Intrinsic Value of a Stock

“What is the intrinsic value of a stock”? A question that crosses my brain as I evaluate what part of the investment pyramid I want to make my next investment in. Simply, intrinsic value is the measure of what an asset is worth. There are many ways to try and measure/estimate this value but it is more of an art vs science. Understanding the intrinsic value of a stock should be balanced with what the market determines that value on any given day.

STMT current investments:

Savings: ~$500 with a 1.10% yield as Ally Bank just reduced their interest rate due to the current economic environment

CD Ladder: ~1,200 with a ~2.0% weighted average yield

SPHD Dividend ETF: ~$2,000 with ~4.5% yield

With that current investment profile, I am seeking to bridge into an investment of 6% or greater. Understanding that risk increases when you seek more reward, stocks are a common asset class that would make sense. But how do I know which stock to buy and at what price is appropriate. That is where determining intrinsic value comes in.

Before I go any further, I am a true believer that it is very difficult to beat the market as an individual stock picker over the long term. I am a huge fan of indexing and dollar-cost averaging. I am only introducing how I would go about a stock evaluation if I decided to invest in common stocks outside of the index/ETFs.

The simple way I look at a stock’s intrinsic value is the current book value of the company plus any additional future cash flows (discounted for time). Here is a pic to illustrate my definition:

Here are some supporting articles that I reference for this post:

Investopedia: Intrinsic Value Explained

Motley Fool: Intrinsic Value Defined