- David ModeratorNovember 26, 2018 at 2:09 pmPost count: 194
I don’t use any fancy formulas, I keep it simple.
If I’m picking stocks then I have two things to consider for the discount rate.
1. The long-term return of the market
2. The long-term inflation rate
I need to at least match the market and keep up with inflation when picking stocks, otherwise there is no sense in doing it.
Taking the S&P 500 as an example the long-term (Jan. 1st, 1871 – Dec. 31st, 2015) CAGR is 9.05% (Including dividends) and the long-term inflation rate (1913-2015) is 3.18%.
This gets me to a 12.23% discount rate.
No you might argue that one doesn’t need to include inflation since companies can pass the cost of inflation on to the customer.
If you are Coca-cola or Philip Morris then you can but most companies don’t have that kind of pricing power. For instance, a dollar store can’t pass the cost of inflation on to its customers since it has to keep selling inventory at a dollar (Terrible long-term business model!).
Most firms don’t have differentiated products/services, those that do have pricing power which stems from some kind of moat.
No moat, no pricing power.
That’s why I include inflation in the discount rate.
Hope this helps!
Davidmario123n@gmail.com NewbieNovember 26, 2018 at 5:15 pmPost count: 8
Regarding your answer to Jordan, does that mean when you pick stocks you are looking for something that will give you a better return than 12.23% either up front or shortly after?
Mario.David ModeratorNovember 27, 2018 at 2:36 pmPost count: 194
Yes, the aim to to find investments that return >12%.
DavidJORDAN Y NewbieNovember 28, 2018 at 2:11 amPost count: 2
Thanks for the reply David.
I find the challenging part is always what discount rate to use.
I was taught to use CAPM and WACC for DCF but I find that it is not so practical in real life. It is commonly used by analyst but i don’t think seasoned investors will use it. If I remember correctly, one of the TIP podcasts also mentioned that such methods are not so practical.
Do you have any thoughts on this ?David ModeratorNovember 30, 2018 at 3:59 pmPost count: 194
I don’t bother with CAPM or WACC, I simply take the long-term market return and inflation rate, add them together and that is my discount rate.
Another way to do it is to think of a stock more like a bond and value it that way. So take the current free cash flow and compare it to the current market cap to figure out a free cash flow yield.
Company XYZ has (ttm) FCF of $100 Mil and a market cap of $700 Mil
100/700 = 0.1428 (x 100 for percent)
So the Free cash flow yield is 14.28%
Then ask yourself;
Does this return beat the market return plus inflation?
Am I happy with this return or do I need more?
Is the FCF sustainable?
Will the FCF grow?
If FCF is lumpy due to the firm being a cyclical then you need to normailze free cash flow. What is average FCF across a business cycle, then use that figure.
DavidEmanuele Z MemberDecember 1, 2018 at 6:47 amPost count: 15
I would like to see analyzed a stock that you just put 15%+ of your portfolio on it…. 🙂Stig Brodersen AdministratorDecember 1, 2018 at 9:39 amPost count: 210
I did that with BRK only. But that was a long ting ago. I like the current valuation too though 🙂
Price is what you pay. Value is what you get. - Warren BuffettAntoine NewbieDecember 2, 2018 at 5:32 pmPost count: 6
Would be interesting to value financial picks. Like JP Morgan or BoA since Berkshire recentlty added these to its portfolio.
Antoinemario123n@gmail.com NewbieDecember 6, 2018 at 1:04 amPost count: 8
Baupost, Appaloosa and Oaktree have been buying it recently.
Mario.Mr M NewbieDecember 15, 2018 at 8:34 amPost count: 4
Westrock, WRK – cardboard company, which is a pretty high volume, low profit margin industry. Their fundamentals look solid, and they’re improving efficiency of the business. Their main moat is size and price. Solid growth in sales and profit. Keeping debt under control. Their main competitor is International Paper, IP. Either company would be good to evaluate, because they are both priced similarly, with my opinion being that both are currently undervalued. I believe WRK will take market share away from IP, and that volumes will continue to increase as online shopping increases (and is less cardboard/packing materials efficient than buying things in stores). Boring product. Currently valued at ~44. I think it is worth ~70.
