Taking Stock… of Stocks.

For What It's Worth -

Forwarded this email by a friend? Subscribe here.

Happy Thursday!

Are you wondering if it’s safe to put away the stress balls and hit pause on the “sounds of nature” meditation playlist for now? Apparently the stock market does not think so. Things are far from “normal.” China’s Omicron wave, the war in Ukraine, a strengthening dollar, and crypto flameouts are just some of the items making headlines this week, and we’re guessing no one had emergency baby formula supplies being airlifted into the US on their 2022 bingo cards. Manufacturers Abbott and Perrigo are ramping up production to deal with the shortage (ICYMI: we dove into investing in the food and agriculture sector last week).

Since the stock market roller coaster comes amid repeated warnings about a possible recession, everyone needs a compass of sorts to navigate turbulent times. That is why we’re happy to focus this issue on the valuation of companies and how to access analyst research to inform your investing. You’ll make many decisions on your investing journey, so understanding the value of the stocks you are considering buying, holding, or selling is a key step toward building the confidence you need to make investment decisions that are in line with your values, regardless of the headlines.

The uptick in corporate impact and climate reports is great, but the variety of standards they use to highlight the positive steps they’ve taken can make comparing different firms’ performance… challenging. That’s why we’ve just launched a new resource page: ESG Reporting Frameworks and Standards: A Primer. It helps you keep all the standards straight and will give you a leg up in understanding what measurement standards companies and regulators are choosing to follow. If you’re looking for disclosures on sustainability matters, you can visit the official company website or simply enter their name on Corporate Register. Happy digging!

News you can use

  • ESG came under further fire this week as the S&P 500 ESG Index dropped Tesla. The revision, which came as part of their annual revision to both reflect the latest E, S, and G metrics within each sector and to reflect the weight of the more famous S&P 500, highlighted the challenges values-aligned investors face with companies that score well in one area (E in the case of Tesla) but fall short in others and how some indexes prioritize climate pledges and disclosures as companies like Exxon remained on the index while Tesla exited.
  • We saw the benefits of broad-based employee stock ownership plans this week when KKR sold CHI Overhead Door to Nucor for $3 billion. The sale, which will be KKR’s highest paying US buyout in 30 years, will deliver significant payouts to most of CHI’s 400 hourly and career employees as the equity program KKR created when they bought the company gave all of them ownership stakes in the company.
  • A majority of Intel and JPMorgan shareholders voted against the respective companies’ executive pay plans. Although the votes are only on an advisory basis, companies do respond to investor pushback, as General Electric recently did. A record 16 S&P 500 companies had their executive compensation packages rejected last year, up from 10 in 2020 and 7 in 2019.

Special May referral bonus: FWIW mug

‼️ Promotion Alert ‼️ For the month of May we’re adding a bonus to our referral program! Now, when you receive your first reward (two people subscribe to FWIW using your personal referral link), you’ll not only receive a copy of the FWIW Guide to Starting Your Socially Responsible Investing Journey, you will also earn a limited-edition FWIW Mug. This special offer is only available in May. It’s super easy — here is your personal link to share: [link to sign up page]

Voting machines vs weighing machines

When stock prices move up and down on your screen, sometimes at a dizzying rate, it’s hard to remember that they are connected to whole enterprises with buildings, employees, customers, products, sales figures, and printers (that only work half of the time). Since investing is a forward-looking endeavor, a company’s stock price is supposed to be based on its expected future performance in the real world. That price multiplied by the total number of outstanding shares is the market capitalization, or market cap, which tells us what investors think the business is worth. Those with the highest market caps are powerful giants like Apple, Microsoft, and Amazon.

But the market doesn’t always get it right. The price may drop due to an overreaction to negative news or skyrocket based on social media hype. A compelling story or a charismatic CEO may influence investors to look past certain pitfalls like high debt or rising competition. And sometimes the complexity of the market and the world economy throw solid expectations for a loop.

That’s where the process of valuation comes in. Investors often seek to decipher or gauge the “true” value of a company so that they can tell whether the market has undervalued or overvalued the stock. If they determine it is undervalued, they buy or hold. If it’s overvalued, they refrain from buying more or choose to sell those assets. As Warren Buffett’s mentor, Benjamin Graham, liked to say, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

Show me the research

To determine the worth of a business, investors use a wide variety of valuation models — none perfect that we know of — and arrive at different valuations. Valuation models use different aspects of a company, such as financial statements (which show numbers like revenue, profits, assets, and debt), as well as less specific measurements like management strength, market conditions, ESG factors, and sometimes, guesswork. While we could try to walk you through all of the different models and throw around terms like “discounted cash flow” and add acronyms like DDM and FFO to the list of things that can be overwhelming right now, you don’t have to crunch the numbers yourself to try to get a sense of whether a stock is overvalued or undervalued, or which stocks to unload if you are in a position to buy or sell.

What? You mean I don’t have to do the work?!? But you said it was complicated….

This is where analysts come in. Analysts at places like Morningstar or Thomson Reuters use sophisticated models that often blend some quantitative and qualitative data to arrive at their recommendations of "buy, sell, or hold" on stocks. Most analysts focus on a particular set of companies or sectors and are in contact with a wide variety of experts at companies; their recommendations are helpful to investors who otherwise don't have the insights they need to properly determine the likely current or future value of a company's stock. In fact, they are often the people you hear asking the first few questions on earnings calls, as these quarterly calls are great opportunities for them to refine their models, or ask CEOs and CFOs about investment or revenue in areas that are central to their ratings.

So, where do I find these “buy, sell, or hold” ratings?

While many analyst reports are proprietary or behind paywalls, most of the platforms you already use to buy and sell stocks provide access to the analyst reports on specific stocks or provide an overview of analyst ratings. This is a service that is often overlooked, but can be a great benefit to tap. For example, Vanguard clients that look up Microsoft will find “Buy” ratings and the full analyst reports from Argus and MarketGrader. Robinhood users looking up the same stock will find a bar chart showing that 95% of 44 analysts rate MSFT as a “Buy”, 2% as a “Hold” and 0% as a “Sell”. No one is saying that you should follow their guidance blindly, but these reports and overviews of the consensus among analysts can help you plot your next steps on your investing journey.

Analysts don't always agree. As we said, valuations can be tricky —  and many argue that independent analysts who have a variety of positions is a sign of a healthy financial ecosystem. In addition, only some analysts take the time to incorporate elements like sustainability and diversity, which many values-aligned investors look for. That is where reading their reports and understanding the factors that one analyst prioritizes over another can be valuable, and why we are drawn to the platforms that give you free access to full analyst reports.

Understanding the value of your values-aligned stocks is an important step in getting a sense of the longer-term strength of a company and in helping you decide whether you want to buy, hold, or sell a stock. Leveraging the extensive work analysts have already undertaken is a great first step in understanding the valuation of a particular company and increasing your confidence when making investing decisions.

And, if you have a hankering to dig deeper into the business of valuations… NYU Professor Aswath Damodaran is known as the Dean of Valuation and, if you ask us, his videos on the subject are priceless.

Before you go -

The Adventure Quencher Travel Tumbler just jumped the shark.