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Fair price calculation

Discussion in 'Technical Analysis' started by emailsaravanans, Mar 5, 2023.

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  1. emailsaravanans

    emailsaravanans Active Member

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    I did the fair price calculation for Stylamind and it turned out the current price is too high. Could you check why is the stock trading at much higher price?
     

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  2. shabbir

    shabbir Administrator Staff Member

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    It means you are expecting a lot less growth that what the market is expecting.

    If you expect a growth of 16% and want a return of 26% and expect PE to sell at 22 then you should be buying it a lot less PE
     
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  3. emailsaravanans

    emailsaravanans Active Member

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    Thanks I understand. Just want more info for educative purpose. Are you saying our expected return should always be less than expected growth?

    I put 16% because their profit growth for last 3 years has been 16%. Also the PE range they are operating is around 22-25 and hence I expect it to sell at 22 PE.

    I am just trying to figure out if the current price level is at fair valuation. But, the excel sheet says otherwise. What parameters that I missed makes STYLAM a fair valuation?
     
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  4. shabbir

    shabbir Administrator Staff Member

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    Yes. If you don't expect the profits of the company to grow inline with your growth expectation, then the PE should expand. If you are investing in a company that is already trading at a fair PE, then you have to rely on profit growth to give you the returns you want.

    If the company is able to do consistent profit growth of 16% and is a midcap/smallcap company at this moment, then in 10 years it will be trading at higher PE multiple for sure. This is how I see the behavior of the market.

    The excel will share based on your inputs. Expect more growth and expect to sell at double the PE from current price and you will see a different picture of fair price. However, when you are doing those kind of predictions, you have to add a lot of margin of safety.
     
  5. emailsaravanans

    emailsaravanans Active Member

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    Okay. It is purely based on our future expectations on the company growth. When the future growth and future PE are expected to be higher, then we need to look out if the current price is fair using the excel sheet. That gives us the confidence when to invest and what levels.

    Let me know if my understanding is correct. I believe the sheet is more fit for growth stocks right?
     
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  6. shabbir

    shabbir Administrator Staff Member

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    Yes.

    It fits every stock. At times we expect good returns when investing in low PE stock but if you are not able to sell it at higher PE and if the company doesn't have profit growth, you will not make much returns from the investment.