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When analyzing a stock fundamentally, one concept that holds the utmost importance is intrinsic value. It is simply the perceived value of the company as per the analyst. If a stock trades lower than its intrinsic value, the company is said to be undervalued and a stock trading above its intrinsic value makes the company overvalued. Hence, this true value gives us a signal of whether it is the right time to enter/exit or not.
However, the most asked question is – how to calculate the intrinsic value of a company?
Let’s take the example of ITC Limited. The stock currently trades at INR 440.75. To figure out its true value, we need to perform various complex financial calculations, often called financial models after taking some assumptions into consideration which is a highly skilled and tedious task.
However, this is all being taken care of by Investing Pro+. As can be seen from the image below, this tool has calculated the true value of ITC based on 14 separate financial models such as 5-year DCF Revenue Exit, P/E Multiple, EV/EBIT, etc. Doing
Image Source: Investing Pro+
Now all these models have projected different intrinsic values based on their own parameters and relevant datasets. So again a question arises, which value to consider for decision making?
As all models work differently, and take different assumptions with different datasets, one of the best ways is to take the average of all to arrive at a much rounded-off and realistic intrinsic value, which we call “Fair Value” in Investing Pro+.
In the next image below, we can clearly see, that the ITC seems to be slightly overvalued as its CMP (INR 440.75) is higher than the fair value (INR 417.95). Therefore, there is a probable downside of around 5.2% before the stock can be deemed to be fairly valued.
Image Source: Investing Pro+
This is the simplest way to keep a tab on your portfolio stocks and see which ones are becoming overvalued to weed them out on time before they start to correct and result in losses.
In a similar fashion, the fair value can also be used to check how much upside potential a stock is left with (if it is undervalued) to help you make a buy or a hold decision.
Those of you who know I hold REC (NS:) in my portfolio had been bought with the same process apart from some additional checks. So when am I planning to exit from my holding? By following the above process. As soon as the CMP of REC shares reaches their fair value, implying the stock’s valuations have come to par, that would be an ideal time for me to exit. This is how I do DIY investing for the long term.
Thank you to all who attended my webinar on 27 September. Those of you who missed the session can access the full recording here: https://shorturl.at/amIN7
Remember, the once-in-a-lifetime offer of a 65% discount on InvestingPro+ via the coupon code PROW478 is only valid till 10th October 2023. You can go to this payment page to avail your offer: InvestingPro Checkout – Investing.com IN
For any assistance reach me at aayush.k@investing.com or aayushxkhanna@gmail.com
In case you want to connect with me, reach out on X (formerly, Twitter). My handle is – aayushxkhanna
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