How do you determine if a stock is cheap?

[i4value]

There are several ways in which people decide whether a stock is cheap or expensive

a) the most common way is to compare current with historical price. Variations of this is comparing current multiples with historical ones. This is what many traders and speculators do.

b) the other is to compare the company multiple with those of some peers. All those who use relative valuation follow this method.

c) if you are going to use relative valuation, I prefer to compare the current position with some benchmarks based on fundamentals or research. For example when using the Acquirer' s multiple I look for those less than 6 as identified by research. Along the same lines when using PE, I look for those < 15 as you can show this with 10% discount rate and 50% Reinvestment rate.

d) if you are a fundamental investor you would compare price with the intrinsic value. I am a value investor and this is what I use.

e) if you are investing based on technical, cheap is based on indicators or pattern.

f) if you are a speculator or gambler, whatever you buy is considered cheap.

Moral of the story? Cheapness is a relative concept. The trick is to select one that have consistently enabled you to make money.

[¯|_(ツ)_/¯]

Thank you, ivalue.
My favourite is (a).

What I did was rather simple.  Every weekend, business time published the price of all STI bluechips.  The closing price of that weeks is marked - relative to the past 52 weeks price range, something like this:

Source: https://www.dataplusscience.com/Visualiz...Price.html

#1 The overall market trends.  If most of the dots is on the left hand side, this is a signal to me that market is going down and at it's 52 weeks low point.  Which means that it's my turn to take a closer look and take out  buy-list for sun-tan.

Other than Business Time, I also spend a lot of time in "ShareInvestor" - the hardcopy one.  I found the entire series of ShareInvestor book in NP library and I spend the next 2 years going thru them.  The 2 years is well spend - I think - because I'm pretty familiar with most of SGX stocks.  

I like to look at their historical PE, PB, ROE, ROA, Dividend yields too.  

Thinking back, it's really enjoyable. 

Gratitude!

[weijian]

For a long time, I thought I was a bargain buyer of stocks but I was just buying cheap (and so I got a lot of junk) and more importantly, missed the good stuff.

For a long time, I thought I was a contrarian but I was just putting a negative sign to many of Mr Market's decisions (which were mostly right).

Ironically, everything starts to make sense once you unlearn everything you learn in Value Investing 101.

The Hidden Costs of Going Cheap: Unmasking 'Bargain' Investments

It’s hard to separate the idea of cheap from the idea of a bargain. Cheap refers to a low price, usually in relation to other things in the category. A bargain is something that is priced below what it should be given what it is.

Buying more cheap things gives me more chances at a bargain. Or so I used to think. In reality, it just gives me more junk or mediocre things and little chance at anything really amazing.

https://behavioralvalueinvestor.substack...-unmasking

[Wildreamz]

I try to guesstimate where I think the company will be in 5-10 years based on conservative assumptions, and work backwards towards the valuation I would pay today. If it exceeds 15% CAGR hurdle rate (approximately double in 5 years and double again in 10 years), I think it's cheap.

[¯|_(ツ)_/¯]

Thanks WJ - we are the same... everyday, we busy searching for a bargain

Cheap or Bargain - is it important or does it really make a different?

It depends.

This one don't make a different - VB's darling - MMH.

MMH was never cheap, even when it was 40cents a piece.  Look at it's PE, PB etc.  Calculate and project it's intrinsic value, discounted cash flow, expected value etc and none were screaming a bargain.  

The reason why I pull the trigger was of course Don's excellent writeup and D.o.g.'s +ve ack.

So simple   

---

Behind the scene:
(let me just be upfront, despite what I says below, LUCK played a significant role in MMH's play).

I worked in an IT company with huge manufacturing facilities.  At one point in time, my role as Business Development Manager allowed me to attend some interesting training.

One of the course I attended was conducted by a CEO of a manufacturing company.  Until today, a particular topic - operation metrics (KPI) itched in my mind.  Why? because of MMH.

(link to FY2023 Result Presentation)

Scroll to last page (page 18) "Balance Sheet".
1) Look at it's "Bad Debt"
FY2022 NIL, FY2023 $141.
Yes, you're correct, FY2023 bad debt is 141 dollar 

Asked yourself, which type of goods that MMH provide to it's customer - that customer happily pay them 100% - zero bad debt.

2) Look at it's "Inventory Write-off"
FY2022 $141K, FY2023 $76K

So, when you saw this "Inventory Write-off numbers, what were you thinking? Good, bad or don't know? 

Well, I can tell you that basically MMH did not have any inventory manufactured that need to be written off. Zero.

These inventories that you see - is basically the parts that it kept for the maintenance of it's machine e.g. CNC.  They are not inventories made for customer. What ever they made, it goes to the customer and customer pay for their goods (happily).

MMH is neither cheap nor a bargain but it works like a gem.

I called it "BUILD TO LAST".



Gratitude!

[i4value]

I would think that cheap or bargain for the fundamental investor has to be relative to the intrinsic value. To determine the intrinsic value, you take into account is earnings. If it is a growth company, then the earnings will have a high growth stage before settling down to a more steady stage. The real challenge is determining the business prospects and projecting its earnings profile. I am sure that if you had estimate the intrinsic value of MMH you have found that it would have been higher than the market price

[weijian]

Whichever method one uses isn't the key. Many roads lead to Rome. The key is the underlying principles of confirming that Rome is the destination:

- Plenty of expensive things around but only a subset of them are bargains. The rest are actually expensive after more facts come out. Plenty of cheap things around but only a subset of them are bargains. The rest are actually expensive after more facts come out.

- Good news and bargains seldom arrive together. Bad news and cheap things mostly come together.

- Good things seldom sell at bargains unless in a severe bear market. Bad things seldom sell for expensive unless in a bull market.

As OPMIs, our job is to choose the poison properly based on our temperament and experience.

[specuvestor]

My teenage sons know what is cheap. If my analysis is at their level I think something is wrong

We know what is good wine when we tasted bad, so I don’t think experimenting with cheap is bad when you are younger. But as we gain experience we will be able to recognise good companies with a reasonable price when people are looking at cheap simple ratios, or the other extreme where people chase ever higher valuations as long the hype / flow / momentum etc is there

[¯|_(ツ)_/¯]

agreed. 

By now, we had already sieved out the great businesses/stocks.

The only things that hold us back would probably simply greedy aka waiting for the best entry point. 

If you asked me whether I will buy MMH at current price point (given that it's a company that "BUILD TO LAST", the answer is No.   

Patient, I tell myself to be patient.

While waiting, do take sometime to enjoy the serenity:


Gratitude!

[weijian]

 so I don’t think experimenting with cheap is bad when you are younger. 

Common sense will tell us who is more dangerous to himself - An ignorant person with 1mil in his pocket (an older person flushed with money), or an ignorant person with 10k in his pocket (a younger person with little money).

Make all the mistakes and suffer from it when we are younger, so that we don't need to bear the heavier consequences if we commit them when we are older.

All I want to know is where i will die, so that I will never go there!