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Why is the Stock Valuation Model superior to traditional equity valuation
models such as dividend-discount models, earnings-discount models and
cash-flow discount models?
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What sets the ValuEngine Valuation Model apart from variants of traditional
discount models is a reasonable parameterization of each firm's EPS growth
and the economy's interest-rate processes, plus the way in which these
parameters are estimated. This is also why our proprietary model performs
better than all other equity-valuation models available in identifying
truly undervalued, profitable stocks.
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Many research studies have demonstrated that the traditional discount
models usually do not help much in finding profitable stock opportunities.
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Our model valuation not only captures the properly discounted value of
a stock's future EPS flow, but also reflects how the market has historically
valued the stock in relation to interest rates, and current and expected
future EPS. In addition, it takes into account the stock's liquidity and
supply demand factors.
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What are the fundamental variables used in the Stock Valuation Model?
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There
are three basic variables utilized in the ValuEngine Stock Valuation Model:
- The most recent, trailing 12-month earnings-per-share
information (EPS) of the stock from the day of valuation,
- The most recent forecasted EPS of the company for the future 12-months
(based on analyst consensus) from the day of valuation, and
- The current 30-year Treasury yield.
The values of these three variables can change
slightly or drastically from day-to-day for any given stock. These changes
in the value of any or all of the variables are dependent upon the current
and future prospects for the company and the macro economy. Consequently,
a stock's model price is subject to change on a daily and intra-day basis.
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Are there any other parameters playing a role in determining a stock's model price?
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Yes,
there are seven firm-specific and three interest-rate parameters that
are all determinants of a stock's fair value today, though the importance
of each differs across the parameters.
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The firm-specific parameters reflect, among other things, its long-term
EPS growth, its actual-EPS growth stability, the nature of the firm's
business cycle, the volatility or stability of analyst expectations about
its future EPS growth, and sensitivity to macroeconomic risk factors.
These EPS parameters differ from firm to firm and across business sectors,
giving the model ample flexibility to capture each stock's distinct characteristics.
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How are the model parameters estimated?
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The
model parameters for each stock are all estimated from the stock's own
history, reflecting not only the business characteristics of the firm,
but also the usual supply-demand situation for the stock by market participants.
The resulting model price thus captures the firm's fundamental soundness,
management effectiveness, and the implicit historical valuation standard
of the stock by the market.
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Can the Stock Valuation Model be applied to IPOs or newly issued stock?
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ValuEngine
recommends that investors refrain from applying the ValuEngine Valuation
Model to newly issued stocks or young stocks (those that have been publicly
traded for less than two years). The ValuEngine Valuation Model requires
at least two years of information to arrive at plausible projections.
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How often does a stock's model price change?
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Because
the values of the three fundamental variables can all change from day
to day and intra-day for each stock, each stock's model price is subject
to change on a daily and intra-day basis.
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What is the relative importance of Earnings Per
Share (EPS) growth versus interest rate to model valuation?
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In
determining an individual stock's fair value, EPS and EPS growth are more
important than interest rates.
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Is the quality of Earnings
Per Share (EPS) estimates critical to determining the model price?
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Not
necessarily. The ValuEngine Valuation Model automatically adjusts for
both accounting irregularities and EPS estimates from companies that are
consistently inaccurate. Of course, the better the forecasts about a firm's
future EPS, the more accurate the resulting model price for the stock.
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I have a stock with very high Price-to-Earnings
(P/E) and market/book ratios, but ValuEngine.com says that it is undervalued.
Why?
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Traditionally,
stocks are considered overvalued if they have a highP/E ratio and a high
market/book ratio. In this particular case, the stock may be considered
"overvalued" in the traditional sense. However, the ValuEngine Valuation
Model is based in part on the stock's historical valuation in relation
to interest rates and the stock's current and expected EPS. Consequently,
if the stock is historically overvalued in the traditional sense, it's
possible that once the stock price falls beneath its historic valuation
level, it will be considered "undervalued" by the ValuEngine Valuation
Model.
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My stock has very low Price-to-Earnings (P/E) and
market/book ratios, but ValuEngine.com says that it is overvalued. Why?
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Traditionally,
stocks are considered undervalued if they have a low P/E ratio and low
market/book ratio. In this particular case, the stock may be considered
"undervalued" in the traditional sense. However, the ValuEngine Valuation
Model is based in part on the stock's historical valuation in relation
to interest rates and the stock's current and expected EPS. Consequently,
if the stock is historically undervalued in the traditional sense, it's
possible that once the stock price rises above its historic valuation
level, it will be considered "overvalued" by the ValuEngine Valuation
Model.
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Is the Stock Valuation Model's "model price"
based on fundamentals or technical charting?
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The
ValuEngine model price for a given stock is based on the current fundamentals
of both the company and the macro economy. However, the model price can
be applied in conjunction with momentum and other relative-strength rankings
included on this site.
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