Cabot Microelectronics, CCMP – makes consummables related to IC manufacturing. They have had solid growth in their financials, and that growth appears sustainable, at least for the next 5-10 years. Given a linear regression of their financials and market cap against the rest of the market, I estimate that the market is valuing this company way below what they are valuing the rest of the market. Very boring product, and it is admittedly very focused. I think the demand is solid, they will take market share away from Dow chemicals, and will also increase in valuation to match the rest of the market. Currently valued at ~94. I’m estimating it is worth ~140, plus growth.Jimmy D ModeratorJanuary 22, 2019 at 3:04 pmPost count: 68
Hi Stig and Company,
I’m submitting AAC for your consideration.
AAC is a holding company of rehabilitation centers in the United States.
Last I saw AAC has a P/B of .47 and PEG ratio of .56
They’re supposed to announce earnings on 1/29.
I welcome your thoughts.
"Every problem is an opportunity in disguise." - John AdamsThomas D NewbieJanuary 22, 2019 at 6:19 pmPost count: 2
Would love to hear your thoughts on BUD.
The beer market has been getting absolutely crushed in the past year or so.
After looking at the financials of Anheuser Busch it can be seen that the company has had a very steady net income and FCF, while also increasing its revenue and gross margin.
The beer market seems to be an oligopoly type market with a few major players that control the vast majority of that market.
Anheuser Busch is the by far biggest of these few major players controlling 26% of the global market and 46% of the United States market.
I think that Anheuser has a great moat in terms of the brands of beers it owns. Beers such as Bud light, Budweiser, Stella, and Coronia. These brands are well known and are a top selling beer in just about any country in the world.
Considering all of the above and the great dividend they pay, I believe that BUD could potentially have some value in it.
1 user liked this post.Jimmy D ModeratorJanuary 29, 2019 at 3:43 pmPost count: 68
Hey Thomas D. I like the concept of this idea but I’m a little skeptical of growth for BUD.
I have noticed a solid niche of the craft beer movement in the US. Craft beers are minimalist businesses that have very passionate followers – not just working class, but upper middle class and educated men and women. It seems the be growing pretty steadily.
The challenge is that craft beers are almost by definition smaller and regional breweries – not likely to be traded on the market.
BUT I recently found a publicly traded craft brewing company Craft Brew Alliance – ticker symbol BREW
My research has been limited since I only found it the other day but I think there’s much more potential for growth than the larger mega beer stocks.
Would love to know your thoughts and would love this stock to be analyzed by TIP.
"Every problem is an opportunity in disguise." - John AdamsThomas D NewbieFebruary 14, 2019 at 7:43 amPost count: 2
Thank you for replying to my post.
The way I am thinking about BUD is not so much as a growth pick but more of a solid BlueChip stock that will pay me a good dividend and is very unlikely to go out of business anytime soon (everyone loves beer and i don’t see that changing haha).
In terms of growth I believe that the consensus is that the major markets are pretty saturated and the oligopolies of the beer market are looking into the developing world to help grow their bottom line, for example I know that BUD just bought breweries in Turkey (aimed to expand into the eastern hemisphere) and in South Africa.
My thought process as far as craft breweries is that they are a very expensive business to run and have small profit margins (they’re basically restaurants that make their own beer) and when an economic downturn comes consumers will quickly cut $6 beers out of their budget, which will really hurt these craft breweries and allow some of the bigger breweries like BUD to come in and buy up a lot of the popular craft beer brands at very low prices.
Really curious what you think about these points, especially my last one.
(jp morgan article https://www.jpmorgan.com/global/research/beer-market)
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