This is Why I Stopped Using Price Targets
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- čas přidán 25. 07. 2024
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When talking about stocks people frequently ask “what’s your price target for this stock” or “what is the intrinsic value for this stock” but do we really understand what those numbers mean? I used to do price targets in my analysis but I’ve stopped and moved on to something I think is better. In this video we break down how I used to do price targets, what I’ve switched to doing, and why I think it’s a better approach for how I analyze stocks.
00:00 How I used to value stocks
04:44 How I’m valuing them now
08:45 Why this works better for me
13:41 Why my view has changed over time
*I am not a licensed professional or a financial advisor. This content should not be taken as financial advice. It is meant for educational and entertainment purposes only. All opinions and perspectives are based on my own personal financial situation, experiences, and goals. Please ensure that you do your own due diligence before making financial decisions and/or meet with a professional. Links above include affiliate links, which means I may receive a commission at no additional cost to you.
Amazing video!! I recently came to a very similar idea that the valuation of a stock only depends 70% on actual business performance and 30% depends on public opinion of business performance more than the actual business performance.
Keep posting these videos I love them!
Thanks, much appreciated!
I’m buying VISA weekly this year regardless of the price, I just could never buy at the right moment 😅
Nice video!!
This has been a good year for it, it really hasn’t done much but I’m guessing they’ll do well again in earnings (consistent usually) and then it pops back up. Adding regularly will be nice in that scenario
Amazing video. LOVE THIS!!!
Shows a deep understanding of markets.. i couldn't have written a better response to that tweet.
Awesome, thanks!
Hi from Portugal.THANKS! I believe this is the best of your videos I have watched so far. Great tesis. I will change my stock buying / selling desitions by suporting more on historic PE or PFCF and on the business itself than on valuation or price target.
There's no perfect science with this stuff, but might be worth trying out and see if it works for you as well
where can u get the stat price to cash flow on Internet?
and how is it different from price to earnings?
Seeking Alpha (and many other sites), on Seeking Alpha they include the definitions as well
Great vid, appreciate it. Perhaps next time go into more detail on p/e vs. p/fcf?
Will do, thanks!
I believe that for cyclical companies you may want to do the opposite.
A company may have great earnings and a low P/E but going forward the economy slows earnings to down, price goes down, but with the expectation of improved earnings as the economy recovers it may have a high P/E. Just an example of what I have seen.
This is a really interesting point. I think the evaluation of the cyclical nature of the business should definitely be part of the "business evaluation" portion of it. Ie, how likely is the future outlook going to be good and/or how likely is the multiple to expand or compress from where it's at. But obviously...there's no way to know for sure when the cycle is turning.
Still, this was a really great point and something we need to be considering
@@mattderron
I have to add that I just buy companies I like that don't have excessive valuations and then hold forever adding or subtracting gradually only based on price. So I am not predicting anything just reacting to what has already happened.
Safest with funds since I am buying on price drops.
I personally find reverse discounted cash flow analysis very useful as it helps determine how much growth is already priced into the stock for the next 10 years. Compare that with the current growth and you get a sense of a risk involved.
Reverse DCF is actually way more interesting to me than traditional DCF, mainly because like you said, you're not trying to predict future growth yourself. Just using your required rate of return (which is up to us) and a future p/cf multiple we expect (reasonable to estimate).
The other thing I like about it is that the output is a growth rate that you have to think about compared to their future outlook. Very similar in terms of concept IMO to what I'm trying to do but with more precision than what I'm doing currently
@@mattderronthere are some free reverse DCF resources online too
Where do you get those P/E and P/cashflow graphs?
Seeking Alpha, Charting tab, select metrics from the Valuation group
Excellent video. Thanks. It is helpful to recognize that no company has an intrinsic value. There is a value that we may be willing buy or sell a company. You described a variety of useful methods to arrive at a value, or set of values, but it is a value we ascribe to the company and not intrinsic to the company.
100% well said. I cringe when people use the term “intrinsic value” as something absolute. It’s literally what you said - a value specific to us that we make a buy / sell decision on
Thanks for sharing. What you think of the software application industry salesforce, adobe, servicenow? Is it temporary bump in the road or their fundamentals going to be affected?
