Chapter 4: Fundamental Analysis: Valuation Models

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“Value matters. You ignore value at your peril.” ‒ Greg Ireland, mutual fund manager with over 35 years of experience

“It is a capital mistake to theorize before one has data.” ‒ Famed Detective Sherlock Holmes (Sir Arthur Conan Doyle)

Learning Objectives

In this chapter, you will

Be introduced to the definition and beginnings of stock valuation
Explore various valuation models including the dividend discount models with an emphasis on the Gordon Growth Model and the Discounted Cash Flow Model
Examine the strengths and weaknesses of the various stock valuation techniques
Utilize an electronic spreadsheet to calculate the Internal Rate of Return from a series of cash outflows and inflows
Be introduced to The Value Line stock research resource and how to utilize key research information from their periodic stock reports

By the end of this chapter, you should be able to

Describe the inherent difficulties of predicting stock valuations
Calculate the present value of the expected future stream of cash flow from various types of stocks using various valuation models
Discuss the benefits and major limitations of various valuation models
Given an electronic spreadsheet, calculate the Internal Rate of Return from given streams of cash flows
Utilize key research data from The Value Line in our calculations of the various valuation models discussed

This is it, Dear Students! This is the heart of our course!

In this chapter, we will learn techniques that should tilt the odds in our favor and help us become successful, prudent long-term investors. We will learn how to predict the future price of a stock. Are our predictions guaranteed? Yes, indeed! They are guaranteed to be wrong! They will almost always be very far away from the actual price one, two, three, or four years from now. However, our predictions should help us identify companies that will allow us to build wealth slowly over time. Most of the companies that we identify with these techniques won't make us rich overnight. But on the other hand, they will help us to avoid large losses when the markets hit a downturn, a correction, a bear market, a crash, etc. We want you to eat reasonably well and sleep reasonably well.

Presentation file - Study guide

4.1: Common Stock Valuation
Do any of know what is going to happen in the future? No! So will predicted a stock price in the future be easy? No! Oh, well. We will do our best nevertheless. Stick with us!
4.2: Dividend Discount Models (DDMs)
Let's get started on our first set of stock valuation models, the Dividend Discount Models. "Dividends Don't Lie!"
4.3: The Discounted Cash Flow Model
This is it! The Discounted Cash Flow Model! This is the model that will transform you into a full-fledged Investment Guru!
4.4: The Value Line: All the Financial News That’s Fit to Print
And just where will we get all the data we need for our valuation models? From The Value Line, of course! All the Financial News that is Fit to Print!
4.5: The Bottom Line
Finally, what should we do with all our predictions? Ignore them. No, toss them, shred them, burn them! We ask ourselves a simple question: Would I want to own this company?
4.S: Summary
Congratulations ‒ You Have Finished Chapter 4 ‒ Fundamental Analysis: Valuation Models

"Measure" by jayninelessons is licensed under CC BY 2.0