Let’s walk through a very basic proof of why we think the way we do.
1) Stocks have an intrinsic value per share that is based on the underlying firm’s future free cash flows and net balance sheet (among other adjustments). Why? Because an investor can buy the whole company outright, pay off the debtholders, and reap the rewards of the future free cash flow stream.
2) Stock prices trade around the firm’s intrinsic value per share, sometimes above it, sometimes below it. Why? Because stock prices are unpredictable in the near term, and purchases and sales can be for a variety of reasons that are unrelated to the fundamentals.
3) Stock prices that are converging to intrinsic value have a greater likelihood of converging to intrinsic value. Why? Because they are converging to intrinsic value (obviously), and the market agrees that the company is undervalued because investors are buying.
4) Stocks trading above their intrinsic value are more vulnerable than stocks trading below their intrinsic value. Why? Because there is less support from investors wanting to take the firm private to arbitrage its future cash flows. There is no cash-flow support in these companies. They are castles in the air.
5) Underpriced stocks that are converging to intrinsic value offer the best risk-adjusted capital returns to investors. Why? Because they have fundamental support from value investors and momentum support from technical investors. There are a lot of buyers.
6) These stocks are called Valuentum stocks. They tend to outperform.
QED.
Quick notes: 22 of 25 of Valuentum’s picks in its Best Ideas portfolio have done incredibly well. That’s 22 of 25. Valuentum’s Dividend Growth portfolio is performing wonderfully. We cover thousands of stocks, dividends, ETFs and generate Excel-based discounted cash flows for all companies in our coverage. We also provide a number of quarterly publications. All of this is made available.
News of the Day
Angie’s List (ANGI) up big on EBITDA guidance hike. (press release)
Natural Resource Partners (NRP) cuts distribution. The partnership had very poor dividend metrics, so vulnerability was not surprising. Expect an updated dividend report soon. (press release)
Chipotle’s (CMG) comp growth is slowing, but it has before, so there’s probably no reason to overreact. Shares are under pressure, however. (press release)
Coca-Cola (KO) is benefiting from better pricing in its first quarter. Shares are still overvalued, in our view. (press release)
Boeing (BA) reaffirming 2015 guidance. (press release)
Abbott (ABT) beats on both top and bottom line in first quarter. (press release)
If there is more we can do, let us know. Please read about the 13 Most Important Steps to Understand the Stock Market here.