I haven't dug into any of those companies in detail, so I don't have anything intelligent to say about them. In general though, SaaS companies are interesting to me because they tend to have high margins, low debt, etc. All depends on how solid the growth story is IMO. I'll likely dig into Salesforce this week after it's big drop. May not be a video though, but I'll look into it
@@mattderron thanks matt, would you please share your findings please? Couldn’t believe the theory of AI creates problem for this industry
very high switching costs in b2b business depending on the industry.. In the case of software it is very high which is why you'll find the most moats in this segment of the market. These businesses can extract a lot of value from their customers.
Great video, and you have a new subscriber! I like the change you've made in your valuation approach, although it does require you to truly know the company's history. At the end of the day, it's all about finding a midmatch between your expectations for the market and yours
Thank you!
nice video matt. appreciate your good work.
Thank you!
I’m still developing the way I do my valuations and this is interesting I like this approach
Good video 👍
Thanks!
what website are you using to view these charts
Seeking Alpha, Charting tab
Thanks Matt, I'm still hanging on to SBUX for a turn around, probably wishful thinking? I did unload CVS last week at 57 (15% loss) I just don't see the growth going forward.
I think cutting CVS will probably be the right move. Similar issues as UNH from an industry perspective and not as well run IMO
In terms of SBUX, I don’t know. Many are holding, but I couldn’t do it. Too many better options with less debt, less growth risk, etc. But that’s just me
@@mattderron I hear ya on SBUX!! A tough hold! 😭
SBUX will definitely turn around. If I were an owner I'd hold too. But then again I've been holding INTC since 2012. 💁
Great vid thanks
Thank you!
Thanks!
No worries!
Great video, always learn something new
Thank you!
Excellent analysis! Using an extreme example I purchased NVDA in 2013. Had I paid 10 times the price I paid I still would have made a phenomenal return. The long term growth of the company is way more important than the so called under or overvalue of the current price. Thanks for highlighting this.
2013 wow!!
If you bought $10,000 of NVDA at the EOY 2013, it would be worth $2,867,357.23 as of market close today (05/29/2024). At EOY 2013, NVDA closed at $4.01 a share. At $4.01 a share, EOY 2013 would have bought 2493.765586 shares. 2493.765586 shares times $1,148.25 (NVDA shr price market close today) = $2,863,466.33.
So, no matter how many you bought in 2013, you have one heck of a profit on NVDA. Congrats!!!
Oh, FWIW, this is without the small dividend. The dividends accumulated over that time frame would total "only" be $3,491.90 (accumulated from EOY 2013 to EOY 2023).
Another nice one Matt! Absolutely agree, superior companies with huge cash flows coupled with huge moats will always outperform in the long run and that’s the goal
For sure!
Had to watch a second time.
This is goood!
Thank-you for this video.
I know that my personal investment journey will continue to evolve; you were able to summarize & communicate a lot of information into this video.
Thanks, Matt! In the past, I have also relied on the DCF model. Now when I analyze companies, I look at financial metrics such as revenue growth over the last 5 years, free cash flow growth over the last 5 years, ROIC >=20%, low debt and a wide economic moat. I don't care at all about analysts' estimates or the current stock price (as long as the price is not crowd speculated). If a company fully meets my expectations, I invest in it anyway. Like Warren Buffett, I don't buy stocks, I buy businesses. It always pays off in the long run.
Agreed, the more we look at them as businesses we're attach ourselves to I think the better we understand what we're actually buying
Yeah business first, I look for the economics of the business, secular trend, management team, is it family owned/founder lead (doesn’t have to but nice if it is) do they have skin in the game? No debt (same, doesn’t have to but nice) smart capital allocation, pricing power, operating leverage. I came down to about 14 names. Some are,
CPRT, COST, AMZN, ODFL, BRO, FICO, MSFT, V, CMG
Love it!
Just like what Warren Buffet’s been saying. It’s all about buying a a wonderful company at a fair price than an average company for cheap.
