Fair Value of the Dow 30 Stocks – Where is Value Hiding Today

by birtanpublished on September 18, 2020

Hi i'm jimmy in this video we're going to look quickly at all of the stocks in the dow jones industrial average our goal with this video is to try to see if we can look at which companies could be overvalued right now

And which ones could be undervalued as many of you may know i've been looking for another stock to add to my personal investment portfolio since right now i've only got two stocks in there i own disney and i own intel

I bought intel at about 48 bucks a share and i bought disney when it fell below 100. so i'm looking for good solid companies that could be great long-term buy-in holds ideally

I don't want to overpay for it and right now there seems to be a shortage of good investment ideas so what i did for this video is i went through all 30 stocks in the dow jones industrial average

And then i found analyst estimates for free cash flow at least for most of the companies i was able to find it for and then i ran those through a discounted free cash flow calculation

For each of the companies ideally trying to come up with what the potential fair value of that company could be and then we compare that to the current price of the stock and ideally we can try to identify which companies are

Worth a deeper dive okay simple enough so before i show you what we what we came up with if we know it as we go through the different companies if we know of a reason why one stock is down or why

The price the current price is out of whack with our calculation of fair value please let us know in the comments below because this is really the starting point for the research so if there's anything that you see that

You know that perhaps i don't account for please let me know in the comments below okay so first we have the tickers for the companies and then we have all the companies now i

Did leave out financial companies so goldman sachs travels insurance american express and j.p morgan are not on this list even though they are in the da i kept those companies off

This list because i have found the discount of free cash flow for financial companies tends to not work quite as well to illustrate that i've actually left in this top company here which uh united

Health which you may know is a health insurance company and it doesn't really work i just got a free cash flow it doesn't really work for this type of company but i left this one in here just to illustrate okay next

Up we have the current stock price now you may notice that one i pulled this data down two days ago and also i rounded this data so uh this top stock here it's trading at 309

Per share the reason i rounded it is whether or not we bought it at 309 or 309.50 to me doesn't make all that much of a difference especially since we really only want to get involved in a stock

If we think there's a good chance that that particular stock could move significantly higher over the long run so i'm not too worried about the individual pennies okay now we need a required rate of

Return and a perpetual growth rate so for required rate return i'm using seven and a half percent that's about five percent over the triple a corporate bonds at least it is ever since they lowered interest

Rates i used to use a slightly higher numbers to use eight and a half percent but since they dropped interest rates i thought it's only reasonable that we get a somewhat consistent

Premium over triple-a corporate bonds so that's why i'm using seven and a half percent then for perpetual growth rate i'm using two and a half percent that's about the long-term growth of gdp and that seems like a reasonable number

To use it's one it's a number i've consistently used okay then what i did next is i've found as many analyst projections as i could find going over the next few years not all

Companies in the dow could i find all the numbers for you'll see here i'm just going to scroll through these you'll see if i left the number blank that's because i couldn't find analyst

Projections and in most cases i went up four years of projections but in some cases i did stop at three so if you're curious about the exact numbers i used you could pause this

Video at any point that's why i'm scrolling through all of them and if you're curious how to do this whole calculation i actually did a video on how to perform a dcf calculation

I'll leave a link to that in the description below i've even created an excel template i can email you oh again there's a link to that video to explain everything over there but with these four years of projections

For free cash flow well we're going to discount those by our required rate of return and this gives us a total company value i'll leave that right here for now and then we adjust these numbers by net

Debt so basically we take the total debt that they have and then we offset it with the cash or crash equivalence that they have and this gives us our net debt so we'll take that away

From the total company value so in most cases this is going to reduce the overall value of the stock but in some cases cases like microsoft or apple down here well they have more cash than they have

Debt so that would actually increase the value of their stock so now we'll clean this up a bit and now we'll add the net debt company value to this and then we divide that by the shares

