AS you gain more experience—I mean grow older—new ideas are emerging, and the meaning of former concepts change. It is part of life and the financial markets.
Back in the Dark Ages when I started, the idea of fair value (FV) related to the options and futures market where contracts for delivery at a latter date might or might not reflect a fair value based on the current price of the underlying stock or commodity.
In accounting, FV meant the estimated value of all assets and liabilities of a company that was being bought out by another company. You figured out what the net hard-asset value of the company was as a base to determine the purchase price.
But now fair value means something different, and has to do with the price of the stock. The current definition of fair value is supposed to mean an unbiased and rational estimate of the potential future market price. Taken into account are factors such as revenues, earnings and other variables that might affect profitability.
That all sounds good. But even those promoting FV will acknowledge that the market price is still the price that counts.
Can stock analysis ever be unbiased and rational and, perhaps, more importantly complete? Cebu Air Inc. (CEB) is a favorite of those that talk about FV. Probably the most important factor for an FV that is about 60 percent higher than the current market price is oil prices. That should make sense. But then the peso-dollar exchange rate, overall economic growth, Philippine consumer spending growth and habits, as well as a bunch of other variables, may cancel out lower oil prices—or they may not.
While focusing on oil prices may be rational as it is a crucial airline expense, how much emphasis is put on the oil price is not unbiased analysis.
In August 2012 the market price of CEB was P67, and the FV projection was P107. Note that the only time CEB traded at P107 was in January 2001 on the way down. A year later in August 2012, CEB was trading at P50. The FV then was put at P80, which the price did hit in December 2014. The FV was then raised to P150, which was the first FV above CEB’s initial listing price of P130. The latest FV for CEB is still around P150; the current price is P87.
Understand that this is not in any way a criticism of any stockbrokerage firm’s forecasts or the idea of FV, in general.
However, ultimately, all fundamental stock analysis—be it FV which is compiled from many factors or something simpler—comes down to trying to predict what factor or factors investors will use to price a stock in the future.
Fundamental stock analysis rests on the belief that we can peek into the future and conclude that investors will buy a stock at a certain price “because.” But look at the stock analysis from the experts that you often read in the newspapers. “Stock prices went up because the economic growth was good.” “Stock prices did not go up, because good economic growth was already factored into stock prices.” “Stock prices went down, because investors ignored good economic growth.”
Every business that has to deal with and sell to the consuming public knows that trying to predict future buying trends and pricing is a difficult proposition. SM department stores have been doing business in the Philippines since 1958. They probably know the Filipino consumer better than you know your own buying habits. Yet, those three-day sales are primarily there because they tried to sell the wrong merchandise at the wrong price.
Fundamental corporate variables may be constantly changing and, therefore, changing investors’ outlook at what a fair price for a stock should be in the future. That is why stockbrokers are always properly updating their analysis.
But are we really going to believe that there is any sort of magic variable or set of variables that investors are always going to base their buying and selling decisions on? Of course, not. I do not have a clue why you are buying or selling CEB or any other stock, and I do not want to know. I don’t want to know, because then my personal bias comes into play as I judge your decision.
What I do want to know is if you are buying, because buying sends the price higher. Then I want to buy, too. And if you are selling, then I will sell also, as the price will go down. You as an investor are the genuine stock- market expert. You go look at FV. I will look at what you are doing when you decide to buy or sell.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.