Using Fundamentals as a First Screen for Technical Trading

[skiehawk11]

I've recently been brushing up on my fundamental valuation of individual stocks. I want to invest in stocks that have a strong balance sheet. I highly recommend you read two books by Benjamin Graham: "Security Analysis" and "The Intelligent Investor".

Currently, I use Graham's simple formula shown below:

V* = (EPS * [8.5 + (2*g)] * 4.4) / Y

V*: Intrinsic Value
EPS: the company’s last 12-month earnings per share
8.5: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham
g: the company’s long-term (five years) earnings growth estimate
4.4: the average yield of high-grade corporate bonds in 1962, when this model was introduced [4]
Y: the current yield on AAA corporate bonds

I modified 4.4 to reflect current average yield. Also, some use 7 instead of 8.5 for a more conservative valuation.

For a quick determination, you can use Relative Graham Value (RGV) as an initial determination of whether a stock is overvalued or undervalued.

RGV = V* / Current Price

A RGV value under 1 suggests that the stock is overvalued and anything over 1 suggests the stock is undervalued.

I don't do OTC or anything fishy. Instead, I downloaded the constituents of the DJIA. I didn't have all the data available for some so I disregarded those until I can get the required information.

Current UnderValued Stocks of the DJIA are:
CSCO 5.600722421
GE 5.031153284
KO 4.865251583
MSFT 3.878331312
PFE 3.651972067
INTC 3.230354838
DIS 2.886524725
HD 2.837793053
AXP 2.265843241
PG 2.059658789
MRK 1.939857623
UNH 1.808592606
UTX 1.759429168
BA 1.635006162
WMT 1.589893247
VZ 1.546436279
MMM 1.455133153
XOM 1.018194196

From this initial screen, you can use technical indicators and/or price action to determine whether current price constitutes a good time to buy.

I'd love feedback. And yes, there are other valuation methods such as Piotroski, Altman-Z, and Graham's intrinsic value calculations.

[RMI]

For a quick determination, you can use Relative Graham Value (RGV) as an initial determination of whether a stock is overvalued or undervalued.

RGV = V* / Current Price

A RGV value under 1 suggests that the stock is overvalued and anything over 1 suggests the stock is undervalued.

Possibly use:
RGV = -V* / Current Price

A RGV value over 1 suggests that the stock is overvalued and anything under 1 suggests the stock is undervalued.

I think it is more in line with how we think... just a thought

[FNG]

Get ready for another leg up!!!!

Forget charts, fundamentals, earnings, etc...it's all happening because the bearded one keeps giving the banks 85 billion a month not to "lend out", no no no, no real returns it that concept, instead, throw it all into the stock market. So you see, as long as this dog & pony show continues, and according to the bearded one, until unemployment hit's 6.5% or less, you will see the most astonding market rally ever witnesses before and when it comes finally to a screeching halt, after in a life time. Just wait until all the retail investors all come back because no one likes to see everyone else making money and not be included too.

Too bad because Main St. will suffer with higher costs like energy and everything else and you better have made enough money to cover the coming crisis when all this free money finally stops or the currencies collapse.

I think this next leg up will go until the debt ceiling talks start again. Link..

http://blogs.wsj.com/washwire/2013/04/2 ... t-ceiling/

[skysoldier]

Thank you so much!! This is info I can really use in non-TSP investing.

[skysoldier]

Skie, I see AAA corporate bond yields for 2 yr, 5 yr, other yr. Which one is right? Thanks and sorry for being pretty new to this.

[skiehawk11]

I use the 5 or 10 year AAA corporate bonds.

[skysoldier]

Wow, I guess that I'm just not cut out for this! My figures are way off! Any way you could post an example of the figures you use? I'm guessing that the percentages (5 yr earnings growth estimate is a percentage, right?) is expressed as a decimal? Also seems like using the 10 yr AAA yield (around 3.4%) gives a much different number than does using the 1.5% 5 yr. yield. Help!

[skiehawk11]

For Exxon Mobil (XOM):

V* = (EPS * [8.5 + (2*g)] * 4.4) / Y

V*: Intrinsic Value
EPS: the company’s last 12-month earnings per share (EPS - TTM) = 7.95
PE ratio (8.5): the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham. I like to use the average PE value for the DJIA. It's more dynamic. I like it. (
g (PEG ratio): the company’s long-term (five years) earnings growth estimate = 1.5
4.95: the average yield of high-grade corporate bonds
Y: the current yield on AAA corporate bonds = 3.14

TTM = trailing twelve months

V* = 79
Current stock price = 93.9
RGV = 79/93.9 = .84 < 1 so overvalued

RMI is incorrect. An RGV of less than one indicates an overvalued stock and should not be bought, while an RGV of greater than one indicates an undervalued stock and should be bought.

Do a quick Wikipedia search of relative Graham value (RGV).

Earnings Estimates
http://investing.money.msn.com/investme ... symbol=xom

Average AAA Corporate Yield
http://www.naic.org/research_moody.htm

Current Corporate Yield
http://www.bloomberg.com/markets/rates- ... ate-bonds/

[skysoldier]

Thanks so much - I can see the light now!

[skysoldier]

My math doesn't equal yours. To get "V" using your numbers, you multiply the sum of the PE (you didn't indicate a specific number so I used 7 as well as 8.5; anything larger than 8.5 just gets ridiculous) and the product of 2 and 1.5 (3). So you then have a number of, say 11. You then multiply 11 by the EPS of 7.95 to get 87.45, and then multiply 87.45 by 4.95 for 432.87. You then divide 432.87 by 3.14. Clearly, all the asterisks in the formula must not mean multiplication.
This CAN"T be that hard & I can't believe I'm THAT stupid! Any simple solution?

[skysoldier]

Skie, please just ignore my response. It seems to be this is too subjective for my use anyway. But thanks for your patience.