If you have used Stock Rover for any length of time, you’ll know that Stock Rover provides an incredible amount of investment data for stocks, ETFs and funds in what we think is a logical and easy to digest form. What we are striving to do now is to perform more complex analysis on this data so we can provide you with higher level analytics that are easy to understand and will help guide you to better investment decisions.
To this end, we have updated our Insight Panel Summary page with a number of these new advanced metrics. This is the first of two blog posts that will describe what we have added and how it can help you make more informed investment decisions.
In this post I am going to discuss Fair Value and Margin of Safety. In the next blog post I will discuss the new score metrics we have added to Stock Rover for Sentiment, Valuation, Growth and Quality as well as the Piotroski F and Altman Z metrics.
Fair value (a.k.a. intrinsic value) and margin of safety are the core investment considerations for value investors. They were defined by Benjamin Graham and David Dodd in their seminal book Security Analysis and Graham’s subsequent classic The Intelligent Investor. Benjamin Graham is considered to be the father of value investing. These metrics were the fundamental way Graham valued stocks. Warren Buffet is the most famous of the many Graham disciples. Fair value and margin of safety are the linchpins of Warren Buffett’s investment style.
So what is Fair Value? And what is the Margin of Safety?
Let’s start with fair value. Fair value performs a forecasted discounted cash flow analysis of a company to determine the company’s intrinsic value based on the expected future cash flows the company will produce. It basically determines what a company is worth based on how much cash flow it is expected to generate for you in the future, taking into account the time value of money and the predictability of those forecasted cash flows.
Margin of Safety is the percentage difference between a company’s fair value and its current stock price. This metric the single most significant valuation metric in our arsenal. It is the final output of our detailed discounted cash flow analysis. For margin of safety, the bigger the better when buying stocks.
By way of example, if you are going bungee jumping for the first time and you weigh 160 pounds, are you going select the outfit that offers bungee jumps with 200 pound test rope, or would you prefer the firm offering the same jump with 300 pound test rope? Same idea with margin of safety.
So within Stock Rover we perform the forecasted discounted cash flow analysis for each company in order to compute the intrinsic value of the company. We then rank each company within its sector by their intrinsic value to find a fair value that is well suited to the current market multiples.
One thing to note for the margin of safety. We don’t use the fair value price vs the current price, but rather the fair value price vs. the 50 day exponential moving average of the price. We also factor in the relative rank within the sector. These modifications help ensure that the margin of safety is more stable and less reactive to a single bad day or a transitory news event.
Below is a screenshot of the Insight Summary panel for Amazon (AMZN). The fair value and margin of safety values are highlighted via the red box and arrow. You can also see a number of other scores that are both numeric and color coded. These are some of the new higher level analytics in Stock Rover I mentioned in the introduction that will be covered in the next blog post.
The purpose of all these new analytics is to offer our concise analysis of a stock. The composite metrics here use the best available accounting practices and SEC filings to show how a stock rates today and how it has rated over past years so you can see how the scores have changed over time.
In the screenshot below we can see that Amazon has a fair value of over $2600 a share and large margin of safety right now (51%), as its current share price is in the low $1700’s.
On the other end of the spectrum is Dow, symbol DOW, which to make things even more confusing is also a member of the Dow 30. Be that as it may, we can see in the screenshot below, the fair value for Dow is around $44, which is actually below its current share price of $49.42. As Dow’s margin of safety is negative, this is a stock we would want to avoid.
Please note that Fair Value metrics are available in our Premium Plus plan only
As you can imagine the inputs to the fair value computation involve many factors. In true Stock Rover form, each of these factors has been exposed as a separate metric. You can see these metrics in the Stock Rover Metric Browser. The Metric Browser when fired up shows all 640 metrics in Stock Rover. But by right clicking on the folder column, selecting filter, and filtering on the Fair Value and DCF model folder, you can reduce the view to just all the new metrics related to fair value as shown in the screenshot below.
These metrics can be added to views for display and comparison in the table. They can also be used for screening. I have created a table view of some of the key fair value metrics. The screenshot of this new view, called “Fair Value” is shown below. The view is loaded with the Dow 30 stocks as an example. I have added this view to the Stock Rover Library, which means you can easily import this view into your Stock Rover account.
Note that companies that report negative cash flows in some of their reporting periods may excluded from the fair value calculations, as is the case for Goldman Sachs and JP Morgan in the screenshot below.
Please note that Fair Value Screener is available in our Premium Plus plan only
I took this one step further and created a new ranked screener looking for the 50 stocks with the greatest margin of safety, using three separate margin of safety metrics; Fair Value, Academic Fair Value (which uses a slightly different fair value formula) and Enterprise Value / Sales Fair Value. The screener screens from a population of the 2000+ most major companies on the US exchanges. Premium Plus subscribers can import this screener from the Stock Rover Library. The screener name is Fair Value. Once imported, you can modify the screener to suit your own tastes, for example including smaller cap stocks or stocks from the Canadian exchanges.
Below is a screenshot of the screener criteria.
The following is a screenshot showing the results of the screener run ranked by highest overall margin of safety.
The Insight Panel Summary fair value metrics and other score metrics will be available on an unlimited basis to all users until June 17th. This will give all Stock Rover users the ability to check out these great new capabilities we have added to Stock Rover. After that, the availability will vary by plan, with Premium Plus allowing for unlimited use and other plans allowing for metered use.
We hope you dive in and check out this new powerful valuation capability that has been added to the Stock Rover Investment platform.
Fantastic it just keep getting better and better.
Outstanding features – can’t wait to use them! very happy Premium Plus subscriber, and thank you!
[…] you will gain access to Stock Rover’s proprietary Fair Value and Margin of Safety calculation which gives you a quick snapshot of whether a stock is trading at a “premium” or […]
After reviewing your 2019 “Fair Value” and “Margin of Safety” calculations during the time of this blog, there seems to have been many misses…like the following:
To name a few….could it be that your calculations could be overly and mistakenly optimistic and misleading?
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