3 Dividend Growth Stocks Selling At A 20% Or More Discount93 views 2012-02-21 11:44 Tags: value dividend ABC
Determining the intrinsic value of a stock can be a difficult task for most investors. Many take the easy road based on current value metrics, such as price to earnings ratio, price to book value, price to cash flow and many other value determinants. There is nothing specifically wrong with this approach, but it is difficult to be accurate. Have you ever looked at a stock that was cheap by PE ratio or book value but not so cheap using other valuation metrics? I like to take a different approach to valuing a stock based on its past and projected growth rates.
By using the average PE ratio and projected EPS growth, you can use the future time value formula to get an estimate of earnings X number of years into the future. Once you have the future projected earnings per share, just multiply by the PE ratio to get a future stock price. All of the projected growth rates are available on most websites providing detailed stock information. This is great information when looking at the future of a stock in comparative terms. Take this one step further, and you can determine the intrinsic value of a stock. Here, you are using the present time value formula based on your required rate of return. The end result is having a fair value estimate of the stock to compare to the stock's current trading price. This comparison will determine if a stock is overvalued or trading at a discount.