PEvaluation - an alternative, customizable, stock valuation model
In this article, we’ll take a look at what PEvaluation is, and how you can leverage the tools at pevaluator to apply this customizable valuation model to the stock market.
What is PEvaluation?
PEvaluation is a stock valuation technique that allows investors to reach intrinsic value estimates for stocks across the market. It uses the traditional P/E (price-to-earnings) ratio to come up with price targets, by calculating an “ideal” target P/E for all companies across the market, taking into account various user-defined metrics.
The PEvaluation method is described in detail in the whitepaper. For the short version, and how you can begin using it now, continue reading below.
An example
Let’s imagine two companies. For simplicity, both are in the same sector and industry - industry which has historically traded at around 15 P/E.
Company A is an old behemoth in the business. Its market cap is huge, revenues are steady, and it has a sound balance sheet. It also pays a steadily-increasing dividend.
Company B is young. It’s only just started to generate profit. Analysts are expecting it to grow massively, but it does have some debt, and it keeps issuing shares.
How much are Company A and Company B worth? (assuming an EPS of $1 for each).
A balanced investor might buy both companies at $15 (industry average P/E multiplied by EPS).
A risk-adverse investor might pay $20 for Company A, and only touch Company B when (and if) it goes to $10 (putting a premium on stability).
An investor looking to the future might pay a hefty premium of $30 for Company B and be completely disinterested in Company A (valuing growth more).
There’s no one right answer, and all 3 might be right. As long as they don’t overpay, all of them can make money (and take on more or less risk).
How to build a market model that works for you?
Using pevaluator, you can easily and automatically define a market model that aligns with your investment style.
With simple drag-and-drop of any combination of metrics, one can define a model that values heavily a company’s growth prospects and moat, with Returi on Invested Capital and change in shares outstanding also playing a role.
In addition to dynamic P/E, with pevaluator one can define metrics that alter the margin of safety for each stock. In this case, the better a company stands with regards to balance sheet strenght and ability to pay off debt, the less of a margin of safety it warrants.
How are fair prices calculated?
On pevaluator, all companies start from a base P/E equal to the median historical P/E for each Industry.
The user-defined market model defined above is applied to the fair P/E. “High impact” metrics will apply a factor between 1x and 2x the base P/E based on the metric metric. “Moderate impact” metrics have a factor between 1x and 1.6x, and Minor impact a factor between 1x and 1.3x.
Using these new calculated P/E, the total market earnings and market cap are calculated, and an adjustment factor is calculated using the formula
k = (Target market P/E) / (Average market P/E)
This k factor is then applied to the Fair P/E to reach a Final P/E for each company.
The Final P/E is used in conjunction with EPS estimates to reach a fair value for every company in the market.
PEvaluation has been used by hundreds of investors so far to consistently beat the market. By making fair assumptions and being guided by fundamentals, one can reduce their risk and improve their returns.
Join them today for FREE at www.pevaluator.com