tshk1221

5 Stocks Selling At a Discount to Fair Value

We all think when the market goes down, stocks have become cheap and cheaper than before.

But, the real problem of thinking that everything got cheaper is the stock market went up so much from 1980 to 2000. Way too much that we tend to think companies with P/Es of 30 - 300 is ok to invest in. Way too much that we think companies paying not a penny of dividends is ok to invest our money in.

It is very possible that during 1950 - 1980, dividend yields of KO, PG and JNJ could have been 6% - 7% or more with P/Es of 5 or less since there were not a lot of market participants back then other than rich people.

5 Stocks Selling At a Discount to Fair Value

TLassen,

I thought a lot about intrinsic value of a company. I think a company's source of intrinsic value is composed of the following three factors:

1. Brand power
2. Product quality
3. Human resource

I know discounted future value of dividends less risk-free investment rate could be used to determine a company's intrinsic value since dividends are a reflection of intrinsic value of a company, but there are somethings that we cannot figure out such as the power of excellent human resource that contributes to generation of earnings and dividends and brand power that's not really easy to measure its value of. My conclusion is we cannot measure true intrinsic value of a company.

And, ROI of 30% appears to be way too conservative. If you apply an ROI of 30% to KO, PG or JNJ, you're requiring an ROI that is applied to riskier micro-cap companies or small businesses. As for big-cap renowned companies like KO, PG and JNJ, I think 10% ROI appears more reasonable.

5 Stocks Selling At a Discount to Fair Value

I completely agree with TLassen except for "That is not the point."

I think how to value a business' fair value is one of the single most important thing we small investors must know of to maximize cash flows and stock values from dividend reinvestment by holding forever. It is because the fair values directly impacts acquisition cost and dividend yield.

Of no real good use at all if KO was bought in 2000 when its price was its max and its dividend yield was less than 1% even if KO is considered to be one of the best companies in the world to invest in.

5 Stocks Selling At a Discount to Fair Value

It seems to me that all four companies except for CVX are still expensive. I used 10 x most recent earnings to come up with the fair values.