Many people wonder what is the fair value of listed shares? The quick and dirty answer is of course the price that shareholders are willing to sell at and what the investors are willing to buy at. However, this market price may not be what is a fair value or what it is actually worth. The market price may driven by some irrational things like public sentiment, a knee jerk reaction to news, misinformation or lack of it, influencers on social media that may or may not know what they are talking about, speculation or simply the band wagon effect.
As a rational investor you should be able to have an idea of what the price or value of something should be, based on a number of things. Top of mind are recent historical prices, asset value, return on investment, future performance and reputation. Recent historical prices are a good starting point especially for companies that have been operating for a number of years. Typically, it would be fairly easy to see the 52 week range of the stock price, and this is a starting point of determining fair value. As an investor, if there are no material changes in the company, you would probably like to buy into the stock if the price is at the lower range. On the other hand, there would be less incentive to buy at the higher price range if there is nothing to indicate that the company will outperform.
Asset value is another valuation technique to arrive at what is the fair price for the shares of stock of the company in question. As an example, if a real estate company has a land bank that is still recorded in its books at the acquisition cost 20 years ago and the said property prices have since increased 10 fold, the share price of the real estate company could be undervalued. If the share price of the company has not changed over the last 20 years, it is most likely that it will only be a question of time before the general public realizes this opportunity and cause the share price to increase in line with the fair market value of the real estate properties owned by the company.
Return on investment is measured in a number of ways for listed share such as the P/E ratio or the Price per share divided by the Earnings per share. The lower the P/E ratio is, the less premium is given to the shares of the company and vice versa. Cash dividend yield is also another important measure. Companies such as REITs give out most of their earnings in the form of cash dividends. Typically the share price will adjust to the comparable market yield. For example, if the public expectation is that the annual cash dividend is 1 peso per share and the industry averages a return of 7+%, the public will value the share price at about P14. However, if the actual cash dividend is 2 pesos per share, this will reflect in the share price, pushing it up towards P28.
Future performance is also factored into the share price. If the company’s earnings per share is expected to double, this will reflect into the price of the company, maybe not immediately or fully but will certainly lead to an upward price bias. Unfortunately, the reverse happens when the forecast future performance is negative, even if it has not happened yet, it will lead to a lower share price. While it is oftentimes impossible to predict what the future will be, analysts and the investing public have their own opinion and make their own forecast.
The reputation of the principals and the management running the company is also factored into the share price. Companies with a sterling reputation often get premium pricing while companies with a bad reputation pay for it by a discounted share price. Learning how to balance and factor all of these things to come up with the fair value is not easy and requires an in depth knowledge and experience. Once you know how, the volatilities of the market price should not scare you.
(The views and comments of the author are his own and not of the newspaper or FINEX. Comments may be sent to [email protected])