Disclaimer: Please note that I do not necessarily purchase, own, or partake of any of the securities or other financial instruments mentioned in this article. I also do not take any responsibility for any actions resulting from any actions taken by anyone who reads this article. You are responsible for your own finances - no one else. Do your yown due diligence when researching financial matters.
The SMP (Stock Market Plus) Stock Valuation Model is founded on the idea that in any market, on average, an investor will beat the market by purchasing undervalued securities at bargain prices. The model suggests building a diversified portfolio of securities that will (theoretically) surpass their current value even in a dismal bear market over a period of 10 years. The SMP Model is extremely sensible. It takes a stock's NTA (Net Tangible Assets), factors in projected growth, and flavors the results with a little market pessimism for good measure. The model is simple enough, but requires research that you can't obtain with your average stock screener.
How do I know that the SMP Model works? In early 2004, tired of my losses that arose from trying to play the market's short-term ups and downs, I came up with an idea for long-term investing. I reasoned that a security's intrinsic value was its current NTA per share, plus its projected Earnings Per Share (EPS) growth, year-over-year going forward, tempered by the realistic possibility of an extended bear market. Those stocks that could come out ahead of their current prices over time, even in a bad market, were the ones that I wanted to consider. I cut the projections off at ten years, because that provided me with a realistic long-term timeline to watch the stocks under consideration. This idea about stock valuation is probably not unique, and I do not claim to be the first person to ever think of stocks in this light. What I like about the model is that it takes away the guesswork. You plug in the numbers, and let the projections speak for themselves.
What kind of performance has the Model returned? In February, 2004, I started tracking a portfolio of 10 stocks, selected by the SMP Model. By April, 2005, that portfolio had produced over a 17% gain, in a little over a year. Now, again, if you're looking for 200% gains, go try Vegas or the racetrack. Realistic, long-term gains are slow and steady, and require diversification of assets for self-preservation. By, comparison, the stock markets have been pretty even (zero gain) over that time, with the S & P outperforming the Dow and Nasdaq.
What kind of stocks does the model like? Well, I'll share some that it doesn't like...Walmart, Microsoft, Gateway, EBAY, Oracle...some real heavyweights. Now, for ones that the SMP Model projects to be worth more than their current prices in ten years...Providian, Washington Mutual, LJ International, Ford, General Motors. I'll give you a larger list later. But, now, I want to give you the formula for the SMP Model so you can build a sensible portfolio today...
First, a couple of definitions:
NTA = Net Tangible Assets = (Total Assets - Intangible Assets - Liabilities)
EPS = Earnings Per Share = Total Net Income/Outstanding Shares
EPS(0) = EPS(current year) = projected EPS (current year) * discount rate (I use .12)
GRW = Projected EPS Growth Rate (use 5-yr or 10-yr if available)
Now here's the formula...
SMP(value) = current NTA/share + EPS(0) + [EPS(0) * (1 + GRW * discount (.12))](= EPS(1)) + [EPS(1) * (1 + GRW * discount (.12))](= EPS(2)) + [EPS(3) + EPS(4) + ... + EPS(10)
OK, the formula's a little nasty, but if you plug it in to a spreadsheet, it works quite well. Just so you know that you're on target with your math, here's a sample computation for (WM) Washington Mutual (these numbers may be slightly different than current values):
NTA = 13.951 (in billions) Shares = .873 NTA/Share = 13.951/.873 = 15.98 (that means WM has current NTA of $15.98) EPS = 3.70 GRW = .10 Discount rate = .12 (using such a high rate builds in the possibility of a bear market/inflation)
EPS(0) = 3.70 * (1 - .12) = 3.26
EPS(1) = 3.26 * (1 + .10 - .12) = 3.19
EPS(2) = 3.19 * (1 + .10 - .12) = 3.13
...
EPS(10) = EPS(9) + (1 + .10 - .12) = 2.71
NTA/Share + EPS(0...10) = $45.76
So, we arrive at a SMP Model value for WM of $45.76, with the current share price around $39. Thus, WM would pass the SMP test, and I would recommend this stock as part of a diversified portfolio.
As a side note, I am not seeking any kind of contribution or fee for this knowledge. I hope it benefits you as I think it will.
Prosperous investing to you!
http://www.stockmarketplus.com
I am in my mid-thirties and have a Bachelor's Degree in Accounting, with a minor in Decision Science. I entered the accounting field ten years ago, when I started working for a software company, where I stayed seven years. I am now the Inventory Control Manager for a large winery. My experience in the financial markets includes both personal and business endeavors.
shuttle from Midway Glen Ellyn ..The stock market can present you with a lot of... Read More
From the book 'The Stockopoly Plan' by the author Charles... Read More
I was devastated!I just couldn't believe it. I was 10... Read More
THERE'S SOMETHING TO BE SAID FOR standing firm in the... Read More
The Shadow knows. There used to be a radio program... Read More
You remember the story about the frog that was put... Read More
Ever have one of those sample boxes of candy? Each... Read More
Have you been listening to the talking heads on CNBC-TV?... Read More
Let's assume that you want to make some serious money... Read More
Do you own any mutual funds? In an IRA or... Read More
How can you dispel an illusion unless you look directly... Read More
The greatest stock market myth is the idea that investing... Read More
Alfred Winslow Jones started hedge funds in 1949. He was... Read More
I was recently interviewed for a press release through a... Read More
A 'stock option' is a contract between two parties giving... Read More
Mutual funds by definition are a mixed bag of stocks,... Read More
(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More
Just 30 years ago the stock market was a shadow... Read More
Are you one of those many people who dread reading... Read More
Sometime around 1980, can't remember exactly, there was a flight... Read More
If it walks like a duck, quacks like a duck... Read More
"If you don't know where you are going, any road... Read More
Very few people, even professionals, have heard of the Dalbar... Read More
That sounds like good advice doesn't it? Don't lose all... Read More
Several times each month I am solicited by various market... Read More
shuttle from O'Hare North Chicago ..Never lose money in the stock market again. Yeah, I... Read More
Let's assume that you want to make some serious money... Read More
Do you have a nest egg? You know, a place... Read More
There are many important things you need to know to... Read More
It is commonly reported that the stock market averages about... Read More
In one of my previous articles (Investing in the stock... Read More
It seems that every day I turn on the TV... Read More
If there is one term over-used when talking about making... Read More
Caught in a whirlpool and being sucked under. No life... Read More
You may have wondered why your mutual funds have been... Read More
One of the great "secrets" of successful people is discipline... Read More
'Sector funds are too risky.' 'I doubled my money with... Read More
It looks like we have now entered a new bull... Read More
The thinking process of the brain relating to the... Read More
The fight continues to rage among traders who use technical... Read More
The bear market that showed up at the end of... Read More
An insane person cannot evaluate an insane evaluation system.As you... Read More
Analyzing growth stocks is an important focus for any investor.... Read More
On November 17 I bought 7 different mutual funds and... Read More
If you've ever flipped on the television to CNN Financial... Read More
From the book 'The Stockopoly Plan' by the author Charles... Read More
Hedge current portfolio positions and gain access to capital resources... Read More
Money management starts with protecting your capital, realizing profits and... Read More
Picking a beaten-down stock requires a different kind of selection... Read More
I use the P/E ratio as a secondary indicator for... Read More
Stocks & Mutual Fund |