Fair Value, Explained

When a stock report mentions a "fair value" followed by a price, that's what the analyst thinks the stock is really worth, regardless of the actual current price.

People who analyze stocks work with earnings estimates, growth rates, and other factors to determine fair values. Based on these target prices, they build an opinions on whether a stock is under- or overvalued. These opinions vary among analysts and don't necessarily reflect the intrinsic value of the company.

Some Fools don't pay much attention to valuation and fair values. They figure that if they're buying truly high-quality companies and are planning to hold on to the stock for decades, then it shouldn't matter whether they bought at a price that was ahead of itself. They point out that many wonderful companies have now and then appeared overvalued according to conventional measures, and that people who avoided these companies based on valuation ended up missing great investment opportunities.

Other Fools disagree. They say that it can only help if you take the time to learn various valuation measures and if you focus your investments on stocks that appear undervalued. It's true that this approach should minimize your downside risk. These Fools, though, would have you learn enough to determine your own fair values for stocks, rather than relying on the estimates of others. The only problem is that it's easier said than done.

One option you have is to use the research of stock analysts, who spend a lot of time researching companies and coming up with fair values for stocks. Grab a free trial of one or more of our investing newsletters, for example, and you'll see many fair values that we've come up with for a bunch of promising stocks. In the January issue of our Motley Fool Inside Value newsletter, for example, Philip Durell pegged the intrinsic value of Coca-Cola (NYSE: KO  ) at $52 per share and that of Fannie Mae (NYSE: FNM  ) at $116.

To learn more about investing Foolishly, visit our Fool's School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides, which feature money-back guarantees. You can also learn all about brokerages and find one that's right for you in our Broker Center.


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11/25/2014 3:59 PM
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