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Hello Everyone...

I like the idea of the PIV-ER... I think this is a great excersise that we must perform in our selections and portfolio.

But I have a question regarding the ER portion.

In the example that Heiserman wrote in The Street. He mentioned that WMT intrinsic value is around $71 and current price is $48.

Therefore, ER = (71-48)/48 = 48%

So far so good, but the above is just an expectation that the stock will jump to $71 right now.

My suggestion/question is that we should consider the time value of money.

In the above example, if the stock goes to $71 in 2 years our return will be 21% (not bad, but not 48%), and if it takes 3 years our returns will drop to 13%! (this does not seems as good as expected).

Any comments/thoughts?
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Duxx201 -

Good question and I see your point. Of course, we do not know if, or when, other investors will bid up the stock so that market value and intrinsic value are in equilibrium.

In any event, the time value of money is in ER. To illustrate, let's examine a company that I am thinking of buying.

If my cost of equity (discount rate) is 9%, then IV is $226 and ER is 157%. The firm's current stock price is $88.

At 10%, IV is $201 and ER is 129%.

At 12%, IV is $182 and ER is 107%.

So as we see, a change in the time value of money assumption changes our ER.

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