Fair Market Value of a Stock

Photo by Roberto Contreras on Unsplash

So we did a lot of math last time to determine the Tangible Book Value of a stock, determining if it was worth the purchase from a tangible asset perspective. For our example company, Nestlé, this purchase was not a great buy from the TBV perspective. As I said though, this doesn't necessarily mean it isn't a buy. After all, we did note in the supermarket a very large stock of their Lean Cuisine frozen meal line. Today, we calculate the fair market value, or FMV, of Nestlé.

What is Fair Market Value (FMV)?

Clinically, we could look at Investopedia and see that Fair Market Value is defined as, "the price that an asset would sell for on the open market," however, I think that is too cut and dry. We need to better understand what that means. This means, if the profits to earnings remain consistent in the future along with the earnings per share, we should expect to pay the fair market value for a share in the company.

How Much Data?

So, to properly analyze, accounting for possible recession data, we should gather as close to ten years worth of data as possible, considering throwing out possible outlier years as they will skew our data. Now I may have lost you at gathering 10 years worth of data, but I promise you, this will not be a difficult task, considering the tools we have on hand.

Now, on the surface, if you have access to something like ValueLine, this will seem pretty good as they wrap up the annual data in one solid PDF for you so you can just plug them all into your spreadsheet (or calculator if you are doing it once), but I'm going to be honest with you: that is probably the long way still. Yeah... it can be even easier and more granular. Let's go over to macrotrends.net. If you read my Tools for Investing page, you already got some idea of how we will do this but this time we'll go in a little more detail.

Pulling Data From Macrotrends

First and foremost, I owe credit to this method of calculation to my first investment teacher: Tom Vilord. Tom teaches a class on Udemy, A Beginners Guide to Investing in the Stock Market and I definitely feel like his class will give you a step up on intelligent investing. While it is no substitute for books like An Intelligent Investor, it is definitely a better start to investing than Benjamin Graham's classic on value investing. The best part is you can learn the basics for less than $20 USD most of the time. I recommend you check it out and enjoy it. 

Alright, credit taken care of, let's look at the method, let's look up Big 5 Sporting Goods (BGFV), a sporting goods chain that operates primarily in the western half of the United States.  

Quick Caveat: macrotrends won't have data on every company and neither will valueline as some foreign companies and some smaller companies aren't included.

In the input box, type (DON'T PRESS ENTER) BGFV. You should now see a drop down giving you the info on Big 5 and all of their different data components. From here, we are going to use our mouse and click on the - Revenue option. From here, you will be led to a page offering you multiple tables and graphs to trend the data available. We are going to jump to Price Ratios and you should see this option on a toolbar at the top of the page. We are getting close now... scroll down and you'll see a section called

PE Ratio Historical Data. This is where we find the gold. Starting with the word Date in the table, I want you to highlight everything you can, as close to ten years ago as possible plus a quarter. 

You are going to copy and paste that data into this spreadsheet calculator I built for you, for a quick calculation. Now that first row after the date is most likely missing trailing twelve month (TTM) Net EPS for the last quarter so we'll need to delete cells in Google sheets to omit that data, opting to shift the existing data up a row, giving you exactly 10 years of data. Don't worry if you brought in too much, though. We are only calculating the last 10 years of data anyway.

You'll need to put in the stock symbol to get the current market value comparison but this spreadsheet essentially averages out the last 10 years worth of data for Net EPS and PE ratio by quarter and multiplies them together to get your FMV. I recommend you make a copy of my calculator for your own use so that you can quickly do this math on your stock picks. Needless to say, if you picked up BGFV in December 2020, you got a good deal and are really loving life in March 2020 as you've seen a 60% increase in three months on your investment.

Calculating FMV is a fairly straight forward calculation and one that, for me and my investments, must be within about 25% of the current market price for me to move past this stage of evaluations.

Hope you found this information valuable. If you have any questions or concerns or just straight up disagree with how I calculate FMV, let's talk about it in the comments! 

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