The most important homework for stock investing: Valuation

On the 19th of last month, I exchanged with you “How to Identify the Financial Disguise of a Listed Company”; on the 22nd, I published “If you recognize the financial truth of a listed company”; Today, let’s study together about valuation. ‘s knowledge. It needs to be emphasized that it is the most important homework for stock investing!

No matter how well-managed, technologically advanced, competitive and profitable a company is, as long as you buy at too high a price, it is doomed to be a bad investment.

The premise of successful investing is that you are buying at a price that is attractive and has a margin of safety compared to the intrinsic value of the business. Unfortunately, however, this idea is often forgotten or even thrown out the window by some people when market sentiment is high.

Therefore, we are heartbroken to see that most people in this world are not taught, but are taught. Think about a year or two ago, those who bought Hengrui Medicine above 90 yuan, Ningde Times above 650 yuan, Arowana above 140 yuan, Tongce Medical above 400 yuan, and the most typical 07 Shouldn’t we always remain rational for the torment suffered by those who bought PetroChina at RMB 48 per year? There is a poem recitation video “I stand on the top of CNPC 48 yuan” on the Internet, I suggest you find it out and listen to it often.

If you buy and sell blindly without doing a valuation, you are actually buying and selling blindly.

At the same time, whether or not to conduct valuation research is also an important difference between investors and speculators. An investor buys a stock at a price lower than the value of the asset, and how much he gets depends on the financial performance of the stock; the initial intention of a speculator to buy a stock is that he believes that the stock can still rise, and there must be a group of fools willing to spend more The price acts as a pick-up man. The trouble, however, is that the music often comes to an abrupt end, leaving a tragic scene of chicken feathers in front of you.

There is a lot of chatter above, with only one purpose: to pay attention to valuation. Below I report in detail the advantages and disadvantages, limitations, caveats and practical objects of various valuation methods. Please read carefully.

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1. Price-earnings ratio

The price-to-earnings ratio is by far the most popular valuation ratio, as long as you know its limitations and caveats. It allows you to do it perfectly.

When using price-earnings ratio valuation, you’d better compare it with the price-earnings ratio of companies in the same industry, and at the same time compare its own price-earnings ratio in different historical periods, and buy when the price-earnings ratio is low.

However, P/E ratios have a big downside: For example, is 15 times P/E a good or bad thing? In other words, is it worth buying if the price-earnings ratio is low? This is a difficult question to answer and requires specific and in-depth analysis.

Therefore, the use of price-earnings ratio valuation should pay attention to:

1. The price-earnings ratio valuation method is more useful for mature and stable companies; it is more useful for companies with bright prospects than for young companies with uncertain prospects; it is not useful for startups with minimal profits, not yet profitable, or companies that suddenly lose money. Be applicable.

2. If you use the price-earnings ratio valuation method to value companies in cyclical industries that fluctuate, you should do the opposite. In other words, buy when the price-earnings ratio is the highest and sell when the price-earnings ratio is the lowest, otherwise you will fall into the low price-earnings ratio trap.

In January 2020, a friend of mine bought Minhe shares, which is engaged in chicken raising, at a price of 35 yuan and a price-earnings ratio of 5 times. Within half a year, the stock price fell to about 20 yuan. Fortunately, stop loss, otherwise the current share price is only less than 15 yuan.

3. There are three different price-earnings ratios, one is the price-earnings ratio calculated from the profit of the previous fiscal year, called the static price-earnings ratio, and the other is the price-earnings ratio calculated with the profit data of the last four quarters, called the rolling price-earnings ratio (TTM), the third The three are the expected price-earnings ratio, which is the price-earnings ratio calculated by analysts’ estimated earnings for the next year. When you see the expected price-earnings ratio, you must be vigilant, or even put a question mark. Because analysts are often just imaginative, very optimistic, and unanimously raising profits for the next year.

