurate intrinsic value. Cash flows must not be ignored and price to earnings ratio or p e ratio is equally important.
Ultimately value is in the eye of the beholder. Fundamental analysis is immensely subjective despite all efforts to make it objective. 2 people with the same information will have a different output of fundamental analysis due to different ideas of p e, cash flow, valuation, personal data, personal finance and bias, growth, market in which the company operates, different interpretations of discount and methods etc.
We at fairvalue-calculator are not going to sell you anything other than our premium membership. You are free to join and leave as you please. We will always be by your side like Alfred Pennyworth to Bruce Wayne, assisting you in your superhero investors activities. Our methods remain the most objective and we build you a consensus of all number and financial ratios making valuing companies easy and a streamlined process helps you with your investing needs.
Real value of a company's stock or companies in general is often a time consuming affair. Not only it is hard and complicated to calculate, it is also tedious and not everybody has the time for it. The excel model required for this activity alone takes immense time and that is debt you cannot afford.
Join us here at fairvalue-calculator.com and we will do all this for you. Your money is yours alone and it has to work for you instead of you working for that money. Investors need to leave it to the experts to do the grindwork and only need to make decisions on stocks to invest in basis the output.
Our aim is to make investing simple for you where you pay only for a membership and we use our scientific methods to build a portfolio minimizing risk and ensuring investors are always the winners. Use our calulators for all your valuation needs and we can assure you, that your portfolio's growth will be on par with the superior companies that you have in your portfolio.
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