Fair Value is the Maximum Price you can Buy the Stock!
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Intrinsic Value Formula (Optimized for India)
Intrinsic Value Definition is created by Benjamin Graham the Guru of Warren Buffett in his book Intelligent Investor. The formula is helpful in Evaluating stocks which have projected growth rate.
Intrinsic Value helps to find the Current Value of the stock after Calculating the EPS Growth for next N years. This is a Moving Calculation!
To calculate Intrinsic Value you require the following:
- EPS – Earnings Per Share (eg: 50)
- G – Growth Rate for next 10 years (eg: 20%)
- Y – No-Risk FD Returns (eg: 10%)
Note: The No-Risk FD Returns shows the Alternative Investment Opportunity
Intrinsic Value
Intrinsic Value meaning is the “Real Value” of the company based on its EPS & Growth Rate. More the growth, More will be the Intrinsic Value.
For example: A stock with EPS 50 and Growth Rate 20% will be having an Intrinsic Value of Rs. 1300
Margin of Safety
Margin of Safety is the Percent(%) you deduct from the Intrinsic Value to have a Cushion. More the Margin of Safety – More the Cushion you have!
Warren Buffett keeps 20-30% Margin of Safety on his new buys. As he buys in Billions of Dollars the Intrinsic Value Margin of Safety protects him from short-term price crashes of the stock.
Margin of Safety differs for each class of stocks:
- For largecaps (bluechips) the MoS can be 20%
- For midcaps & smallcaps the MoS can be 30%
Fair Value
Fair Value is the Intrinsic Value – Margin of Safety
In above example, Rs. 1300 – 30% = Rs. 910 is the Fair Value
It means if you get the Stock at Rs. 910 or less will be a Good Deal.
Practical Example
Let us say your friend is advising to Buy Page Industries. You will put the following values as per 2020 April data on Screener.
- EPS 350
- Growth Rate: 10% (based on past 3 year average)
After submitting above values in our tool, You will get the Intrinsic Value as Rs. 5400
On Margin of Safety of 20% (for bluechip companies the MoS can be lower)
You will get the Fair Value as Rs. 4000!
Decision: The CMP of Page Industries is Rs. 18000 – Hence it is Not a Buy!
More Exercises
Now you can perform the following Intrinsic Value Exercise using Screener LINK.
Intrinsic Value of Blue Chips
- Find Intrinsic Value of HDFC Bank
- Find Intrinsic Value of Infosys
- Find Intrinsic Value of Reliance Industries
How much Margin of Safety you found there on each?
Intrinsic Value of Midcaps
- Find Intrinsic Value of V-Guard Industries
- Find Intrinsic Value of Caplin Point
- Find Intrinsic Value of Hester Bio-sciences
How much Margin of Safety you found there on each?
Intrinsic Value of Smallcaps
- Find Intrinsic Value of Globus Spirits
- Find Intrinsic Value of Dolat Investments?
- Find Intrinsic Value of Hester Bio-sciences
How much Margin of Safety you found there on each?
Inference
As you can see the Margin of Safety is Less going from Smallcaps to Midcaps to Bluechips! This is the reason Futurecaps is never recommending any Bluechips as the Intrinsic Value is Low & they will only give Low Returns & thus not suitable for Wealth Generation.
Pro-Investor Tip
You can make the 3 Important Decisions based on Intrinsic Value – buy, hold & sell. We recommend you make the decision every Half-yearly or Yearly based on the Results of the stock.
BUY If CMP < Fair Value
HOLD If CMP > Fair Value AND < Intrinsic Value
SELL If CMP > Intrinsic Value
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References
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