4. When you look at a company’s P/E ratio, you must be confident that its earnings are real. It should know whether it has sold assets during the reporting year, whether it has a one-time investment gain, and whether it has capitalized accounts that could have been expensed (such as research and development expenses). One of the above situations is not a real profit.

As we all know, at the end of each year, some A-share companies need to sell real estate to make up profits, and such profits must be another matter.

5. Risk, growth and capital needs are the basis for determining a stock’s price-earnings ratio. Companies with higher growth potential should enjoy a higher price-earnings ratio pricing, and companies with high asset-liability ratios and large future capital needs should be valued at lower price-earnings ratios.

6. When using the price-earnings ratio for valuation, companies with abundant cash flow and low investment needs in the future should enjoy a slightly higher price-earnings ratio than other companies. Just like Maotai, the annual profit growth is generally not more than 15%, but it has always enjoyed a price-earnings ratio of more than 30 times.

2. PEG

PEG is actually a branch of the price-earnings ratio. The calculation method of PEG is the price-earnings ratio divided by the growth rate. It is more suitable for fast-growing companies. Investment guru Peter Lynch likes to use this valuation method, but Peter Lynch adheres to the pricing principle of PEG≤1. However, in our A shares, those high-growth companies have always had a PEG of ≥ 2. In the past two years, Hengrui Medicine, Mindray Medical, Ningde Times, Sunshine Power, Tongce Medical, Aier Ophthalmology… It is rare that the PEG is less than equal to 1. Even if the valuation is killed until now, most of them are still overestimated.

Because, when you use PEG valuation, you are assuming that all growth rates are the same, when in reality, risk and growth always go hand in hand, and growth rates are accompanied by the same amount of money and the same size Risk. Businesses are always the product of risk and speed. An enterprise that can increase the speed in the risk and reduce the risk in the speed is a rare enterprise that operates at a high level. Therefore, those companies with low input and high output are the ones with more valuation premium.

3. Yield

Yield is another branch of the price-to-earnings ratio. The so-called yield, that is, earnings per share divided by the stock market price. For example, there is a stock with a stock price of 20 yuan and an earnings per share of 1 yuan, then its price-earnings ratio is 20 times, and its yield is only 5%, which is just the inverse of the price-earnings ratio. The advantage of using the yield indicator is that we can compare it with the bank’s fixed deposit rate and the five-year 10-year Treasury bond rate. If the yield on 10-year Treasury bills is 5%, then it is obviously not worthwhile for you to buy stocks at 20 times earnings (5% yield).

Speaking of this, someone must have come out and said, how can anyone buy stocks for the dividend yield? – No, you don’t know. There are always some people and some funds in the market who are not willing to take risks. Only when they realize that buying stocks must be more cost-effective than bank deposits, they will bet on the stock market. The dividend yield is the judging criterion. Look at Ping An of China, it has such a huge amount of money, but its annual return on investment is mostly less than 5%.

4. Market-to-sales ratio

The price-to-sales ratio is the most basic of all ratios. It is the current stock price divided by the sales revenue per share, or the current market value divided by the total sales revenue. The sales revenue reflected by the price-to-sales ratio is more realistic than the net profit in the financial statements. In “How to Identify the Financial Pretenders of Public Companies,” we said that companies use a variety of accounting tricks to try to push up profits, rendering the P/E valuation method ineffective. Therefore, we need to compare the company’s sales revenue in different historical periods with the current stock price, which makes it easier to see whether the company is undervalued or overvalued.

However, the price-to-sales ratio has a big flaw: The value of sales revenue can be small or large, depending on the company’s profitability. Therefore, the price-to-sales ratios of different industries are meaningless unless the profitability levels of the two industries are very similar. If you compare the market-to-sales ratio of Yonghui Supermarket and Chengda Bio, the conclusion you draw will just mislead your investment. Only a comparative analysis of the current market-to-sales ratio and historical price-to-sales ratio of the same company is meaningful.

