Stock and bond valuation Flashcards
How can you look up Longterm corporate interest rates to valuate a stock?
Treasury.gov
The Treasury High Quality Market (HQM) Corporate Bond Yield
Curve 30 Yr.
When should the investor invest in inferior Types of bonds and preferred stocks
Bought at bargain levels at least 30% below par
for corporateBonds paying above average interest rates,
or preferred yielding 10% or more
Recommended minimum coverage of earnings to total interest charges for bonds and preferred stocks in public-utility operating companies, railroad, industrial and retail
P. 284 intelligent investor and p. 285
Graham’s formula for valuing growth stocks, see intelligent investor p. 295 and 296
Value = current (normal earnings) x (8.5 + twice the annual expected growth rate)
The growth figure should be that expected over the next
7 to 10 years
Calculation of past growth rate
Use the average of the last 3 years, with corresponding figures
10 years earlier
Ex. Avg. earnings of Alcoa 1968-1970 $4.95
Avg. earnings of Alcoa 1958-1960. 2.08
Growth. 141%
Annual rate compounded. 9.0%
(3/5 special charges in 1970 deducted)
Defensive investor maximum stock valuation in 2003,
when yield on 10 year AA corporate bonds = 4.6%
100/4.6 = 21.7 = suggested maximum PE ratio
Graham recommends average stock be priced 20% below
max ratio = 17, graham would consider stocks selling at
17 times their three year average earnings potentially attractive
Benjamin Graham’s intrinsic valuation formula
Intrinsic value = (E x (8.5 + 2G) x 4.4)/Y
E = earnings per share G = expected growth rate Y = current yield on triple A rated bonds
According to Klarman, when should an investor use NPV?
When earnings are reasonably predictable
Private Market Value
Look at historical prices of companies in the same industry
Good resource recommended in Keiso for understanding note disclosures
Http://www.footnoted.org/
Site highlights things companies bury in SEC filings
