I've probably covered this but I'm about to cover it again. Valuation of stock using experience. I consider this to be the most accurate method of stock evaluation. Perhaps this method could be called Dead Reckoning. This technique requires careful study so, it's not for everybody. Actually, given that it requires work, patience, and attention span, it's for nearly no one. I got it from Warren Buffett. I will explain using fictitious numbers. For the high speed crypto traders among us, "fictitious" means I made them up. Let's say I've been following oil and gas for 20+ years. Over that period of time, I've seen all kinds of problems that have driven the price of oil to near zero and I've seen problems that sent oil skyrocketing. I've read a ton of quarterly reports and am familiar with profitability of various companies. I own one or more companies in this field. Something unusual happens. How do I make sense of it? Perhaps I've come to know Exxon as a $100B company. Their MarketCap may vary from $60~200B but they are generally worth about $100B when the planet isn't on fire. They have a network of 5000 fuel stations, petrochemical contracts, and refining contracts. I also know how many barrels of oil they pump and how many they buy. This would not be a deep dive, to say the least. This is knowledge of rudimentary numbers. A new company, Whyon, comes into the market. This will be a merger or joint venture. They share their vision with big ideas. They have 1000 fuel stations with plans to expand to 10K. They don't own a refinery but perhaps they own part of one or they have started construction on one. What then are they worth? I may have estimated Exxon fuel stations as worth $10B. How could I isolate them? One way would be if I've also followed a company that is a pure fuel station business. Maybe they are worth $8B and they have 4000 fuel stations. That would be an extremely nice sanity check, if it existed. Whyon has 1000 fuel stations. That would value around $1B, all else considered equivalent. But, they are expanding like crazy. If the fuel market has space for this expansion, I would consider them with perhaps $2B of future value. Whyon has a refinery project that is 3/4 complete. What's that worth? Perhaps Exxon has 10 refineries. Those 10 refineries drive fuel and petro chemical business that is worth roughly $90B, so about $9B per refinery. When Whyon gets their refinery online, I would expect they will gross just as much as Exxon. There are situations where one company will gross more or less for the same product due to franchise value, geographic advantage, or, to an extremely tiny extent, vertical integration. The Whyon refinery will be in debt to the legal allowable limit. The LTV is probably more than 1, so it would be really hard to estimate. Over the next 10 years, assuming normal inflation and competent operation, it might be worth about half of an Exxon refiner. That brings it in at $4.5B. I've just valued Whyon at 6.5B. I would not buy it at a market cap of 6.5B. It's going to IPO at $25B. All IPOs are wildly optimistic, in terms of real value. That IPOs go up right away has nothing to do with corporate value. So, Whyon IPOs or is currently trading at $10 with a market cap of $25B and debt ratio perhaps just a bit higher than Exxon. I'm going to want to buy it with a market cap around $4B to account for risk, and that's if I think management is great, so I'm looking to buy in at a discount to allow for risk so I'm going to peg this company at roughly $1.60. I probably wouldn't place a long term buy order for Whyon at $1.60. Instead, I'd just watch it. They will be superstars for the first while, until their track record is tangible. At that time, they may be framed as bums when people realize their shares are worth no where near $10. Whatever the case, Whyon is very likely to over-correct at some point in the next couple of years. $1.60 is very doable for the patient investor. Again, $1.60 is the *maximum* I would pay for Whyon. I would probably buy a certain amount and then buy more if it goes down. If it goes up, I would just be happy with the original tranche. If I have one Whyon, there is a very real chance I will not invest or make money. But, what if I'm following 10 Whyons and finding another every few months. Over the years, I will have plenty of opportunities to buy companies with strong value for long term hold. Gamblers among us will point out the folks who bought the Whyon IPO at $10 and sold at $18 after three weeks made out better than a long term investor ever would. This is partly true. If you can do that reliably, it's quick money. Help yourself. I've found the guys who double and triple their money every week or two never seem to have a lot of capital of their own to invest. At that rate of return, they should be billionaires in the first year, if they threw down $100 to start. Value investors tend to do pretty well. I estimate market investors (untimed S&P500 buy and hold) do substantially better than value investors and value investors do wildly better than traders.
As it happens, I do follow oil and gas very closely. This is how I was able to value Tesla's SuperCharger network when others gave it $0 value. 100 SuperChargers would have been worthless. If Tesla went bankrupt, those chargers would have been shut down and the land repurposed. Unlike a fuel station, no expensive cleanup would be necessary so it may have been slightly cash positive. 1000 SuperChargers certainly had value. Tesla blew by this number some years ago. EVs were starting to be a thing. Had Tesla gone bankrupt, someone would have wanted the charging network. I estimated it's value using a fuel station and pump analogy. The value in a fuel station is selling gum and cigs, so being electric seemed equivalent. It wasn't long after Tesla started production on the 3 I valued them higher than BMW at the time. I portioned 0% for the cars and 100% for the charging network. Even now, the charging network is a huge asset. This approach can be surprisingly useful.
This is for Canadian investors. With Tarifs around the corner and a recent flurry of bonds, this seems like a good opportunity for short term capital gains on bond offerings.
