S2O Stock Analyzer Tutorials: Value Price

type: video (mp4); length: 6:03; watch on YouTube.

Demonstrates how to use Value Price (intrinsic value) and the Graham Number, MOS (margin of safety) and IRT - Investment Recovery Time; explains 3 different projection models used to compute value price - pessimistic, moderate and optimistic.


In this video we are going to keep talking about Stock Analyzer and today's subject is Value Price Estimates. Just as in our previous videos we are going to use Apple as an example.

Here we are, in a Value Price section, but what is it?

Value Price (intrinsic value)

Value price is an estimate of the intrinsic value of a stock. It is frequently called Fundamental Value or Intrinsic Value or Fair Value. It really means Value of a business regardless of the price it is selling for on the market.

This is a very important number, because when we calculate a business's value price, we will instantly know whether the stock is on sale or overpriced; all we have to do is compare the value price with the current market price.

It sounds straight forward and easy, but the catch is there is no single formula to compute an intrinsic value. Stock2own uses methodology best described in Phil Town's book as "Rule #1" and if you want to understand every detail of stock2own computations, take a look at this article.

How to compute the Value Price

Value Price is ordinarily calculated by summing the future income generated by the stock, and discounting it to the present value. We usually assume that all future projections are done for 10 years.

All input parameters are at the top of this section. They are automatically discovered for me:

  • PE - Price to earnings ratio
  • EPS - Earnings per share. For both of them, historical, current and projected future values are used.
  • Equity Growth Rate - it is actually a button and if you click on it you shall see all growth rates in the popup window
  • Desired Rate of Return - which is 15% by default
  • Margin of safety - it is set to 50%. As Warren Buffett says "I like to buy a one dollar investment for ever 50 cents".
Different Projections

As you can see here, we have to make several assumptions: we need forward projections for PE and Earnings and we also need a sort of aggregation of the historical growth rates in order to compact them into one number - Equity Growth Rate. Therefore in the Stock Analyzer we can find 4 projection types for each computation: Pessimistic, Moderate, Optimistic and "My Numbers".

Each projection weights differently historical, current and estimated future values. For instance, pessimistic projection always uses the lesser of all values, just to stay conservative.

You can use any projection you want. When market is in a bull stage, I tend to use either optimistic or moderate projection; when it is in a bear stage, we all have to be more careful and pessimistic projection seems to be more appropriate. When I think that the market is about to change direction, I like to reverse my models. For example, if the market is in a bear stage for a while and I think it is reaching its bottom, it makes sense to me to look for a recovering stock and at this moment, optimistic projection may help.

Another interesting thing to do is compare all the numbers. If they are in the same range, I usually see it as a sign that that stock is highly predictable and not very volatile. If the numbers are very different, like in Apple's case, it is time to pay more attention to the details; I usually see it as a warning sign.

All right, let's see what results we have here.

The Results

Next three lines show intermediate results. They are useful to new users who want to verify stock2own numbers. I usually skip right into Value and MOS Price.

There are 2 numbers in the Value Price line: Value price itself and the Margin of safety percentage. MOS % shows you how big of a margin Value Price has, compared to the current market price. If MOS % is negative it means that current market price is already above value price and there is no margin left.

Next number is the MOS Price. It is based on the MOS %, which is usually 50%.

IRT stands for Investment Recovery Time. It means... (I like this small help section! Everything that is underscored like this or has a small question mark icon has a help section). So, IRT is the number of years it would take for a company's cumulative earnings to equal the stock's current PE ratio. If you want to read more about it, read Phil Town's book "Payback Time".

All numbers have a colored background, which makes it really easy to read - green background means numbers are good; orange or red - be alert!

My Numbers

From time to time I find a stock where I would like to adjust the estimated numbers a bit. This is where "My Numbers" are really helpful.

For instance, I think that Apple's future EPS growth should be somewhere between 22 and 25%, so I will put 22% here. For the Future PE I would like to use an industry average which is in a 14-20 range, so I input 15 just as an example. Click on the "My Numbers" button and I got my results!

It is also easy to remember this number. All I need to do is add Apple to one of my watch lists and set "my value price" for it. Done.

The Graham Number

So far we've been talking about Value Price. However, there is also a Graham Number computed for me by stock2own.

The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's fair value. It is named after Benjamin Graham, the founder of value investing.

It is another methodology that can be used to estimate value price of a business. And I do really like to have a second opinion!

The formula for the Graham Number is rather simple, BUT this number applies only to certain types of stocks in combination with a number of other criteria. The Graham number is, theoretically, the maximum price that a defensive investor should pay for the given stock. Put another way, a stock priced below the Graham Number would be considered a good value, if it also meets a number of other criteria.

The complete Graham selection procedure is much more elaborate and currently stock2own does not rank the stock if it meets the criteria or not - this is up to the investor to use it or not.

Still I like to see Value Price and the Graham Number on the same page. It helps me to choose the value price that is more appropriate at the moment.

In the case of Apple, it seems that Graham Number is somewhere between the pessimistic and moderate projection numbers. It gives me even more confidence in my decision!

See you in the next video!