Last week saw the launch of our new valuation comparison module. After doing several webinars / demos with our clients and prospective clients, we found that many people would like to see more evidence (and particularly comparatively) that the STRIDE Algorithmic Valuation Engine (SAVE) was creating realistic valuations.
Introducing the Valuation Comparison Module
In response to last week's feedback, we have developed the comparison module. Let's take a look at how it works...
The first valuation we will look at comes from Apple Inc. Clearly, everyone knows this business, so it's an easy one to look at.
On our detailed company analysis page, you will notice that the 'Fair Value' line is now a link / clickable and that it has a small chart icon next to it.
Clicking on that link will bring up the chart below:
In the case of AAPL, we see that we have valuations ranging from $66.20 using the traditional Benjamin Graham 'Graham Number' approach, up to $139.45 using the (often misused) Graham Formula. We can also see the STRIDE Fair Value comes out at $121.47, the price is $117.63 (as of writing this blog) and that the Average Valuation comes out at $108.78.
The average 1 year Analyst Price Target over at Nasdaq is $125 (again, at the time of writing).
Ultimately, this tells us that in the case of Apple, we're slightly more optimistic than the average of valuations we have calculated but also slightly less optimistic than the average analyst. Does this make us right? Well, we like to think so... but that isn't the point. This module shows us some really interesting aspects of valuation. If you look at the 4th to 7th column on the chart, those use the average multiple for each of those measures over the past 5 years. This gives us a flavour of what the market has been doing, which can be a useful view on market sentiment. The rest offer differing valuation methodologies to us that we can use to compare to (a useful view on 'valuation range').
In this case, we can see the price, average valuation and STRIDE Fair Value are all in a fairly tight range (and also tie in with the average analyst view) - which means it's quite likely that Apple is trading at our around its fair value.
Undervalued Companies on STRIDE's Target Stock Pick List
Now, what to do when STRIDE tells us a company is fundamentally undervalued? (As is the case with The Greenbrier Companies, currently on STRIDE's target stock picks list). STRIDE feels this is currently trading at below 50% of Fair Value. That is a massive discount, but is the STRIDE engine being too optimistic?
Let's take a look at the comparisons and get a better perspective?
From the above chart, it's plain to see that, at $36.10, GBX is trading well below every possible valuation metric we have and well below the average valuation. While there are plenty of debates that can be had about their industry, marketplace etc., it's clear that based on current results, this company is trading well below it's fair value. In this case, though, the average 1 year Analyst Price Target over at Nasdaq is $35 - $1 down from the current price.
Wow - that's quite a mismatch... and we don't really have a problem with that. Remember, we aren't looking at a 1 year price target, we're looking for businesses that we can / might hold forever. The short term outlook for railcars in North America might be poor, but this is a well run business that has demonstrated an ability to weather storms and keep growing through all the recent tough times. All our indicators tell us that they're setup in the right way to continue doing that into the future. As such, we feel they will turn their significant internal investment into future growth, regardless of short term market conditions.
Overvalued Companies on STRIDE's Stock List
Yes, but what about those companies where STRIDE feels there is no value or that the market has gotten way ahead of itself? Let's stick with the big names: Salesforce, Facebook and Alphabet / Google.
Starting with Salesforce:
The first thing we notice is that there are several missing columns from the historical valuations. That's because those numbers would come out negative, and we can't have a negative valuation. That is because, historically, Salesforce has never made any money. So the historic valuation multiples on those measures have been negative. STRIDE also feels there is no value in Salesforce, so the only valuation that sits around the current price is the historic price to sales multiple. This isn't a Salesforce bashing session. It just proves that you can't use standard valuation models to reach a valuation... it also proves this isn't a value play.
Now take a look at Facebook.
This is really interesting to see as a value investor. Facebook has grown so aggressively, generated a profit so rapidly, and moved so quickly, that it is already showing an average valuation of ~$59. Amazing when you consider that, just a few years ago, it was barely breaking a profit and trading at multiples over 100x earnings. We still feel this is trading at an extreme valuation, but it's still an interesting picture of a growth company that is fulfilling potential far quicker than other Silicon Valley counterparts.
Finally, Alphabet / Google:
This is clearly just a little more grown up than Facebook and has started to generate strong valuations across the board. STRIDE still feels that the market is over-exuberant, pricing in massive growth where it is probably going to slow from here on out. Even at average historic multiples that reflect higher growth than in the past 12 months, you only get to a $650 valuation.
The valuation comparison module has been built to provide you, the value investor, with more information and a quick reference with regards to valuation. We can see from all these examples that long term valuation is not a simple task and that many different methods can be used to arrive at many different results. Our hope is that this allows you to make better informed decisions and gain some insight into how our valuation is derived.
As always, if you'd like a demo of the platform and to understand more about what we do, sign up for one below.