Thanks for the video Matt. I agree that multiples have usually served me well when investing. And great job picking up AMZN using this approach last year! As a minor nit pick, many people are very bullish on AAPL and cite the 100B+ in FCF each year as a reason to just always buy, but I like to ask "how much are you willing to pay for that FCF?". Because AAPL currently trades at a P/FCF of 28, which is the most expensive it's ever been in the history of AAPL. Yes their business model is improving, more revenue and eps is coming from reliable subscriptions so I suppose that justifies some multiple expansion, but revenue has stalled for the past 2 years now and eps isn't growing at an impressive enough rate to justify their PE or P/FCF multiples. Imo it's just hard to buy or hold a business that only grows at mid single digits at these valuations
Thanks, and yes regarding Apple I wasn’t trying to say that it was “cheap” by any means. It’s one that actually shows the P/CF getting more expensive like you said. What I was trying to say there is that just a valuation calculation isn’t enough to understand why a company trades the way it does. The reason why Apple’s cash flows are so expensive IMO is the perceived lower risk of investing in their business vs another due to their loyal customers and $100B+ in cash flow. Obviously people may not agree that it’s worth it and that’s ok. But I think that’s why it trades at a premium in spite of the lower growth numbers. Also not sure if you saw my Apple End of an Era video but I talked about how their revenue trend is actually similar to previous phone cycles and IMO likely to come back next year. But I guess we’ll see 🤷🏻♂️
How did I miss that video?? L
Any how, I think the emphasis is to understand and agree with where the Co is going and yes the stock price becomes secondary.
I will take META as an example again. For a period of time I was not believing on their "promises" especially their AI development. So I had a bunch of META stock at +/-90$ and I sold a about 40% of it, it was not paying dividend and the stock was at 180$ fo by selling some the rest was "Free" in my portfolio. Then I learned more about what they were doing with their AI (medical solutions, etc) and I decided to hold to the rest of my precious shares. Of course now that stock is 330% what I paid for and has started paying dividends. I now understand the business better, have more confidence in the stock and do not intend to sell. Do I regret selling some of it? Not really at the time it gave me cash to purchase some 3M and Apple stock that I thought were a good opportunity and it turned out to be correct.
Cheers,
a.
My ability (or inability) to properly value companies has caused me to miss out on some great returns. I never bought Nvidia, sold Amazon and Microsoft waaaaay too soon, and many others. When I decided to start buying good companies that have fallen out of favor, I've made some really nice returns.
I love the idea of comparing a company's current state to its past, that makes more sense than anything else I've seen. If they're trading low despite making money and having a solid balance sheet, that's often the best buy indicator. Just check the news to see if there's anything glaringly horrible, of course :)
Total agree on valuation models. Valuation models tend to only work in very depressed companies after some bad news. I think P/E is not a very good metric because all the best companies will have a high P/E because they are predictable or have promising growth prospect, or have had a proven track record. Companies I tend to buy on average have a P/E between 20-35(probably leaning towards 30 most of the time) I also care about free cash flow yield to be around 3-4% (in some instances I ignore this if a company I am looking at has higher cashflow yield over its historic average) with free cash flow growth. But as far as valuation goes that's most of what I care about.(I will also factor in debt at times). Love your videos man keep up the awesome work.
Thank you, much appreciated!
maximize your investment return and mitigate your speculative returns (which we can't control), by paying close attention to valuation (growth in earnings, dividends etc.). It is still possible to over pay, so everyone watching don't get to carried away with the fact that he's not setting price targets.
To be honest in my DCF model visa is below intrinsic value right now, and so is Amazon and Mastercard. Maybe the problem is using a discount rate that is unrealistic like 12%, the market will never discount a great business at such rate. Plus if you also want a 20% margin of safety on top of that basically you’re discounting to get 15% per years for the next 20+ years on an amazing business which the market is never going to give you unless there is the apocalypse happening. Anyway if for you this new method works best I believe it is also very good and it is less time consuming
For sure, I can always update the assumptions to make the numbers work but the reason why I used 12% discount rate because I was using it as a "required rate of return" as opposed to WACC. The idea being a very crude "the index averages roughly 10% / year over time, I should expect a 20% premium for my stock picking efforts" It's very crude, but that was the thought process.
The additional margin of safety I agree is unnecessary but added it as per normal "value investing" principles dictate.