5. P/B ratio

The price-to-book ratio is also a commonly used metric, which is the share price divided by net assets per share, or market value divided by the book value of the balance sheet (owner’s equity or net worth). Buffett’s teacher Graham is an advocate for the price-to-book ratio.

The price-to-book valuation method is useful for financial services companies and loss-making companies. It is basically useless for asset-light companies, companies with high brand added value, network computer software companies, high-tech companies, and service-oriented companies.

When using the price-to-book ratio to value a company, you should also pay attention to goodwill. The existence of goodwill will depress the price-to-book ratio and make a company look cheap, but it is not.

6. Discounted free cash flow

The common flaw with the previous ratios is that they are all price-based, and they compare how much you paid for one stock to the price you paid for another. But anyway, those ratios don’t tell you how much a stock is worth. In reality, if you don’t know the intrinsic value of a stock, how do you know how much to pay. Therefore, assessing the intrinsic value of a company can give us a good indication, and discounted free cash flow is an assessment of the intrinsic value of the business. It tells you exactly how much a stock is worth, and it considers the value of the stock equal to its future cash flow discounted.

We know that companies create economic value and generate income by investing capital, some of which cover operating expenses, some are used for expansion or reinvestment, and the rest is free cash flow. Free cash flow is money that can be taken out of a company’s business without harming operations. A company can use free cash flow to generate profits for shareholders in many ways, such as paying dividends, such as repurchasing and canceling shares, such as continuing to invest…

Discounted cash flow reflects the time value of cash and estimates possible future risks.

Speaking of this, we can understand why stocks with stable earnings and predictable earnings (such as Maotai) often enjoy higher valuations, because they have a lower probability of future cash flow risks. Conversely, those with great uncertainty in the future Companies (such as Haikong) will definitely be a lower valuation.

Valuation using the discounted free cash flow method is more difficult but more reliable than the above methods. Special essays are required.

7. Gross estimate

This method sounds unreliable, but it actually works. Just like the left and right brains of our brains, IQ and EQ.

When Duan Yongping introduced that it bought the shares of General Motors in the past, he admitted that he was a gross estimate, and he bought it at the first sight.

If you are interested, you can climb the stairs and have a look. When I called and bought China Mining Resources several times in the snowball in July and August of 2020, the stock price of China Mining Resources was 15-16 yuan, the share capital was 278 million, and the market value was more than 4 billion. I have clearly stated that in July 21, its stock price can be seen at least 50 yuan, and its market value can be seen at least more than 10 billion yuan. What is my judgement based on? I think that in this world today, no matter what you are in the world, you can be worth 10 billion, even if you wash your feet, polish your shoes, and collect garbage. What’s more, China Mining Resources is a double champion. Fortunately, as I said, the share price of China Mining Resources not only exceeded 50 yuan, but also exceeded 100 yuan due to the sharp rise in the prices of lithium hydroxide and lithium carbonate.

8. Other Valuation Methods

1. Product competitiveness and industry status valuation method

This method is more suitable for valuing unprofitable or loss-making companies for the year. The Lanshi Heavy Equipment I proposed to buy last year is an example. Its performance and cash flow were negative at that time, its stock price was more than 5 yuan, and its market value was less than 6 billion yuan. I think it has an irreplaceable role in the manufacture of wind power photovoltaic nuclear power equipment. The unique skill, just buy it, and the result will be 8 consecutive boards soon.

2. Customer value valuation method

This is often the way to value unprofitable companies and Internet big data companies. Although the company has no profit or very little profit, but its number of customers and future value is not small, it is unfair if we value it by price-earnings ratio, price-to-sales ratio, or price-to-book ratio. , is not objective. We should value it by its customer value.

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In fact, every valuation method and every investment method has its flaws. Those who are trained in valuation may miss out on some investment opportunities, but will surely avoid many pitfalls. After all, the cost of losing money is far worse than losing the opportunity to gain. So, the price you pay is just as important as the company you’re buying.

Sincerely wish everyone a good investment!

#中MINING RESOURCES# #Blue Stone Reloading # #Minhe Shares#

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