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  • First Solar: Pre-Earnings, Street Optimism [View article]
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    I use the classical text book formula for calculating present value based on discounting the future earnings cash flow back to the present. The classical model is called the dividend discount model, but I use earnings in place of dividends. The variables include earnings growth estimate, current year earnings (I use estimated earnings for the year not yet ended), expected rate of return for the market (I currently use 10%), currrent risk free return (I currently use 4%), and stock beta.

    The equation is too complicated to put in this note. You can find it in any investment finance text book. For example, page 202 in "Investments: An Introduction" by Herbert B. Mayo, Fourth Edition, The Dryden Press, Harcourt Brace College Publisher.

    Doing the fair value analysis is fraught with uncertainty. The biggest uncertainty is the earnings growth estimate. I feel these estimates are a real crap shoot. However, I try to make my bigger bets when I can buy good growth potential near or below calculated fair value.
    Jul 30 17:13 pm |Rating: 0 0
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