I’ve been spending time reading posts here and on your blog, listening to your analysis on Market Call, and overall just trying to get a better comfort level reading the Model Price charts. Generally speaking, it’s pretty straight forward, and is in fact exactly the type of thing I was trying to put together myself. Thank you, Brian, for saving me the time.
I have a couple of questions I would love some guidance with, hopefully clarifying a few grey spots I still have.
- A company like Torstar Corp (TSB on Canada) is trading below -3EBV, which from what I undertand is a bad spot, forecasting writeoffs or some such things. Looking at the model price, however, it shows a decent support along EBV-1. How do I know when to read the price line, and when to read the model price line? I realise this needs to be used with some knowledge of the business as well, but from the MP chart, am I to read it as a danger sign, or a stock possible of doubling?
- Generally speaking, you don’t want to buy into an equity that has a MP below the current price. That makes obvious sense. However, you spoke about cyclical companies on Market Watch, and when the MP shows a bottoming and a history of running cycles, it can be a sign that buying isn’t a bad idea. Would there be any other time, other than strong cycles in a company, where having a MP lower than the price would be anything other than a “stay away”?
Once again, thanks for your great work. It’s truly appreciated.
From ModelPrice Guy
Remember at Model Price we are giving you two pieces of information that don’t exist anywhere else. Our Model Price calculation (Purple Line) is highly dependent on the mean earnings estimates from the equity analysts who cover the company. Equity Analysts, as a group, can be a benefit and gives you knowledge when their estimates are used in our Model Price algorithm. In my opinion, Model Price – the calculation – is relevant in the majority of companies in our 2,000 company database. (Keep in mind I can say this because most of our stocks are large cap stocks…that has predictable ‘forcastable’ balance sheets and a large number of analysts covering the stock.)
Our EBV Lines (second piece of information we are giving here at Model Price) gives you two independent variables – stock price and balance sheet values – working together. I have not found in finance two independent variables complimenting each other in any analysis, so this is a first. Over a short period of time you can see these EBV Lines will become what Technical Analysts call support and resistance areas for past stock price movement and users of Model Price can see future areas of support and resistance as well. When a transit occurs (either positive or negative) this tells the user that changes in future fundamentals are/will be occurring that will have a direct impact on the valuation of the company.
I have been using Model Price for so long that snap judgments can be made by just looking at our Model Price charts. Sometimes our Model Price calculation is relevant (usually in Bull markets) or our EBV Lines (what the market is communicating) depending on the chart. Companies like TSB-ca are in the ‘Blue’ with the market communicating that the company’s assets are impaired and write-offs will be coming sometime in the future. That’s not to say the analysts are wrong in their earning estimates, it’s just the market communicating to you about the quality of Torstar’s balance sheet. (Not Good!)
As I said yesterday on BNN, cyclical companies share prices will always turn upward before earnings are apparent. Again our EBV Lines can help, in that positive transits will generally always occur at bottoms, before analysts mean estimates are apparent, and our Model Price calculation is above its share price. Likewise for market tops…. no one remembers this but I said sell Teck Cominco at $65 on BNN when the stock had a negative transit of EBV+3 with a model price of around $95 bucks.
Keep on with Model Price, especially with our ‘Speed Charting’ function, and you will (over time) properly weight the value or relevant information given between our Model Price calculation and EBV Lines in a blink of an eye. The equity markets (stocks) are communicating information everyday while the markets are open. And only through Model Price can interested observers can know what a company’s stock price is saying. Trust me.