Value Momentum
Investing Course Lesson 5
Stock Valuation
By Adam Khoo
Professional Stock & Forex Trader
www.piranhaprofits.com
www.wealthacademyglobal.com
Is the Stock Price Expensive or Cheap?
How Do You Value a Stock?
1) PEG Ratio - PE Ratio Versus Earnings Growth Rate
2) Discounted Cash Flow from Operations (DCF)
3) Discounted Net Income (DNI)
4) Price to Book Value
5) Price to Sales Growth ratio
Valuation by PEG Ratio
When to use:
As a quick check to a stock’s value
Can only be used when Earnings is consistently Increasing
Recall PE Ratio (TTM) = Price per Share
Earnings Per Share (TTM)
1. Comparing PE Ratio to Earnings Growth Rate
• PE Ratio of a company should be equals to its earnings growth rate
• Example, if the earnings are growing at 15% a year, the PE ratio should
be 15 at fair value
PEG ratio = PE Ratio
Earnings Growth rate
Valuation by PEG Ratio
• A stock is overvalued when PE Ratio > Earnings growth rate. i.e.
PEG ratio > 1
• A stock is undervalued when PE ratio < Earnings growth rate. i.e.
PEG ratio < 1
Note: I would still invest in a stock if the PEG ratio is less than 1.5
Websites:
www.finviz.com
www.simplywall.st
2) Discounted Cash Flow
When to use:
More in-depth calculation of a stock’s Intrinsic Value
Can only be used when Cash Flow from Operations is increasing consistently
The Intrinsic Value of a Stock is Equal to the
Present Value of Its Future Cash Flow from
Operations Plus Current Net Assets
0 1 2 3 4
Calculating the Intrinsic Value of Microsoft (MSFT)
Discounted Cash Flow Method (20 Years)
Present year is 2020. Growth rate 11%-15% . Discount rate = 7%
Cash Flow from Operations (Last 12 months) = $58,110m.
No. of shares outstanding = 7,600 million. Total Debt = $66,610m.
Total Cash & Short-Term Investments = $137,626m
2) Discounted Cash Flow
3) Discounted Net Income
When to use:
Finance Companies (Insurance, Brokers, Asset Management, Credit Cards)
Used when Cash Flow from Operations is NOT increasing consistently
Used when Earnings are Increasing Consistently
Present year is 2020. Discount rate = 5%, Growth Rate 11.7%-12.72%
Net Income (last 12 months) = $13,754m.
No. of shares outstanding = 948.4.9 million. Total Debt = $51,607m.
Total Cash & Short-Term Investments = $24,445m
4) Valuation by Price to Book Value
When to use:
• When Company Has Negative Earnings (Making losses)
• Used for Banks
• Used for Property Developers & REITS (Real Estate Investment Trusts)
• Price to Book Ratio
• Compares the “share price” to the “book value per share”
• Underestimates value of a growing company
• Book Value
• The liquidation value of a company
• Total assets - intangible assets - total liabilities
• Book value per share = Book value/ no. of shares
• Price to Book Ratio = Stock Price
Book Value per share
4) Valuation by Price to Book Value
1) Company is losing money (negative net income and cash flow)
Use Price to Book (PB) Ratio to value the company
Buy only when PB Ratio is less than 0.50
2) Banks
Use PB ratio to value banks.
Fair value for Banks is PB Ratio of 1.00 to 1.20
Singapore Bank (DBS)
US Bank (BAC)
1.20
Average = 1.00
0.80
US Bank (JPM)
1.60
Average = 1.40
1.20
4) Valuation by Price to Book Value
1) Company is losing money (negative net income and cash flow)
Use Price to Book (PB) Ratio to value the company
Buy only when PB Ratio is less than 0.50
2) Banks
Use PB ratio to value banks.
Fair value for Banks is PB Ratio of 1.00-1.20
3) Property Developers/ REITS
Use PB Ratio to determine the intrinsic value
Singapore REITS Historical Price/Book Ratio
Average P/B = 1.1
US REITS Historical Price/Book Ratio
Average P/B = 2.2
5) Price to Sales Growth Ratio
• This method should only be used for new growth companies with strong revenue
growth. However they do not have a consistent track record of “Net income” or
“cash flow from operations” yet
• During the first 5-7 years of growth, a company may still be investing a lot of money
on expansion and not able to achieve economies of scale yet.
• Once economies of scale is reached, we expect net income and cash flow from
operations to kick in.
• For example, Amazon did not make consistent profits until after 6 years of its listing.
• For such growth companies with strong revenue growth and negative profits, we can
use Price to Sales Ratio as a way to value the stock
Price-to-Sales (P/S) Ratio = Share Price
Revenue per Share
We then compare the P/S Ratio to the Revenue Growth
Price-to-Sales- Growth (PSG) Ratio = P/S Ratio
Revenue Growth Rate
A PSG Ratio of 0.20 is a Fair Value. Above 0.20 is Overvalued
6) Price to Sales Growth Ratio
Case Study: Meituan DianPing
Reuters -> Key Metrics
Price/Sales Ratio = 6
Revenue Growth Rate = 44.13%
PSG Ratio = 606/ 44.13 = 0.13
Below 0.2 is undervalued
Caution:
Only invest in loss making growth companies
If you are very confident that it will become
profitable because of a strong competitive
advantage
Uber, Wework, Lyft are examples of Unicorns that Take the lowest Revenue growth
may never become consistently profitable!
Value Momentum
Investing Course Lesson 5
Stock Valuation
By Adam Khoo
Professional Stock & Forex Trader
www.piranhaprofits.com
www.wealthacademyglobal.com
