By the end of the day tomorrow you should have seen numerous headlines about Adobe System, the vast majority of which will be touting the value of owning this stock. Don't believe what you read. The stock is hugely overpriced. But hey, that's just what I think, and admittedly, nobody is paying me not to say what I think.

What They Do
Adobe Systems is a software company offering products and services used professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across personal computers, devices and media. Industry peers include Apple, Inc., Microsoft Corporation, and Quark Software, Inc.

Short-Term Target
My short-term target for the stock is $258.52, with an initial trailing stop set at $241.28. With a current price of $244.95, upward price movement will find resistance at $251.61 and again at $262.25, with final resistance found at $272.56. Downward price movement will find support at $238.98 and at $220.10.

Momentum Target
My momentum target for the stock is $83. Momentum targets are determined by overlaying a company’s most recent annual EPS, its year-over-year earnings growth, and the current yield of a 10-year treasury. As a value investor, the central issue that I have using momentum targets is that they require investors to trade in stocks that have already enjoyed significant gains while making no allowances for overall market corrections or the sustainability of a company’s earnings.

Growth Target
My growth target for the stock is $251. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Fair Value Investing
Fair value investing requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. For many fair value investors the minimum required hold is five (5) years. What follows are some of the metrics I use to determine my fair value estimates. They are presented only to assist investors considering an investment in Adobe Systems.

Average Volume
The average volume number is simply an average of the number of shares traded over a specific period of time, in this case the prior 50 days. The lower the number the greater the volatility the markets can impact on the stock price. For Adobe Systems the most recent ADV number is 4.245 million shares.

Days to Cover
The most recent days to cover number is 1.6. The days to cover number is a measure of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is updated twice per month and is sometimes used along with the beta ratio as a volatility precursor for a stock.

Beta Ratio
The beta ratio is a measure of the systemic risk of ownership of a particular stock as compared to the systemic risk of ownership of the market as a whole. Stocks with beta ratios above 1 are more volatile than stocks with beta ratios below 1. For Adobe Systems the current beta ratio is 1.25.

Unrelated Income
Income unrelated to a company’s day to day operation, such as income tax benefits or income from other sources can significantly distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. For Adobe Systems 0% of the company’s net income came from income tax benefits and 0% of net income came from “other” sources.

Insider Transactions
The SEC classifies insiders as the “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge. In the past 12 months, the company has reported 64 insider trades involving 402,611 shares of stock. Of those 64 insider trades, 21 were Buys involving 104,897 shares of stock, and 43 were Sells involving 297,714 shares of stock, creating an insider buy to sell ratio of 0.4 to 1.

Year-Over-Year Metrics
Several year-over-year metrics that are of interest to many investors are revenue growth, earnings growth, free cash flow growth, debt growth, price growth, and price growth. For Adobe Systems, revenue increased by 24%, earnings increased by 53%, free cash flow increased by 45%, debt increased by 119%, and the stock price increased by 28%. Year to date the stock price is down 2% and the S&P 500 is up 6.3%.

Equity Risk Premium
The equity risk premium is the excess return I want to receive for investing in an equity as opposed to a risk free investment such as a treasury. I calculate my equity risk premium by multiplying the a company’s stock specific beta by the yield for a 10-year treasury and then adding my risk premium to that result. My calculated equity risk premium for Adobe Systems is 7%.

Capital Ratios
Many investors use various capital ratios as a means to measure the effectiveness of management and the overall health of the business. I personally think it’s all a lot of hocus pocus, but I am just an investor. The most common capital ratios seem to be Return on Assets, Return on Equity, Return on Capital Employed, Return on Invested Capital, Cash Flow From Invested Capital, and Debt to Capital Ratio. For Adobe Systems, Return on Assets is 14%, Return on Equity is 29%, Return on Capital Employed is 20%, Return on Invested Capital is 1273%, Cash Flow From Invested Capital is 23%, and the Debt to Capital Ratio is 44%.

General Use Metrics
I am a practical investor. To get a quick sense of how the markets are currently valuing a stock, I like to use practical metrics instead of hocus pocus ratios. The ratios I like to look at are the PE Ratio, the PEG Ratio, Book Value, Tangible Book Value and the Merger and Acquisition Return Period. For Adobe Systems, the PE Ratio is 45, the PEG Ratio is 1, Book Value is $19, Tangible Book Value is $(7), and the Merger and Acquisition Return Period is 42 years.

Value Averages
One of the metrics I focus on is the stability of a company’s valuations. Earnings are subject to annual fluctuations which can impact year-over-year valuations. To offset some of that valuation volatility I use a running 5-year valuation average for comparison to my most recent valuation. For Adobe Systems, my 5-year average valuation is $78.

Baseline Value
As an on-going concern, my current baseline or intrinsic value for the company is $78. Baseline valuations are based on free cash flow value, net current asset value, book value, tangible book value, earnings, earnings growth, and the current 5-year yield of a AAA rated corporate bond. Value investing initiate, reduce, and terminate targets are derivatives of my baseline valuation.

Future Value
My future target price (based on a 5-year hold) for the stock is $778, which is an average annual return of 44%. A prior five-year hold of the stock (FY2014- FY2018) would have returned an average of 68% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Investors should always be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Risk/Reward Ratio
The risk/reward ratio measures how much your potential reward is for every dollar you put at risk. I determine my risk/reward ratio by subtracting the current stock price from my termination target (sell price) and then dividing that result by my initiate (buy) target and a swing multiplier. The swing multiplier allows for stock purchases within a price range percentage. Typically I like to see the risk/reward ratio at 3 or higher. For Adobe Systems my risk/reward ratio is (2.5).

My Investment Summary
My investment summary was determined utilizing that the financial information taken directly from the company’s latest SEC 10-K filing and is based on a value investing philosophy which considers that price determines return.

Adobe Systems, Inc. (Nasdaq: ADBE) – FYE 11/2018 – OVER VALUED The stock is currently trading at levels above my most recent $127 terminate target. Please See Linked PDF Worksheet