How Do You Value a Company?

Tim Huang — Sun, 01 Jan 2012 03:39:58 +0000

Two major approaches for valuing a company are the intrinsic valuation and the relative valuation. The relative valuation is the more frequently used method. It estimates the value of an asset by merely looking at the market values of common variables of comparable companies or looking at the company’s own historical valuations. Variables that are examined include earnings, cash flows, book value, or sales. For example, if you were using the relative valuation method to value Apple, you might compare its stock’s price/earnings ratio (P/E ratio) with Microsoft’s P/E ratio. If Apple has a P/E ratio of 25 and Microsoft has a P/E ratio of 20, then Apple’s shares are more expensive on a relative basis (a higher P/E ratio means that investors are paying more so the stock is more expensive compared to one with a lower P/E ratio).

On the other hand, the intrinsic approach is determined using a discounted cash flow, with the value of the asset being the present value of expected future free cash flows (cash flow minus capital spending) on that asset. This valuation is based on the asset’s intrinsic characteristics, such as its ability to generate cash flows.

In simple terms, valuing a lemonade stand using the intrinsic approach suggests that its value should fundamentally equal the present value of future cash flows that the stand is expected to generate. Using the relative approach, you may determine the value of the lemonade stand by simply looking at the value of comparable lemonade stands.

However, there are disadvantage to both methods. A disadvantage to the relative valuation method is that not all companies are alike and comparable. The intrinsic approach is less frequently used because calculating the intrinsic value of a stock is tough. For example, it is hard to forecast how fast and how long a company’s free cash flows will grow. In the end, do your research well and consider using multiple stock valuation methods.

Bear Market Trading Strategies

Tim Huang — Tue, 07 Jul 2009 00:15:40 +0000

The following are my trading strategies for the bear market. They work pretty well for me so far. Use it on your own risk if you would like.

1. If Dow Futures is down close to 100 points before the market opens, I wouldn’t buy any stock that day unless a stock is going up with good volume or if Dow turns positive later that day. This rule protects me from entering trades on bad days where Dow is down over 200 points. It is hard to trade against the Dow when most of the stocks go down.

2. If a stock didn’t open higher or isn’t trading above yesterday’s closing price, I wouldn’t buy it. The reason behind it is simple. I believe that if a stock is strong enough, it will continue to go up for a couple of days. If it fails to go up the next day, it means the trend is not strong enough.

3. My stop loss is between 4%-5%, depending on the volatility of the stock. My stop loss point is right below the support of a stock. I like to make quick money so the stocks I pick are volatile.

4. Never trade a stock at market open and during the first half hour unless the volume is really strong for a stock. Often, a stock gaps up at open with little trading volume and then pulls back in the next hour. I don’t want to fall for that. My trading hour begins at 10am.

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How Do You Value a Company?

Bear Market Trading Strategies