Selecting a Valuation Method to Determine a Stock’s Worth

Posted on December 9, 2014 | AAII Journal

Investing is about earning a financial return. Valuation is at the heart of investing—you need to find a stock selling at an attractive price relative to its intrinsic or underlying value, otherwise your prospects for a financial return are poor.

Wait, you say, that sounds like value investing and I am a growth investor. We feel this dichotomy is unnecessary. All investing is about identifying companies for which we expect to earn a handsome financial return. Why would we want to buy companies selling above their intrinsic value? We might be willing to buy them if the current price is equal to the intrinsic value, as a fair financial return would be expected. However, ideally we would prefer to find companies where the current price is well below intrinsic value. Whether you are a value investor or a growth investor, you are likely concerned about the price you are paying relative to intrinsic value (including the company’s growth prospects). All investors should therefore assess the value of the company using some valuation method and compare that value to the current market price. Doing otherwise is to speculate, not invest.

All valuation methodologies are not created equal and no single method applies to all companies or works in all market conditions. Some valuation methodologies are more appropriate in certain circumstances and not in others. In this article, we examine different valuation methodologies and provide guidance for selecting the method most appropriate in particular circumstances.

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BUY OF THE WEEK 12/9/2014

Posted on December 9, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why The Navigators Group, Inc. (NAVG) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week




Poor Black Friday Sales Leave No Mark

Posted on December 5, 2014 | Stock Superstars Report

The December SSR Monthly Report is now available at the SSR website. There is one new portfolio deletion and one new portfolio addition to announce.

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The Individual Investor’s Guide to Personal Tax Planning 2014

Posted on December 5, 2014 | AAII Journal

We start this year’s tax guide with some good news: You may have a smaller federal tax bill in 2015.

The Internal Revenue Service (IRS) adjusted several line items to account for inflation. This indexing increases the dollar amounts defining each tax bracket and the dollar amounts for various exemptions and deductions. The net result is that less of your income may be taxed. Plus, if you are just above the breakpoint for a tax bracket this year, the adjustments could potentially put you into a lower tax bracket in 2015.

The amount of any federal tax savings will vary by taxpayer. Some of you may actually pay more, particularly if your income is higher in 2015 or if there are certain exemptions or deductions that you no longer qualify for. A new penalty for not having health insurance is now in effect as well. Still, many taxpayers will get a savings next year. Wolters Kluwer, CCH estimates that a married couple with total taxable income of $100,000 will pay $125.50 less in income taxes in 2015 than they will on the same income in 2014, assuming they file a joint return. An unmarried person with income of $50,000 will pay $62.50 less in 2015 than he or she will in 2014. Keep in mind that these are just estimates. The numbers also exclude the impact of state and local taxes.

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Our Stance on Owning Oil-Related Stocks

Posted on December 5, 2014 | Dividend Investing

While we were off for the holidays, oil-related stocks experienced a sizable drop.

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Third-Quarter Earnings Make Little Impact on Investor Attitudes

Posted on December 4, 2014 | AAII Survey

This week’s Sentiment Survey special question asked AAII members whether their six-month outlook for stock prices has been impacted by third-quarter earnings. Nearly 19% said third-quarter earnings gave them reason to stay bullish or become more optimistic. Earnings growth and economic growth were the primary reasons given as to why. An equal number of respondents said third-quarter earnings had no impact on their outlooks. Several of these members said this was because they have a long-term focus. About 27% of respondents said other factors—including global monetary policy, politics and prevailing valuations—matter more.

Here is a sampling of the responses:

  • “Earnings are continuing to grow and price-earnings ratios are reasonable; therefore, stocks should have room to grow.”
  • “Earnings have been better than I expected, so I think we will continue to see upward movement in the stock market.”
  • “Earnings have not affected my outlook. It’s the global economic slowdown that concerns me.”
  • “I think longer-term than quarter-to-quarter earnings.”


AAII Sentiment Survey: Despite Big Drop, Optimism Stays Above Average

Posted on December 4, 2014 | AAII Survey

After being at unusually high levels for three out of the past four weeks, the level of optimism among individual investors fell by the largest weekly amount since June 18, 2014 (9.5 percentage points). However, because optimism was at such high levels, bullish sentiment remains above its historical average. Meanwhile, pessimism continues to be below average despite a rebound in bearish sentiment.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 9.5 percentage points to 42.7%. This is a seven-week low. Even with the decline, bullish sentiment remains above 40% for the eighth consecutive week and above its historical average of 39.0% for the 16th out of the past 17 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 4.3 percentage points to 31.4%. The rise puts neutral sentiment above its historical average of 30.5% for the first time in four weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 5.1 percentage points to 25.9%. The level of pessimism registered by our survey was last higher on October 16, 2014 (33.7%). Even with this week’s rise, bearish sentiment remains below its historical average of 30.5% for the seventh consecutive week and the 40th week this year.

Prior to this week’s reading, bullish sentiment had largely been at unusually high levels. Optimism exceeded 50% during three out of the past four weeks. Accompanying the swing back toward the historical average was short-term weakness in large-cap stocks prior to yesterday’s new high for the S&P 500 index.

Keeping individual investors optimistic is the overall upward momentum in stock prices, earnings growth, the Federal Reserve’s ending of its bond purchasing program, falling energy prices and sustained economic expansion. Keeping other AAII members cautious are geopolitical events, a sense that prevailing valuations are too high, the pace of economic growth and worries that a larger drop in stock prices is forthcoming.

This week’s AAII Sentiment Survey results:

  • Bullish: 42.7%, down 9.5 percentage points
  • Neutral: 31.4%, up 4.3 percentage points
  • Bearish: 25.9%, up 5.1 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.



Sell OF THE WEEK 12/3/2014

Posted on December 3, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Windstream Holdings Inc. (WIN) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week





BUY OF THE WEEK 12/2/2014

Posted on December 2, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Hibbett Sports, Inc. (HIBB) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week




End of QE Makes Little Impact on Member Allocations

Posted on December 2, 2014 | AAII Survey

November’s Asset Allocation Survey special question asked AAII members how the coming end of the Federal Reserve’s bond-buying program influenced their thoughts about allocating to bonds or bond funds. More than half of all respondents (53%) said the announcement had no impact. An additional 14% said they do not own fixed-income investments or are avoiding them. Approximately 7% said they are not adding to their fixed-income allocations or are reducing their allocations. Roughly 6% said they may either buy bonds or bond funds or are prepared to do so if interest rates rise.

Here is a sampling of the responses:

  • “No effect whatsoever. I keep a short five-year ladder of Treasury notes only.”
  • “Not much impact. [The bond-buying program] was unlikely to continue too much longer and I think that the market realized that.”
  • “Will not invest in bonds. Rising interest rates = lower bond prices.”
  • “Expected [the bond-buying program to end] for the last year, so had little effect as I’m already in short- to medium-term funds.”
  • “I will continue to stay light in bonds. Returns are just not that terrific.”
  • “I may take advantage of buying opportunities in the coming years as prices fall and yields rise as I tend to hold to maturity.”


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