Trying to be more precise with the WACC/discount rate just added yet another assumption I had to make that starts to skew the result IMO. Obviously I know many people use these models successfully, so this is just my thoughts on it and the approach I chose to go with.
@@mattderron Thanks for the reply. I totally get what you mean and I've been struggling with these numbers too for a while. My understanding is that if you input your required rate of return as an investor in a dcf you overestimate it probably because you miss the compound effect that you have as an investor reinvesting dividends and with buybacks so you own more and more of that cashflow and that is an effect that overtime matters and it is missed in the dcf calculation. So it is correct to use wacc as a discount rate to represent different risk rates for different business and than as an invertor you'll actually get a better return than the wacc. Great content by the way, I really like your channel.
Really good point about compounding and rate of return. All the more reason for me to move away from this since I don’t want to calculate WACC 🤪 lol. Thanks
@@mattderron yes, probably you are getting very similar entry points anyway! 😄 Sometimes I use a super simple rule of thumb that works too, FCF yield + growth and that is give or take the long term return as an investor. All road lead to Rome. I totally agree with you that the most important thing is to buy a great business and valuation is mostly to make sure not to get a price that is way too risky.
I use intuition and weed
😂 love it
God I wish some of the value guys would watch this video. End up scraping the bottom of the barrel.
Only thing that matters in the end for most stocks is future growth. Where its cash flow, revenue, or earnings. It’s what you are buying and it’s very difficult to use as a comparative value.
This is the change that made BRK what it is today. That being said, it's a change that's necessary when you become too big. Small investors can still well outperform, but the likelihood is still really low. Mostly due to action, rather than inaction, TBH.
I agree that numbers will ever get you so far.
However, I think relying on past ratios will likely won't go in the way you want.
I think comparing past ratio of a company will trick an investor to believe there is some sort of pattern.
I think an investor must choose company that he understands first and look at the future roadmap of the company.
Buying apple for brand strength is wrong IMO, even though they make 100B per year doesn't mean they can't downfall.
If investor buy apple without knowning its future roadmap, despise its slow growth, that is call gambling.
You are right to say that price may be fluence by people's opinion, but as far as I'm concerned these opinions are noise.
If Apple, Visa or Costco will never look good it may be because it is not good xD.
You don't want to buy hype and risk, you want to buy something that you can make money of.
I think you might've misunderstood what I was trying to say. I agree with you - an investor should look at companies they understand and the future outlook of the company. That is the most important part.
Looking at price ratios simply shows you how that particular stock tends to trade historically. It's not a guarantee of a future pattern, but may tell you where it's at in terms of it's own historical price to value ratio. It's an input that helps account for different business models, industries, and accounting methods better than some other valuation models do IMO. But it's simply one input, not the only thing.
Lastly, we will agree to disagree that "Apple, Visa or Costco" are not good. I'm not saying to buy them now at current prices. I'm saying they will never show up as attractive in a traditional DCF model because they trade for a premium. They trade for a premium because of the quality of the company. And yes...many investors have made a lot of money from them.
I'm curious though about your comment of "don't buy hype and risk, buy something you can make money off of" what are examples of things you can make money off of that don't have risk?
@@mattderron you are right I made a mistake at the end… risk is fine obviously. I meant avoid hype and avoid gambling on the fact that big company will stay big because they are big. I think valuation method are useful to find hidden gem and not so well known company. Because blue chip will always be traded at a premium. If you only buy the obvious winner and have 10-20 stocks of well known companies, I feel you’ll end up not beating s&p500
fwiw I never look at price targets. Too much speculation. I tend to look at how Buffet does; strong business, with strong demand, good cash flows. The price will take care of itself if the fundamentals are there.
And yeah I dumped out of AAPL, SBUX, and others earlier this year because I wasn't as confident in their businesses going forward. I may be wrong with AAPL (AI) but we'll see. And to me SBUX is going against the current now. Labor, supply costs, international (ie: China) is a big question mark, etc.
No interest in LULU, fwiw. $100 yoga pants..
That's totally cool, what makes market interesting is that we all have different thoughts and opinions and can allocate our money accordingly
Laaalala
I don't know what this means, but I will assume it's good lol