Thinking of a lot of defense stocks here. It feels like these things always trade above their DCF value. In practice, do you just accept the way the market values these things (on next year earnings or EBITDA) and disregard the DCF?
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If you rely on DCFs to do anything other than lie to clients with numbers pulled out of your ass, I have a bridge to sell you
LOL. I actually use it to back into what kind of assumptions are baked into the current share price. In most cases, the trading prices turn out to be unjustified by a material margin.
Are you sure you're backing into the right assumptions? There are many places to look... I first imagine you have cost of capital right but other than that how are you sure you are backing into the right growth / profitability assumptions?
"Unjustified" is a funny way to say "My model is entirely inaccurate at predicting public market prices that depend on far more factors than what you can find on accounting statements". Lots of ex-PE and ex-IB folks entering public markets think that the voodoo they and every other glorified accountant calls a "rigorous model" is enough to compete against hundreds of people with STEM PhDs and/or decades of experience trading that sector.
Newbie here. I get that DCF is kinda not that useful, but then how do you value a stock in the first place? What are all the STEM PhD's actually doing?
When I was first learning about finance, I was really confused at how the markets assign a seemingly arbitrary value to a stock. Why are stocks trading at their current level, and not twice as expensive / half as expensive?
Then I learned about DCF, and it seemed like a convincing answer. Stocks couldn't be twice as expensive, because if they were, you could sell your stocks and buy an equally risky portfolio of bonds to get a greater return on investment. Time value of money, arbitrage, MPT, CAPM, etc etc etc.
After a while I realized that you can make a DCF say whatever you want it to, and you will generally end up making a model that confirms your existing subconscious beliefs. Not only that, but it seems that the markets don't really trade on DCFs anyway. So all in all, I'm kind of back to where I started. I mean, clearly there's no single correct answer to this question, but I'm curious ... what do you even do, if not DCF? How do you begin to approach the question of valuation?
Doesn't that just mean that the market's "DCF value" is higher than what your assumptions show it to be?
Well, if we take exactly the consensus numbers for the initial years and calc the DCF, for a lot of stocks we still end up with a substantially higher DCF value than what it's trading at. That means the bulk of the value is in the terminal value, which you can then use to back into the implied growth rate. Often times, even in a 10 year DCF, that implied g is more than 3% when we have been taught that no company can outgrow GDP forever.
Where are you getting consensus 10-yr forecasts?
Could be a short.
Then I guess they wouldn’t be trading above intrinsic value then, eh?
Gold mining companies - Newmont, Barrick, and so forth. Terrible historical returns on capital, doubt future returns on capital will be much better, they are valued the way they are due to the scarcity of large cap gold-related stocks. Fine to trade but buy & hold will leave you with an inadequate return.
Longer term likely to be superseded by copper mining companies as the high value pure play mining companies (and the gold mining mgmt teams know it too!).
Why do you think copper miners will replace gold and not another metal miner?
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