Stock Valuation - The Art and the Science
Warren Buffett is one of the most famous investors of our time and is a stock valuation pro. He learned most of what he knows from Benjamin Graham - the KING of Value Investing.
"Long ago, Ben Graham taught me that price is what you pay, and value is what you get. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." - Warren Buffett
Stock valuation involves analyzing a company from many different angles to determine an intrinsic value. This intrinsic value will either be above or below the current stock price. If the value you arrive at is above the stock price - buy it! It's cheap. If the value is below the stock price- sell it! It's expensive.
Not everyone is a fan of value investing; it's more of a long term approach. Hundreds of thousands of traders around the world pay little attention to the value of a stock, instead raking in big bucks betting on fluctuations in the price of the stock. Day trading, however, is incredibly risky and very few make money at it in the long run. To make an informed investment decision it's wise to analyze the value of the stock before buying.
Stock valuation is as much an art as it is a science. Running a discounted cash flow is somewhat of a science. Deciding which assumptions to put into that model - that is an art. Looking back over historical earnings and performance is a science. Modeling future sales based on industry knowledge and macroeconomic forecasts - that is an art.
There are lots of tools publicly available to assist you in performing stock valuation. We've developed two free tools that take care of the science for you, allowing you to focus fully on the art.
A First Glance at Stock Valuation Using Vantage
Intrinio provides a useful tool called Vantage, and it's completely free. It's a great way to take a quick-and-dirty view of a company's value. This app leverages the Intrinio Financial API to pull in relevant and important data for your analysis.
Vantage quickly displays the company's financial statements, price charts, metrics, ratios, and more right on the web. It also automatically calculates a cost of capital, conducts a discounted cash flow, and returns to you a baseline intrinsic value of the company.
Enter Your First Ticker
You can check out the Vantage app here. You don't even need to sign in to get started, just simply enter a ticker into the search box on the main page.
Behind the scenes, Vantage is pulling in thousands of financial data points to run an automatic DCF on the ticker you have chosen. What you'll see next is a dashboard. At the top will be the baseline intrinsic value for the company, the latest stock price, and a margin of safety. You can hover over each of these for definitions.
Adjust Your Assumptions
Keep in mind that this baseline intrinsic value is derived from analyst estimates and many other assumptions. You'll need to practice your "art" here on the assumptions to make sure it's reasonable.
Take some time to browse the tabs at the top. You'll see an assumptions tab. Here, you can click and drag the dots on the metrics that are forecasted. You can also double click and manually enter values. Play around with the charts to see how changing the assumptions affects the value of the company (this is the art part).
You'll also find the financial statements, a weighted average cost of capital calculation, and a discounted cash flow. Scroll through and see exactly how the value was derived. If you log in with your email, you'll be able to save your valuations and refer to them later.
Stock Valuation With the Intrinio Excel add-in
Vantage is a great tool for a quick look at a stock valuation, but if you really want to get your hands dirty you'll need to venture into Microsoft Excel. Excel enables you to model stock valuation in more detail, curating your model and developing your own assumptions.
Intrinio provides a free Excel add-in that is very easy to download. This add-in is a powerful way to pull live stock data into Excel dynamically.
Intrinio Discounted Cash Flow Template
We did a lot of the hard work for you already. Once you successfully install the Intrinio Excel add-in, you can leverage our Discounted Cash Flow template. It allows you to see a DCF in action without the arduous work of building out all the functions.
Open the Template
If you're on a Mac, look in the Intrinio Excel add-in folder you downloaded. You'll see a folder called "Templates". Inside that folder you'll see a folder called "Industrials". Inside that folder, open the file called "IntrinioDCF.xlsm". Type in any ticker, and hit calculate.
If you're on a PC, click on the Intrinio ribbon at the top of Excel. You'll see an option towards the left for "Templates". Click on this. Navigate to "Industrials", and the "IntrinioDCF.xlsm" file. Open it and save it. Enter a ticker, and hit enter.
What you'll see next is a main dashboard page, showing you basic information about the company including pricing data and a full company description. Checking a company's website, analyzing their CEO, digging into their industry, and checking their recent price activity can all play into the valuation. Click on any cell and you'll see the function that was used to dynamically pull the data in.
The next two tabs will show you a complete Income Statement and Balance Sheet. Full analysis of these statements is important in the process of stock valuation.
The fourth tab includes three major cash flow assumptions that drive the valuation model. We've broken down this DCF to include three main cash flow drivers of value, but more complex DCFs can forecast hundreds of assumptions.
On this tab you can click in any of the "Estimates" cells to change your assumptions for Revenue Growth, NOPAT (Net Operating Profit After Taxes) Margin and Invested Capital Turnover. Once you do, it'll adjust the value you see on the final DCF tab.
WACC & DCF
Next you'll find a tab that shows the calculation for the WACC model (weighted average cost of capital). Here there are two assumptions you can adjust - the credit spread on the debt and the company specific risk premium.
The last tab in the DCF Excel template is the actual Discounted Cash Flow calculation. Spend a lot of time here understanding how the assumptions calculate into actual cash flows, how those are discounted, and how the adjustments are made to arrive at a final intrinsic value for the company.
Dig in Further
Congratulations! You've tried out Vantage to get a birds eye view of your stock valuation. You've also leveraged the Intrinio Excel add-in to get into the details without wasting time building functions and entering data. You can stop here, but if you're feeling daring, dig in further.
Visit our documentation to see a full list of data types you can pull into Excel. Experiment with your own custom functions to pull in additional data you think might be valuable in your stock valuation.
Stock valuation is no easy task. We built tools like Vantage and the Intrinio Excel add-in to give you a jump start because we know it can be challenging. Accessing quality financial data can be very expensive too, but it is essential to analyzing your investments.
The Intrinio Fintech Marketplace, complete with templates, valuation tools, and free data, solves most of these problems for you. If you run into issues or have questions, remember you can chat with our team at any time by clicking the chat bubble in the bottom right hand corner of our website or clicking on this link:Chat with Us