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Stock Current Market Price and Valuations

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Fundamenal Analysis works on past data.

It used data from company Balance sheet, quarterly results and financial rations to make decisions.

Fundamenal Analysis rarely makes decisions based on future estimates.

In our long journey on analysis, we might have come across fundamentally good companies.

Having a list of fundamentally good companies does not always mean we should jump in and start investing.

Investing in fundamentally good companies should be done at the right price points.

Assume we have a fundamentally good company whose CMP is Rs. 100

We now have to determine if Rs. 100 is a good point to start investing.

One easy method of doing this is to determine if there is any valuation gap.

For this, we do the following.

Step 1: Determine the price of the stock 1 year ago and compare it with today's CMP.

ie. Stock price difference between 1-Nov-2016 and 1-Nov-2015

Assumption: If there are any stock splits, bonus shares, reverse splits, dividends etc. you need to adjust the CMP accordinly

Step 2: Take the latest quarterly report of the company and the difference in the Net Profit

ie. Net Profit as of 1-Sep-2016 and 1-Sep-2015

Step 3: Find the percentage difference of price difference and earnings difference.

If the price difference % < earnings percentage difference, the company is under valued

So, we can say CMP is Fair, Attractive or Very Attractive depending on the difference in the percentages

If the price difference % > earnings percentage difference, the company is under valued

So, we can say CMP is Expensive or Very Expensive depending on the difference in the percentages

Here is a way of using Stock price valuations for our investing decisions.

Assume we are invested in a fundamentally good company. There will be 5 levels for CMP valuations.

1. Fair: This means the stock is in a neutral zone. The stock CMP will go up or down and we will decide accordinly.

2. If stock price goes up, the share price becomes Expensive or Very Expensive.

Expensive is the area where we need to slowly start selling.

Definitely exit when in Very Expensive.

3. If stock price goes down, the share price becomes Attractive or Very Attractive.

Attractive is the area where we need to slowly start buying in SIP.

Definitely add the best volumes you can buy when in Very Attractive.

For example, at the end of Oct 2016,

Amongst Private Sector banks, South Indian Bank, Karur Vysya Bank, IndusInd Bank, Axis Bank, Kotak Mahindra Bank, ICICI Bank, HDFC Bank are all fairly valued.

But my general entry point is when they are attractive or very attractive so that we can have some margin of safety.

Of course, if it is for 5+ years of investing, a fair level of valuation will be sufficient.

  • Rule #39: Invest in companies whose earnings growth is more than the share price difference in the past 1-year

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