Stock Valuation Calculator

Investment is not a simple process that requires the right approach, discipline and certain knowledge. We try to simplify the decision-making process by systematizing and filtering out unnecessary information, but some things cannot be excluded. We are talking about assessing the quality of the company whose stocks we are going to buy, as well as analyzing its current value.

Warren Buffett’s wisdom reminds us that it’s preferable to buy outstanding companies at fair prices rather than ordinary companies at great prices. The question of how to find a fair price is an age-old debate between different approaches to assessing value. Discarding all intuitive and non-systematic approaches, we can distinguish 2 main ones.

The absolute method, known as DCF valuation (Discounted Cash Flow), requires knowledge of the future company’s growth rate and calculates the business’s current value based on future income. The relative method assumes that we can compare the value of similar assets without assessing the future, choosing the cheapest and eliminating the most expensive.

At Eyestock, we have developed an analysis based on the relative method. It is simple, transparent, easy to use, and most importantly — unbiased. If you don’t need to improve your entry points, then feel free to skip this article. If you are interested in learning about our method, which was confirmed first by backtest research on historical data, and then on real portfolios, then we would like to share with you step-by-step how we use it.

Step 1. Understanding price-to-earnings ratio.

The P/E ratio, a key metric comparing a company’s market price per share to its earnings per share (EPS), is central to our analysis. Both the profit value and the stock price are publicly available information. Dividing earnings by price, we get the company’s market valuation. Let’s take IDXX stock as an example, which we wrote about in the Healthcare sector overview. IDXX current price on Nasdaq as of April 26 was $499.3, and its EPS for the last 12 months was $10.06. IDXX P/E is thus 49.6. What does it mean?. The market values every $1 of the company’s net profit at $49.6 in capitalization. Nothing more.

Step 2. How to determine a fair price?

In the Eyestock methodology, we do exactly the same thing for each previous period to understand how $1 of net profit was previously valued by the market? For a more accurate assessment, we study history over 5 years (20 quarters if the company reports quarterly).

The average P/E value will be a fair valuation level for us. Let`s clarify: since the average is not a completely accurate measure, we prefer to use the median — the number that is in the middle of the series. The advantage of this method is that it is not influenced by numbers that stand out from the general mass, therefore it is considered one of the most reliable and stable indicators.
So, the median P/E for the company is almost 58, and if we multiply the current 12-month EPS ($10.06), we get a fair price of $582.22 using the Eyestock method.

Step 3. Determine whether the company is undervalued.

After all it`s not a big deal. We compare the current price with the average value level. If the current price is lower, then we consider the company to be undervalued. Since the share price as of April 26 is significantly below $582 — by 17% — we call IDXX shares undervalued.

What to do next?

It is best to implement the information and methodology received into your own investment strategy — this will be the most effective and safe. If you don’t have such one, or you want to improve the quality of your own, you can use our insight. Once the price falls below Eyestock’s average value, it is a great time to invest in a stock you have previously chosen for fundamental reasons. This level is indicated in yellow on the chart. However, there are two more: the green line corresponds to the minimum P/E for 5 years, and the red line corresponds to the maximum. Notice how the stock price has behaved over the last 5 years. We hope this illustrates the application of our method quite colorfully.

This is how we calculate the stock value. The main idea of our approach is to find outstanding stocks at competitive prices. 29 stocks out of 618 mega and large-cap companies traded on the Nasdaq and NYSE exchanges currently fit this description. When viewing a company page, it is ideal to see a screen like this:

To speed up the search, we made an Advanced Stock Screener, where rating and valuation filters, like 50 others, are designed to make the search for viable investments quick and comfortable. Sign up and start your free account to improve your investments.