understanding what has or hasn't been discounted in the stock price - newbie begs for help
as the title suggests, how can i possibly understand the factors that have been priced in the stock price? i mean yes i have my DCF magic model, i have all the comps and i have the standard values for the business at hand but even looking at announcements/earnings/etc may not tell if the analysis, however accurate, is taken into account or if the market is betting on a particular scenario. given that the market IS smart and takes all information under scrutiny (studies proved stocks to take account of earnings manipulation for example), how to spot wheter the price embodies some risk or some opportunity?
because i imagine my (eventual) reader to be disoriented at this point, i'll try to picture a situation:
you have company X with great fundamentals and a good relative position, every comp tells you it's a safe buy but there hasn't been much of a trading volume even for a large cap, volatility is really modest and you feel like it's a sort of value trap considering the business model, however solid and profitable. valuation and business analysis tell me different stories and i don't know what has been priced especially given that there were no surprises in earnings, there were neither future nor present acquisitions.
what should i look at?
thank you for your time and patience
Given you're early on it might make sense to maybe look at some broker reports to get a sense of the qualitiative factors that analysts are perhaps factoring into their valuation multiple etc. Ultimately, you've got to know the business / sector well enough that you can make subjective judgement calls in order to chop here and add there.
You don't. You can get a consensus by reading a ton of different blogging sites, research reports etc and try and aggregate all the different opinions but then you will end up leaning towards those that fit your opinion (confirmation bias). Not matter what the price of an investment is it will always embody both risk and opportunity, some will just be more asymmetrical than others.
In my opinion you are talking yourself in circles and you will never actually put a trade on because you weigh both sides of the equation and try to come up with a 'right' answer. There is none. You do your best research and then put on a position where you feel comfortable. The market will tell you whether you are correct or not and whether everything has been priced in (it probably hasn't). Since you are asking for advice I'll try to give you a few guidelines I go by when I look at an investment.
First, since you are talking about value: why is it undervalued, by how much and what will unlock that value. So you are looking at Company X and you believe it is worth $50 dollars a share. Currently, it is trading at $30 dollars a share. Earnings forecasts look good, valuations are low and it seems like the company is simply being underestimated by the market. Well you need to figure out exactly why that is. Maybe, it historically under performs expectations. Maybe management has turned over and people aren't confident in the new team. I could go on and on but I think you get my point. In this type of situation you have to test your thesis as to why it will eventually hit $50 dollars and if it seems sound, put on a position. Watch it. Constantly evolve your process by bouncing your idea off of every research report and forecast for the company you can get your hands on. Watch all of the ancillary industries that may or may not contribute to the bottom line and understand exactly what is going on around it. There is no perfect answer, but that is kind of the point. That is why there are opportunities to make money.
Secondly, it sounds to me like you are losing the forest through the trees. I'm a fan of basics. I'm also a fan of realizing that you need to, more than ever, be your own person when it comes to looking at companies and discerning values. There is no magic bullet valuation ratio that says, " Buy me now to make 20% by next week." I think you need to focus less on what is already priced in and figure out what isn't. That is where the advantage is.
Hopefully that is at least somewhat helpful and on topic... it is the day before July 4th and I don't feel like being here.
thank you for your input. i am already doing it. fact is that i'd like to restrain the "subjective" element as much as possible to a reasonable degree. i'd like to speculate the least possible and try to back my conclusion by solid, well-reasoned, logical arguments. to me the classic "i got a strong feeling XYZ will soar 20%" is quite meaningless. i very much prefer: "data, when matched with the micro/macro/sector scenario, shows compelling evidence that XYZ blah blah"
Qualitative and subjective are not really the same thing. I think jrmistmaker is more referring to news that isn't directly translated into numbers, but can have material impact on the company/sector's future operations etc.
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