The GuruFocus site gathers together a wide variety of information and calculations that investors can use to help determine whether or not investing in a specific stock is the right choice for them.
The GF Value represents the intrinsic value of a stock, determined using GuruFocus' proprietary methodology. The GF Value Line on our stock Summary page provides an estimate of the stock's fair-trading value.
To calculate this value, GuruFocus follows these steps:
- We analyze historical correlations between the stock price and key business performance metrics, such as revenue, earnings, cash flow, and book value.
- We identify the metrics that have the strongest historical correlation with the stock price and determine the historical multiples at which the stock has traded relative to these metrics.
- Using these historical multiples as a reference, we estimate the stock's fair value while accounting for future business growth. Adjustments may be made based on the company's past returns and growth trends.
GuruFocus believes that the GF Value Line represents the fair value at which a stock should trade. Stock prices typically fluctuate around this line. If a stock's price is significantly above the GF Value Line, it is considered overvalued, and its future returns are likely to be lower. Conversely, if the stock price is significantly below the GF Value Line, its future returns are likely to be higher.
About GF Value
The GF Value chart takes inspiration from Peter Lynch, who managed the Fidelity Magellan Fund during the 1980s. Lynch developed a "quick way" to determine whether a stock is overvalued or undervalued by comparing its price line to a line representing what it would trade at if the price-earnings ratio was 15.
Building off of the idea of having a quick-reference chart to get an overall estimate of whether a stock is overvalued or undervalued, the GF Value combines the historical multiples, the company's past returns and analyst estimates of future business performance. The combination of these factors produces the GF Value line, to which the stock's price line can be compared.
The GF Value chart consists of the following components:
- The light blue line is the stock's price line.
- The solid black line represents the GF Value line, while the dotted black line gives the stock's estimated future GF Value line.
- Above the black line, there is a red section representing the overvalued zone. If the price is in the red zone, it means the stock is overvalued. The darker the red, the more overvalued the stock is.
- Below the black line, there is a green section representing the undervalued zone. If the price is in the green zone, it means the stock is undervalued. The darker the green, the more undervalued the stock is.
Below is the GF Value chart for Intel Corp (INTC, Financial). As you can see, Intel's current share price is still within the colorless area that is less than 10% beneath the GF Value line, so the stock is rated as “fairly valued.”
The possible valuation ratings on the GF Value chart are “significantly overvalued,” “modestly overvalued,” “fairly valued,” “modestly undervalued,” “significantly undervalued” and “possible value trap.”
Uses and pitfalls
The GF Value chart can be useful in getting a quick idea of how overvalued or undervalued a stock is. It also has the added benefit of estimating the future GF Value based on analyst estimates of what the company's earnings will be over the next couple of years. Growth investors might feel confident buying stocks that are trading at a discount based on their future GF Value rather than their current GF Value, while value investors may be more comfortable sticking to stocks that are fairly valued or undervalued based on their current GF Value.
A company's GF Value chart can be found on its stock summary page:
GuruFocus users can also use the GF Value as a screening criteria in the All-in-One screener. There are two ways to do this. The first is by going to the “fundamental” tab and selecting the GF Valuation as a screening criteria (i.e., modestly undervalued, fairly valued, etc.).
The second way is to use the price-to-GF-Value ratio, which can be found under the screener's “valuation ratio” tab. If this ratio is less than 1.0, the stock will be considered in the undervalued to fairly valued range. However, if the price-to-GF-Value ratio is too low, it could indicate a potential value trap.
So what is a potential value trap? Stocks that are labeled as such by the GF Value chart are those that may look like a good value on paper, but which have significant issues that could lead to permanent financial impairment or business decline. Most stocks these days that look undervalued are undervalued for a reason; the majority of investors are steering clear of them because the upside potential is not worth the struggling business and risk of insolvency. There is still a chance that these companies could improve their conditions and provide stellar returns on the future, but the risk is high and careful study of the company's financials and business outlook is needed.
Possible Value Trap, Think Twice companies are those that appear significantly undervalued based on their Price-to-GF-Value ratio, but whose fundamentals show signs of weakness. Indicators that a company may be a value trap include:
* Deteriorating Financial Health: A low Altman Z-scores indicates a higher risk of bankruptcy, or a low Piotroski F-Score.
* Earnings Manipulation: A high Beneish M-score indicates potential earnings manipulation, raising concerns about the reliability of reported financials.
* Stagnant or Declining Growth: Lack of revenue or earnings growth, or a recent slowdown, may signal limited future prospects.
Investors should conduct thorough due diligence, examining financial statements and growth indicators, to avoid falling into value traps.
There are some exceptional cases in which the GF Value isn't useful for estimating the intrinsic value of a stock. Investors should be aware of these situations so as to avoid paying attention to the GF Value when it is not useful.
One of these exceptional cases is the stocks of entities that derive the majority of their revenue from investment portfolios. U.S. accounting regulations now require unrealized investment portfolio gains and losses to be counted as part of a company's top and bottom lines. This causes constant fluctuations in the revenue and net income of these companies, which translates to the GF Value chart. Below is the GF Value chart for Apollo Global Management (APO, Financial), which operates in the asset management industry. The sharp fluctuations from the value of this company's investments mean that the GF Value chart, along with many other valuation metrics, are useless in terms of evaluating its potential.
Investors should also take caution when assessing the GF Value of companies that only report their earnings twice a year. Unlike companies that report on a quarterly basis, those that report twice a year will frequently have the problem of their most recently reported data being too old to be useful. This applies to all of the company's data and valuation metrics, not just the GF Value chart. Those companies that report twice a year will have the following warning in their GF Value chart: “data out of date, use caution.”