Outstanding and this gives us a fair value for each of the companies on this list in fact let me duplicate this and move this over so they're next to each other make them

A little bit easy to compare and then to make it even simpler let's add the percentage away the current price is away from our projection of fair value so anything that is in the red is a

Negative number and that implies that that particular stock is overvalued and that the amount that you're seeing in red is how much it's overvalued by anything that's black implies that it is undervalued once again the percentages

Matter now we may remember that i mentioned united health just to illustrate about financial companies and as we could see well using basic discounted free cash flow

Well united health ends up looking undervalued by about 73 and one of the reasons for this is how we calculate free cash flow a quick and dirty way to

Calculate free cash flows is simply take cash flow from operations and subtract capital expenditures and for many companies for most companies this works very well but for financial companies capital

Expenditures is not a fair representation of the cost of them maintaining their business which is the main concept as to why that formula usually works so for us it might make more sense to do

A separate video just on financial companies maybe we take a financial etf and analyze those do the same same type of analysis if you're curious again let me know in the comments below in that video we could do

More industry specific valuation methods to try to come up with reasonable numbers okay so that explains that one now when we look at a company like intel well intel is showing itself to be

Largely undervalued this is actually one of the reasons i personally bought this stock because some bad news had come out and i recently did a video on it if you're curious again i'll leave that in a link

Just in a link in the description below as well but i think that the stock market overreacted to with the news that had come out and the

Stock based on their projections of free cash flow looked like it could be undervalued a company like ibm i actually haven't looked at ibm in a while so that could be worth a deeper dive

Looks like that could be an interesting company and then you have something like cisco again could be another interesting company to look at i'm not sure why they're down as much as

They are boeing is another one that i think looks very interesting although we really have an idea we know what's happened to them i've done a few videos on boeing and i think we know uh why they're down

As much as they are and perhaps it's it's well deserved in fact i was a bit surprised on one hand that this stock wasn't further away from its calculation of fair value

But on the other hand well the their problems are directly leading to them having lower free cash flow so lower free cash flow would lead to lower projections so i guess i'm not too shocked by the current price

But again there could be an opportunity there if we're willing to sit in that one for a long time okay now i should mention that we should be careful about taking the fair value the price that we came up with and just

Running with it the goal with coming up with this type of analysis with running these types of numbers is to hopefully try to identify companies that could be worth a deeper

Dive what companies do we research next like i brought out a second ago there's a few of them here that could be interesting and just so we're all on the same page using let's say microsoft as an example

Well in this example we're saying that microsoft has a fair value of 180 per share so if we were to pay 180 per share for their stock today and if we're right about the projections

That i had up on the screen before well we would earn 7.5 percent per year assuming the market valued it correctly of course that's a giant assumption but as buffett says over the long run the market tends to do a good job now

That's the very purpose of using our required rate of return that's where we got the seven and a half percent from if we needed to earn more than the seven and a half percent well we would have to

Pay less than our calculation of fair value the further below that we got the better of our return would end up being once again assuming our assumptions were

Correct and that's why i'm saying we can't just take this number and run with it because we have to assume that yes i hope our assumptions are free cash flow assumptions are reasonable but i don't expect them

To be exact i don't expect them to be i expect them i'm hoping they will be reasonably close but there's a lot of things that could happen between now and a projection four years from now that is

Why it's very important for to use what warren buffett calls a margin of safety and a margin of safety is when we add some sort of buffer to our calculation of fair value so if we think the stock's

Worth 100 we're not going to pay 100 ideally we want to pay less than that and the more uns the more uncertain we are about our calculation of fair value or uncertainty are about our projections

The larger that buffer should be and if you're curious as to how to come up with a reasonable margin of safety i actually did a video called when to buy a stock where i go through that very concept

If you're curious i've got a link right here i've got a link in the description below and thank you so much for sticking with me all the way to the end of the video i really appreciate it thanks and i'll see in the next video

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