EC Net Present Value Bargains

There appears to be a few huge statistical bargains available in the stock market based on the simplified version of Benjamin Graham’s intrinsic value calculation. For back-of-the-envelope purposes, we use the following equation to calculate net present value:


  • V = Estimate of a company’s intrinsic value
  • EPS = Recent yearly earnings estimate of a company
  • 8.5 = Price to earnings (P/E) afforded to companies that have shown no-growth in recent history
  • G = Estimated long-term growth expectation for earnings
  • Y = Current yield on 10-year AAA corporate bonds

As we seek a big margin of safety, we are very conservative with “G” and “Y”. We’ve been using a 5.5% estimate for our “Y” discount rate, and we generally are 20-30% lower with our growth estimates than what Wall Street consensus may imply. At the time that Graham wrote about this, he looked backward and saw that AAA bond rates had averaged 4.4% over the prior decades. The 4.4% assumption is adjusted by the “Y” denominator, causing the formula to be germane in differing rate environments.

A long time ago, we heard Warren Buffett say that all the math you need to be a successful investor was learned by the seventh grade. We are happy to admit that we probably could never have been hired at Amazon or Microsoft, where they are looking to hire mathematical/technological geniuses. Hence, our simple calculation with very conservative assumptions.

What triggered these thoughts was the behavior of home builder share prices each time interest rates have ticked up recently. The myopic media has preached that home buying will be determined by interest rates and affordability going forward. We believe it will be driven by a massive shortage created by horrifically low home building in the 2009-2019 period and an explosion of interest in the 90-million-person Millennial age group which will dominate the 30-45-year old contingent over the next ten years.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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