Analysts often post their predictions based off many assumptions. Generally assumptions are factual and based off expected growth, earnings, etc. While these stock price valuations are usually helpful to us small time investors to firm up a theory for investment or to validate a current investment it doesn't help us decide when we should take profits or help us determine a more precise entry and or exit point.
By the time we have watched our favorite syndicated financial news or scoured finance websites and made a determination we may have missed excellent trades. I believe that with some simple math and some fairly safe assumptions that we can determine what I call "Fair Market Daily Value".
With several upcoming catalysts and what seems to be the turning point for Apple (NASDAQ:AAPL) I have used it for my experiment to test my Fair Market Daily Value theory.
Fair Market Share Price Based On Future Earnings & Current Multiple
October 28 2013 Multiple = 13.37 Actual share price = $529.87
FY2013 Earnings = $39.75 x 13.37 = Fair Market Share Price $531.46
Estimated 2014 Earnings of $43.55 (Prior to adjustment for $CHL deal.) = EOFY 2014 Price = $617.10 using current Multiple (December 2016) of 14.17.
Share price difference from theoretical EOFY 2014 $617.10 - Actual EOFY 2013 Share Price $529.87 = $87.23
$87.23 / 365 days per year = Theoretical *daily share price increase of $0.2389
*Days since 2013 Q4 Earnings Report = 50
Fair Market Value based on 2014 Estimated EPS using Current Multiple 14.17 + *Daily Price Increase of $0.2389 (50 *Days into Fiscal Year 2014)
50 (*Days since EOFY 2013) x 0.2389 (Theoretical *Daily Price Increase based on projected EPS) = $11.95
$529.87 (EOFY 2013 Actual Share Price) + $11.95 (*Daily price increase x 50) =
Fair Market Share price 16 December 2013 = $541.82
Current price 16 December 2013 = $557.18
2014 Estimated EPS $43.55 + China Mobile $3 EPS Gain
New 2014 EOY Price = 659.61 (46.55x14.17 (December 16 2013 Multiple))
Daily Fair Market Price Increase = $529.87-$659.61= $129.74/365Days= 0.3554
China Mobile 16 December 2013 Fair Market Share Price =
Weighted Q1 Top Heavy Revenue (Without China Mobile)
2014 Q1 Weighted Average = 32% of Yearly Revenue.
32% of $87.23 (2014 Price Increase) = $27.91
$27.91 / 88 (Days in Q1) = $0.317 Q1 Fair Market Daily Increase
50Days x 0.317 = $15.85
$529.87 + $15.85 = $545.72 (Fair Share Market Price 16 December 2013 - Weighted)
Weighted Q1 Top Heavy Revenue (With China Mobile)
Assumptions made: Q1 will receive 45% of yearly iPhone Sales. (No facts used here. Purely intuition based on psychology/product buzz/newness/etc.)
45% of additional $3EPS = 1.35
1.35+14.10 = Adjusted Q1 EPS of 15.45
$129.74 (China Mobile 2014 Price Increase) - $87.23 (2014 Price Increase w/o China Mobile) = $42.51
$42.51x45% = $19.13 (Q1 China Mobile Price increase)
$27.91 (Price Increase w/o China Mobile) + $19.13 (Price Increase with China Mobile= $47.04
$47.04 / 88 (Days in 2014 Q1) = 0.534 (Q1 Fair Market Daily Price Increase)
Currently 50 days since EOFY 2013: 50x0.534 = $26.70 (Price Increase since EOFY 2013)
$529.87 + $26.70 = $556.57
By my calculations current fair market value of AAPL with 2014 Q1 consensus of $14.10 + additional 45% of top end estimate of China Mobile deal equaling $1.35 for a Q1 adjusted $15.45 EPS = Fair Market Value on 16 December 2013 of $556.57.
If my numbers and assumptions are correct then my price implies that the consensus Q1 revenue and China Mobile deal are already priced in. A Q1 earnings report surprise above $14.10EPS could cause a surge in share price on earnings release but I expect days before we will see a share price increase due to those already in the know. Any abnormal price move above the daily average price should result in profit taking barring any additional fundamental changes to future EPS. Determining what would be considered "abnormal" would require comparisons of the current price movement relative to the average price movement and/or the calculated theoretical price movement.
*Daily = Calendar Days including Holidays & Weekends
The bottom line is we are often given forecast from the companies we follow and we are also given consensus estimates from the "Street". If we calculate the theoretical daily price increase using those supplied earnings relative to the prior year or prior year's quarters then we can determine a theoretical daily price movement or "Fair Market Daily Value". Factoring in new developments with some common sense assumptions can help us determine a new daily price and also trigger us to fine tuning our entry/exit points based on said data.
While this theory would need to be tested against several other stocks to confirm its validity I think if you follow the numbers it does raise the question: Can Fair Market Daily Value be determined?
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.