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James Li
James Li
Articles (1346)  | Author's Website |

New Feature: GuruFocus Value Line

A new way to measure how overvalued or undervalued a stock is

We are happy to announce a new feature where you can measure the percentage of stock overvaluation or undervaluation: the GuruFocus Fair Value Line.

Background

Legendary value investor Peter Lynch, who managed the Fidelity Magellan Fund during the 1980s, developed a "quick way" to determine if a stock is overvalued or undervalued: simply compare a stock's price line to a hypothetical earnings line assuming a price-earnings ratio of 15. Figure 1 illustrates a sample Peter Lynch chart for Walmart Inc. (NYSE:WMT).

417a34dcca63fa1eff001e90966abd8b.png

Figure 1

As Figure 1 illustrates, we can see that Walmart is likely overvalued based on Peter Lynch's legendary chart.

Lynch also warned that cyclical companies tend to have higher profit margins at the peaks of economic cycles, resulting in artificially-low price-earnings ratios.

GF Value Line gives a new way to value stocks using an exclusive method

The GF Value Line gives a stock's intrinsic value based on GuruFocus' own valuation method. The website's calculation considers the following three factors:

  1. Historical price-valuations, including price-earnings, price-sales, price-book and price-to-free-cash-flow
  2. A GuruFocus adjustment factor based on the company's past returns and growth
  3. Future estimates of business performance

Figure 2 illustrates a sample GF Value Line for Walmart.

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Figure 2

The GF Value Chart contains the following elements:

  • The light-blue line gives the stock's historical prices.
  • The black solid line gives the stock's intrinsic values based on the GF Value line, while the dotted line gives the stock's estimated, future intrinsic values assuming the GF Value factors hold.
  • The GF Value Chart then shows a red section and a green section, with lighter sections close to the GF Value Line and darker sections further away.
    • If the light-blue price line is inside the red section, the stock is overvalued based on our GF Value model. Lighter-red sections indicate modest overvaluation while darker-red sections indicate significant overvaluation.
    • If the light-blue price line is inside the green section, the stock is undervalued based on our GF Value model. Lighter-green sections indicate modest undervaluation while darker-green sections indicate significant undervaluation.

As Figure 2 illustrates, Walmart's price line is within the dark-red section of the Chart, suggesting modest overvaluation.

Figure 3 illustrates another GF Value Chart for Apple Inc. (NASDAQ:AAPL), the top holding of Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B).

54a87d3ddfd896d915dc9dc8a5742ddd.png

Figure 3

As Figure 3 illustrates, Apple's price line is "off the charts," i.e., Apple's share price is above the darkest-red section, suggesting significant overvaluation. GuruFocus ranks Apple's valuation 1 out of 10 on the heels of price valuations underperforming over 88% of global competitors. As Figure 4 illustrates, Apple is trading close to its 10-year maximum price-sales valuation.

21d969b2b1b39c28a4d01c3bb8143601.png

Figure 4

You can also screen using the Price-to-GF-Value filter

GuruFocus Premium members can screen for undervalued stocks using the Price-to-GF-Value filter. For example, suppose we screen for stocks where the Price-to-GF-Value filter is less than 0.80. Figure 5 illustrates the filter activated underneath the Valuation Ratio tab.

Figure 5

Figure 6 illustrates the GF Value Chart for Intel Corp. (NASDAQ:INTC), a stock with a price-to-GF-Value ratio of 0.78 as of Monday.

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Figure 6

As Figure 6 illustrates, Intel's price line is within the light-green sections, suggesting modest undervaluation.

Disclosure: The author is long Apple and Intel. The mention of stocks in this article are for instructional purposes only, i.e., to promote this new feature of our website.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


Rating: 4.9/5 (7 votes)

Voters:

Comments

Jean-Francois Nobert
Jean-Francois Nobert premium member - 1 month ago

That's a really nice feature, thanks for this innovation

Searcher_of_Value
Searcher_of_Value premium member - 1 month ago

So, wich one is a better depiction of intrinsic value: Value Line, or the Valuation Box?

gurufocus
Gurufocus premium member - 1 month ago

Value Line is a better indication. The valuation box numbers are references.

Thanks!

Dr. Paul Price
Dr. Paul Price - 1 month ago    Report SPAM

How are you defining "possible value trap" and why?

Watchdog
Watchdog premium member - 1 month ago

Very nice new feature for a quick price-to-value assessment of any stock. The exact calculation of the GF value is understandably kept secret but it gives a nice smooth line over time. However it should be noted by users that the concept of fair value as a multiple of recent earnings etc. is different from the concept of intrinsic value (present day value of all future earnings / cash flows). For intrinsic value we need to make assumptions about the life span of a company and about earnings / cash flows in the distant future, which is difficult. So the concept of fair value as used for the GF value is an excellent starting point in my view to see if a stock might be an investment.

gurufocus
Gurufocus premium member - 1 month ago

"Possible value trap" is for the companies that look very undervalued, but either in the long term trend of business decline, or in financial distress.

Parth71
Parth71 premium member - 1 month ago

How can we access these two new fields via API or Excel add in please?

Searcher_of_Value
Searcher_of_Value premium member - 1 month ago

Coming to "value trap", how is long-term business decline defined? Is it long-term revenue decline? Is it long-term margin decline? Also, what is meant by long-term? 5 years? 10 years? 20 years?Thanks.

gurufocus
Gurufocus premium member - 1 month ago

hi @Searcher_of_Value, for "value trap", we are talking about 5-year revenue decline and more than 5 years of margin decline.

thanks!

Parth71
Parth71 premium member - 1 month ago

Could I get a response too please.

gurufocus
Gurufocus premium member - 1 month ago

hi GF Value is now available in API and Excel Add-In. In API, it is in 3. Company key statistics data. In Excel Add-In, it is called "gf_value".

richday101
Richday101 - 1 month ago    Report SPAM

Great feature. GuruFocus should use P/OCF rather that P/FCF as P/FCF blows up at times even for the most stable companies e.g. WMT's P/FCF was 1040 in Dec 2000 versus 28.3 for P/OCF. Compare that to the Med P/FCF of 16.6 and Med P/OCF of 9.1. Same thing happens for P/E ratios at times. Thus, EV/EBIT is better and more stable that P/E per Greenblatt.

What does GF do when Book Value is negative?

I'd suggest GF Value Chart be expanded to 15 years similar to the Peter Lynch Chart and placing it above the Peter Lynch Chart so we can see how stocks performed in 2008-09. That would be awesome.

Parth71
Parth71 premium member - 1 month ago

Thanks so much

gurufocus
Gurufocus premium member - 1 month ago

hi Richday101, we use the combination of multiple ratios and the results are more stable.

innovestors2016
Innovestors2016 premium member - 1 month ago

What does the "%" values reflect in the GF Value Chart? Does it reflect percentage away from the GF Value Line? Thanks.

gurufocus
Gurufocus premium member - 1 month ago

Yes, that is right @Innovestors2016

Searcher_of_Value
Searcher_of_Value premium member - 4 weeks ago

How are the future estimates of business performance determined? Thanks.

nary
Nary - 5 days ago    Report SPAM

How can I suscrib to GuruFocus Value Line feature?

Please leave your comment:



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