tag:blogger.com,1999:blog-28086856.post1394756027936050510..comments2024-03-20T01:42:13.273+08:00Comments on Eight percent per annum: Value investing in Singapore stocks: The Many Faces of PE - DCFJayhttp://www.blogger.com/profile/03292158817395898619noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-28086856.post-41621709332546573692011-07-14T18:45:07.405+08:002011-07-14T18:45:07.405+08:00Hi Jereme,
The point that I am trying to make is...Hi Jereme, <br /><br />The point that I am trying to make is that applying a PE and EPS methodology is very much similar to DCF, which uses the discount rate. <br /><br />As a simple example, if the average EPS of the stock is $1 for the last 10 yrs with little volatility, what is the fair value of the stock?<br /><br />The answer is an art form, not science.<br /><br />If we apply 10x PE, the fair value is $10.<br /><br />At 15x PE, the fair value rises to $15. <br /><br />The insight here is that applying different PE is also the same as applying different discount rates for the firm. <br /><br />PE is just the inverse of the discount rates.<br /><br />So when we apply very high PE on stocks, like 50x PE. Essentially we are saying that the discount rate of is 2% - which is lower than long term Singapore govt bond yield.<br /><br />What are the chances that we overpay then?<br /><br />Yes, very high.<br /><br />As a rule of thumb, I would usually buy stocks with PE not higher than 18x.Jayhttps://www.blogger.com/profile/03292158817395898619noreply@blogger.comtag:blogger.com,1999:blog-28086856.post-21733309111985888252011-07-14T18:31:50.744+08:002011-07-14T18:31:50.744+08:00Hi Value Investor
Spot on the discount rate, yes ...Hi Value Investor<br /><br />Spot on the discount rate, yes it should be higher at 8-12% for most co.s<br /><br />My argument was trying to protray that using a discount rate of 6% is essentially the same as applying a PE of 17x which gives you roughly 6% earnings yield.<br /><br />As to whether it is appropriate to use 10 or 30 yrs, the true answer is that it really doesn't matter, bcos at the end of it, we still need a terminal value.<br /><br />The terminal value determines the bulk of the intrinsic value anyways.<br /><br />So in order for the DCF to be really accurate, we need to know all the inputs for the next 30 yrs.<br /><br />Wouldn't it be easier to apply a PE and EPS methodology then?<br /><br />That was the point I tried to make.Jayhttps://www.blogger.com/profile/03292158817395898619noreply@blogger.comtag:blogger.com,1999:blog-28086856.post-21215878429523285782011-07-14T11:05:14.694+08:002011-07-14T11:05:14.694+08:00Send an email to me at metal.commodity@tradingeduc...Send an email to me at metal.commodity@tradingeducationprogram.org. <br /><br />I will send you my spreadsheet which I had used to calcuate DCF.<br /><br />Value Investor<br />Tactical Trading AcademyFinancial Journalisthttps://www.blogger.com/profile/06490416137194206916noreply@blogger.comtag:blogger.com,1999:blog-28086856.post-57292950325042149912011-07-14T01:27:24.668+08:002011-07-14T01:27:24.668+08:00Hi,
Great Post. Could you please explain how you ...Hi,<br /><br />Great Post. Could you please explain how you use the discount rate and calculate prices in layman's term. I am not a finance student and it would be easier for me.<br />Your value investing ideas are useful for new investors like me. Thanks.<br /><br />JeremeAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-28086856.post-79553438455664476762011-07-12T21:12:09.312+08:002011-07-12T21:12:09.312+08:00P/E and DCF is obviously different.
P/E ratio de...P/E and DCF is obviously different. <br /><br />P/E ratio depends on earnings. <br />DCF depends on free cash flow. Free cash flow means operating cash flow minus capital expenditure.<br /><br />A company with rising earnings may not result in rising free cash flows.<br /><br />Using 30 years for calculation may result in an expensive valuation. I prefer to use a conservative 10 years.<br /><br />As for the growth rate, we can use past history growth rate as a guide. Problem is most companies do not have consistent growth rate. So we have only apply DCF to company that has consistent growth rate like Boustead, OCBC, DBS, Raffles Medical etc.<br /><br />Discount rate of 6% is too low in my view. Discount should be based on equity premium. Most stocks have discount rate of 8% to 12%.Value Investorhttp://tradingeducationprogram.orgnoreply@blogger.com