One of the biggest problems I had with stock valuations is their actual share prices. While subjectively a 1% move will make an investor the same amount of money as a 1% move in any other stock, a 1% move in a stock with 500 million shares outstanding will affect the market differently then a 1% move in a stock with 10 billion shares outstanding.
Ultimately what matters is the amount of money being invested into a company. However, market capitalization is less valuable from a technical analysis perspective but can we have our cake and eat too? The answer, I believe, is yes.
In this article I will present a very simple method of reconciling stock prices that makes them more valuable both technically and fundamentally through something I call Reconciled Share Price or "RSP".
The formula is simple, you take a share's current market capitalization and divide it by a common number, I personally use 100 million, but any number will suffice. You use this common number for all stocks you want to reconcile. Let's use two companies in a common space to demonstrate, Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) as of December 12, 2012.
Shares Outstanding: 328.59M
Market Cap: 229.21B
Shares Outstanding: 1.18B
Market Cap 22.92B
While single values might give some insight to scale, they don't serve much more utility then viewing the market capitalization directly, however, with the share prices reconciled we can plot them on the same chart to open an entire new world of technical and fundamental analysis.
The RSP Delta Running Total Oscillator is constructed by taking the daily difference in RSP and finding the difference of those values (first differential) followed by a running total of that differential.
What this particular technical indicator shows is the pace at which Yahoo is acquiring capitalization versus Google. On the 18th after disappointing earnings by Google, Yahoo's pace at which it was acquiring capitalization finally went positive. Obviously a direct relationship cannot be expressly stated but there is a strong correlation pointing to the idea that on the days following the 18th investors saw more potential for growth in Yahoo then they saw with Google.
How could RSP be used in fundamental analysis? The rate at which a company is acquiring market capitalization is very important because this affects all valuations. If you have a pair of competitive companies, a long term evaluation of capitalization acceleration might give very important clues to where a stock is in its life cycle.
If a stock is close to book price and has slow RSP acceleration, this could mean the stock is prepared to accelerate if all other things are in place such as earnings growth. Alternatively, if you have a stock with a slowing capitalization acceleration but a high price to book, this might indicate that the interest in a stock's growth potential is waning.
In most cases, I am of the opinion that the best form of RSP evaluation is between two companies, one of which could be considered to be in a mature phase of its life. In order to properly evaluate acceleration you need a proper reference point.
Yahoo is currently acquiring capitalization at a faster rate then Google. This is probably being fueled by confidence and support in Yahoo's new CEO Marissa Mayer.
I will be using RSP in future articles for valuations of companies. If you're interested in me doing some specific analysis on particular stocks, please let me know.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.