The Sharemaestro US Stock Valuation Model is a clear, systematic tool for assessing the value of stocks traded on the NYSE and NASDAQ. Designed for value-seeking, contrarian investors, the model cuts through market noise to provide an objective snapshot of a company’s worth. By combining multiple valuation techniques, it offers insight into whether a stock is trading at a fair price relative to its earnings and operational performance. Read on to understand how the model works, the factors it considers, and how its final output can guide your investment decisions.
Market Coverage
The model focuses exclusively on US stocks, analyzing companies listed on the NYSE and NASDAQ. To maintain a consistent framework, it excludes companies with market capitalizations above $25 billion. For firms with market caps between $10 billion and $25 billion, the model employs an adjusted method that accounts for the unique characteristics of larger mid-cap companies.
The Valuation Approach
The model uses a multi-step process to derive a target price and a final rating. It begins by estimating an earnings yield - a measure that is essentially the inverse of the price-to-earnings (P/E) ratio. In practice, a lower P/E means the company produces higher earnings for each dollar invested. When this ratio is inverted, the resulting earnings yield is higher, suggesting the stock may be undervalued relative to its earnings. This approach provides investors with insight into the return potential compared to the stock price.
Next, the model assesses operational performance by calculating a hybrid efficiency score based on operating margins. This score offers a view of how effectively a company controls costs and utilizes its assets. The earnings yield and hybrid efficiency score are then averaged into a composite score, giving a balanced perspective on profitability and operational strength.
To determine a fair target price, the model calculates an EPS-based estimate, representing what the stock should be worth based on current earnings per share. For companies with larger market capitalizations (above $10 billion), this target price is refined by blending it with an alternative target derived from relative valuation multiples (price-to-book and price-to-sales). For banks, a specialized approach based on price-to-book ratios is used to better capture their unique financial profiles.
Key Metrics
The model outputs several key metrics that together provide a comprehensive view of a stock’s valuation:
- Yield Score:
Derived by inverting the P/E ratio, a higher yield score indicates that the company generates strong earnings relative to its share price, suggesting potential undervaluation. - Hybrid Efficiency Score:
Based on operating margins, this score reflects how efficiently a company runs its operations. - Composite Score:
The average of the yield and hybrid efficiency scores, this metric offers a balanced overview of the company’s overall financial performance. - Target Price:
An estimate of what the stock should be worth, calculated primarily using EPS and refined for larger companies using relative valuation multiples. - Price Target Ratio:
The ratio of the target price to the current market price. This ratio is central to the final qualitative rating, indicating whether the stock is undervalued or overvalued.
Price Target Ratio & Final Rating
The final output of the model is a qualitative rating based on the price target ratio. This ratio tells you how the estimated fair value compares to the current market price. For example, if the ratio is significantly above 1, the stock is considered undervalued; if it is below 1, the stock may be overvalued. The rating scale is defined as follows:
- Extremely Undervalued: Ratio is 1.75 or above
- Deeply Undervalued: Ratio is between 1.40 and 1.75
- Significantly Undervalued: Ratio is between 1.15 and 1.40
- Moderately Undervalued: Ratio is between 1.05 and 1.15
- Fairly Valued: Ratio is between 0.95 and 1.05
- Moderately Overvalued: Ratio is between 0.75 and 0.95
- Significantly Overvalued: Ratio is between 0.50 and 0.75
- Deeply Overvalued: Ratio is between 0.30 and 0.50
- Extremely Overvalued: Ratio is below 0.30
This scale translates complex calculations into a simple, actionable signal for investors.
Handling Special Cases
The model adjusts its approach depending on the type of company:
For larger companies with market caps between $10 billion and $25 billion, the EPS-based target price is blended with a target derived from relative valuation multiples, providing a more refined estimate. In the case of banks, where traditional revenue measures can be misleading, the model uses a price-to-book approach. If a bank’s reported book value is low - suggesting the number is in millions - the model converts it to absolute dollars to ensure an accurate assessment.
Market Fluctuations and Final Thoughts
It’s important to remember that no valuation method can fully account for market fluctuations. While the Sharemaestro model provides a thorough snapshot of a stock’s fundamentals, external factors such as economic events and market sentiment can influence stock prices. As such, the model’s outputs should be used as one of several tools in your investment analysis.
👉 Disclaimer: This valuation is based on all available data at the time of calculation. It is generated by an algorithm designed for deep-value, contrarian investors and does not constitute financial advice. Always conduct independent research and seek professional advice before investing.
