Stock Value Science
“If you stand for nothing, you will fall for anything.”
I want to dive into one of the subjects mentioned previously but more in-depth. In this Toasty Post we’ll talk about the main areas of stock valuation. This is the process to determine stock value. Come on in, the waters fine…
On this week’s Toast:
- Ignore the media, politics, analysts and news that clog your social feeds. Not because “they’re all wrong” but because you need to form your own opinion FIRST. {see the quote above}
- Emotions won’t do you any good {clouded judgement}
- Perceived value, do you even like this company? {remember first rule}
- Share value vs Share price
- Now that you’re done, you can come off of your media/news hiatus.
Stocks or #fakenews
Let’s start with ignoring the media, including analysts, although I’m not the guy that’s going to tell you every source is wrong because that isn’t true at all. There’s a lot of opinions and noise surrounding a stock’s value and while certain news articles about the stocks you’re trading are important, I would like to start with a clean slate. This allows a clear head and good judgment on the numbers side of things.
Don’t panic, it still isn’t rocket science…or even algebra for that matter. I like to form my own opinion about a stock including it’s value before I begin including the news into my analysis. Eventually you’ll sift through all the noise for the betterment of your portfolio.
No emotion = value
This point is pretty simple. We don’t need any drama, lama! You gotta leave your emotions at the door. The last thing we need to do is trade off of fear or excitement.
All sex jokes aside emotions about the market will only drive you to do irrational things. A prime example of that are the trade wars we’re facing right now. Investors are freaking out and they don’t seem to know whether they should buy or sell.
One day we’re up, the next we’re down. The only thing I’m left asking is; which stock can I buy at a bargain?
Things are not always as they seem
The value of a stock is not an “end all be all” method for determining whether or not you should put your hard earned money into it. If you look at my last article, I had stated that first and foremost you need to know the company you’re looking at.
Either use their description on their website or use them irl (cause real is always better). This is one of the easiest attributes to “value” you can use on a daily basis without even looking at charts or numbers. Take Walmart (NYSE:WMT) for example. Do you see customers there often? Better yet, do you shop there yourself? Did you enjoy your experience and did they deliver on their promise?
Another useful tool that you should get used to here are the quarterly earnings calls or conference calls. For more on these see this post.
Those are rookie Stock numbers!
When it comes to numbers I don’t do a whole lot tbh. The calculations that I use (most of the time) are EPS (Earnings Per Share) and P/E (Price to Earnings ratio). I am different from a lot of investors in this regard because I don’t spend a lot of time in this section.
Basically, the higher the P/E ratio the more earnings you may have in the future. The lower the P/E ratio, the less you’ll make on each share of your stock. Too high, though, and it becomes risky. When it’s low, you may have more earnings potential like in the case of IPOs, big tech stocks or similar companies that may not report high earnings, but are on the way up. This is why investors care so much about the EPS estimates each quarter when they value it, and why a single stock can change dramatically based on the earnings call each quarter. If you didn’t get enough here, stay tuned for a numbers only Toasty Post.
Note: No matter what others may tell you, the earnings call is the first public hearing for the company, so if the stock price is changing ahead of the call it isn’t based on facts. It’s based on the estimate that analysts have given. Remember; you’re not listening to media right now.
Stock Valuation Complete/Donsies
If I had written an article similar to other more comprehensive guides that are available you may not have understood a lot of it. So you’re stuck looking up definitions and clicking links only to realize it’s been 2 hours and you’re late to that pot luck thing…you probably didn’t want to go anyway. I’ll continue to tread lightly on the next few posts
Now that you’ve completed your own determination you can see what others have said about it, but don’t sway with the wind. Stand up for a stock you believe in. After all you even built a presentation on this stock. If you didn’t see this post.
