What are individual stocks worth in the publicly traded equity markets?
This question plagued me for sometime not only early in my financial career but when I started taking finance courses in university. Would you believe the world of finance doesn’t know this basic question? Sure there is the famous ‘Discounted Cash Flow’ [DCF] calculation but having spent 5 minutes doing this calculation and the amount of guess work about time frames, normal business activity and interest rates (discount rate) makes, at least in my mind, the DCF calculation dubious and imprecise. The other well-known calculation of fair market value can be what is known as ‘Enterprise Value’. Again spend any time with this calculation, and its simplistic nature and I have always wondered whether there is a better way.
Unfortunately in today’s financial world, there seems to be no definitive or agreed upon technique – algorithm – about what a company is worth especially public companies. In other words, business valuation is more art (justification) than science (math).
Enter Model Price
After many years of hard work and R&D our algorithm – Model Price – was born in 2002. I have been observing our model price calculation for over 12 years. Four years ago we decided, conceptually, to release Model Price to the public on the Facebook platform. Two years ago we released our Model Price App (Application) on Facebook. This application allows the general public to view our model price calculation (and history) in our database of stocks – over 2,000 companies both Canadian and US listed – at your convenience.
Our algorithm – Model Price – is so robust that we can calculate model price or fair market value for all companies in our database no matter what kind of business or peculiarities a specific industry sector may inhibit, like banking/finance. In my opinion model price represents a major break-through in security analysis and helps me considerably in the evaluation of individual public companies for investment.
Hopefully model price can help you as well!
However in order for you to use model price you have to be convinced that our calculation – algorithm – is relevant.
How do I do this?
Certainly one way is to evaluate M&A activity, where independent parties come together and make acquisitions on an arms length basis. This transaction price would certainly be considered fair market value especially in the transparent world of company boards, investment bankers and various experts on both sides of the transaction.
Yesterday morning Japan’s Dai-ichi Life Insurance agreed to acquire Protective Life Corp. at $70 per share. What was our calculated Model Price for Protective Life you ask?
Here is Wednesday’s model price chart for Protective Life Corp. (PL) after the transaction was announced and our calculated model price of $70.44.
Protective Life with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Our simple dashed purple line, included on our model price charts, probably looks superficial to the sophisticated and complicated world of finance. I prefer elegant!
In my opinion the world of security analysis and investing becomes a much more interesting place when participants begin to realize and have confidence in what the true fair market value of a public company really is. Maybe investing becomes much more ‘rational’, at least for those who use Model Price and may have a significant impact on your net worth.
I have seen model price work for over 12 years. I know this simplistic purple line ‘delivers’ the goods in terms of fair market value. I also realize I need to prove to you that our calculation of model price is relevant. Hopefully this transaction and others are a step in the right direction to that result.
Other links to transactions that have confirmed our model price calculation.