How to value a stock easily using the 3-factor method. I’ll show you step-by-step how to use a stock valuation model to calculate the intrinsic value of a stock so you know when to buy a stock at the right price. Subscribe here for more content: http://bit.ly/SubscribeMichaelJay

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In this video I’ll be showing you how to value a stock using a very simple 3-factor method. I’ll also show you how you can apply it yourself so that when looking at an individual stock, you will be able to determine what your expected return is likely to be in different scenarios and use that information to come up with a smart buying strategy to help limit your risk of loss and improve your returns.

So when you buy a stock over the long term, your returns, or the money you will make from investing in the stock will come from two components: 1) are dividends or cash distributions that the company will pay to share holders. 2) is share price appreciation (also called capital appreciation) when the value of your shares rises over time. If you decide to sell you shares in the future at a price above what you paid for, that capital gain combined with all the dividends you received make up your total return.

Dividends are fairly straight forward and are the first factor in our three factor method.

As for capital appreciation, what is actually going on behind the scenes is that there are two specific factors driving the change in the share price.

One of those factors is how much earnings, or profit, the company generates. Specifically, how fast those earnings are growing over time.

The other factor is called valuation, and it is a relative metric of how much other investors are willing to pay for an ownership right to a company’s earnings. Specifically, how much investors will pay to get $1 of earnings.

By combining these three factors together you can get a fairly accurate picture of the expected future returns from an individual stock.

We’ll go over an example on how to perform a stock valuation on a stock as well as how to determine its current expected return and how to determine appropriate entry points to buy the stock. For this, we'll take a look at Home Depot stock (ticker: HD) and perform a baseline stock valuation, walking though each step in detail so you will be able to perform a similar valuation yourself on other stocks in the future.

If you have any questions about the content in this video or suggestions for future videos, please share them in the comments below!


DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.

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Michael Jay - Value Investing
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