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Investment Approach:
Stock Valuator Model
Channel Trend’s other basic stock ranking model is its Stock Valuator Model. As its name suggests, it is a stock valuation model. Most investors use valuation models or valuation measures in their investment processes. By contrast, relatively few investors and investment organizations use price behavior models, particularly one as rigorous and explicit as our Price Projector Model. For this reason alone, our Stock Valuator Model is the more conventional of our two basic stock ranking models.
The Stock Valuator Model is a true present-value discount model. The model begins with analysts’ projections for a price at which a stock is forecast to trade five years ahead. This forecast price is based on a fundamental assessment of the company, its forecast growth rate in earnings per share, and an estimated price/earnings ratio at which the stock is expected to trade five years ahead. Dividends on the stock are also forecast over the forthcoming five-year period. An annualized total rate of return is calculated from the stock’s current actual price to its five-year ahead forecast price plus forecast dividends. This is the annual total rate of return that an investor would earn on the stock if it were purchased at its current price and if the five-year ahead forecast for the price of the stock and dividends paid over that period turn out to be accurate.
The most attractive stock would not necessarily be the one with the highest expected total rate of return over the next five years because this simple assessment does not take risk into account. Stated another way, if two stocks have the same expected total rate of return, but they have very different risk levels, then investors would prefer the one with the lower risk. See Historical Performance of this model.
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