1. Stock valuation, potential market
value and stock image
Between their fundamentals and their images, stocks
lead a double life.
What is stock valuation and why is it needed?
To make a valuation - of an asset, product, service... -
is to estimate a potential market price.
The goal of a stock valuation is to compare it with the current market
price, to see if the stock is worth buying or selling.
Well, it is a bit more complicated. If you are in philosophical mood,
click here for a more detailed definition.
But you can skip it and go directly to the more practical issue,
*how to* evaluate a stock, starting with the question below.
Is there a pertinent method
That question is, in stock analysis matters, akin to the Holy Grail quest.
Financial specialists have to surf between several well-known, but often
Methods using "fundamentals": economic forecasts, probabilities of future
results or future net worth, actualization using money rates.
These bases are necessary. But often, the market bypasses them. Why?
The financial science's pillars: "volatility" and "risk premium".
They have their interest ...and limits. See the famous "beta coefficient".
Does it measure the stock's risk? Not really, only its correlation to the
whole market's risk and return.
The role of "trends" and "momentums", and the attempts (or temptations) to
master them with chartism.
OK, there is something to dig out here ...but we are miles from stock
The "market efficiency hypothesis".
To invest, the big criterion would be chance. Oops, sorry, the stochastic process,
adorned with "efficient" diversification
This denies, not only trends, but even the need of an evaluation method...
The theory of "complex dynamic systems" (yes, those systems move and get
mixed up), aka "chaos theory".
A theory spiced with fractals, butterfly effects, stress, breaking points, stability /
instability phases, (vicious) circles, spirals and attractors.
This "complex determinism" really means ...full uncertainty.
Good bye, probabilities!
To take everything into account, a bridge is needed
Although fragmentary, each approach listed above is useful.
But this hides the - mundane - fact that the prices of financial assets reflect both
the yin and the yang:
The assets' characteristics
The investors' behavior.
Analysts and portfolio managers need a bridge to unite both aspects.
This site provides it. It is called the stock image, a simple coefficient
EEV / Estimated
=> PMV / Potential
We see that the image coefficient is the key of our behavioral stock valuation
model, which purpose is to estimate the potential market value of a stock.
So what is a stock image?
Each stock has its own image. It is the bridge that links:
its ECONOMIC value its MARKET value
Practically, it is the "Price divided by EEV
(Estimated Economic Value) ratio".
An easy to find coefficient if you know how to calculate an EEV (the next
page gives a simple method for that).
As a love bonus or hate discount (see levels / factors page), the image is a
coefficient that indicates if the market:
venerates the stock (image > 1)
or has no special feelings (image = 1)
or hates it (image < 1).
The image of a stock is a coefficient that:
takes mainly into account the market's behavior towards the stock.
has for current value the stock price divided by the stock's
estimated economic value
varies in time, in a bracket specific to each kind of stocks.
Thus, a stock's image has:
an indicative maximum value
(reached in buoyant market periods)
a structural value
(average historical market's attitude
towards the stock)
an indicative minimum value
(reached in depressed market phases)
that image variation range allows to define
indicative high/low potential prices for each stock
Is that all?
However simple and intuitive, this image concept can be used profitably only with a
good knowledge of the underlying model (BAPM / Behavioral Assets Pricing Model)
and its operational data.
I included in this site the main keys to use it, taken from my treatise-guidebook
(only in French, and now out of print, sorry)
"Concept d'image appliqué à l'évaluation des actions: à quel cours acheter
ou vendre en Bourse".
The first thing to calculate, as shown in the next page, is the economic value