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Strategies & Market Trends : Value Investing

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To: Area51 who wrote (8446)	9/30/1999 10:00:00 AM
From: Bob Rudd	Read Replies (1) of 78599

Area51: Valuing a co based on fundamental factors is a bit more complicated than plugging numbers into a simplistic 2-factor model. EPS is based on accounting numbers all of which aren't created equal. Growth rates have a funny way of changing - basing a valuation on peak growth rates will not yield a good value estimate if the growth rate sags, particularly if it sags quickly. The basic concept of valuation is divide the present value of future earnings by a discount rate. Either the earnings estimates or the discount rate should reflect the uncertainty that the earnings will come thru as forecasted. Future earnings guesstimates are often wildly wrong, especially in technology areas where today's successful launch is tomorrow's stale lunch. Other approaches to valuing stocks include: Comparing to similar companies to see if ratios differ, using option based methods to value potentials, and just accepting the market's estimate. If you wish to explore valuation further look at "Investment Valuation" by Damodoran or similar available at most libraries and book stores.

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