Diamond Foods – Using EBV’s to help Traders know where the stock is heading.
February 10, 2012
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Disaster struck at Diamond Foods (DMND) when it was announced the CEO Michael Mendes and CFO Steven Neil was dismissed. At issue was the way certain payments were recorded. So on hearing the news, where did the stock end up?
As one can see from the chart, the stock ended up at EBV. Even with controversy over accounting issues, the stock price used model price’s structural lines as support. Remember, these lines were already in place before the news was released. We see this type of action all the time. So if disaster strikes any of your stock positions use Model Price’s EBV lines to see where the next area of support will be before the market opens.
Diamond Foods with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
(For those interested, a daily updated chart of DMND subsequent to this post will be maintained on Facebook, here.)
|Review of EBV lines, and How They are Derived.
The model price valuation zones are a function of a company’s “Economic Book Value” (EBV). Adding the balance sheet’s “Theoretical Earnings” to its Book Value derives the EBV; we calculate Theoretical Earnings as a function of the balance sheet.When constructing Model Price Charts we plot the historical EBV price series by joining the calculated EBV’s from balance sheet to balance sheet. As a function of the balance sheet, the current EBV is based upon the most recent statements available. To improve on the timeliness of the EBV, Model Price Charts extend the EBV price series forward using a growth rate based on forecast earnings.The valuation zones are defined at specific multiples to the EBV. These multiples are referred to as EBV Prices and in total there are 11, including the EBV itself, three below the EBV and seven above. In using the Model Price Charts, you will note that the EBV prices do not change on a daily basis as they reflect the more stable growth of the balance sheet.
When a new balance sheet is released, we update the charts calculating the EBV with the new data. The EBV prices are then extended from this new balance sheet date. Upon the update, there could be a large revision to the EBV if an unexpected corporate event such as share buyback, acquisition or write-off occurs, or if the company misses its earnings by a significant amount rendering the growth rate invalid. On the Model Price Charts we publish the date of the most recent balance sheet we have available for the company. Users should check this date and if a corporate action has occurred after the balance sheet date, then users must be aware that the EBV Prices do not reflect those changes.