Value Investing

Aswath Damodaran’s Spring, 2015 Valuation Class Project Results

Aswath Damodaran’s Spring, 2015 Valuation Class Project Results by Jordan S. Terry, Stone Street Advisors

As some of you know, I’m finishing my MBA at NYU’s Stern School of Business, and thankfully, I’ve had the privilege of taking Aswath Damodaran‘s capstone valuation class. Each year since 1999, students in Professor Aswath Damodaran’s capstone valuation class are required to complete a large valuation project. Students pick from any listed stock globally (with a few exceptions), and perform a discounted cash flow (DCF), relative, and in some cases, a real-option valuation.

The results are in, and boy are they interesting! I’ve written a quick summary, and I think you’ll enjoy reading it!

Aswath Damodaran’s 2015 MBA Valuation Class Project Results

Jordan S. Terry

May, 11th, 2015

Each year since 1999, students in Professor Aswath Damodaran’s capstone valuation class at NYU’s Stern School of Business are required to complete a large valuation project. Students pick from any listed stock globally (with a few exceptions), and perform a discounted cash flow (DCF), relative, and in some cases, a real-option valuation.

Since Damodaran began tracking the results of the valuation project, they have been interesting, to say the least. Perhaps the most surprising if not important result is that this year, the recommendations were the most bearish they have been since 1999 when he first started tracking the them! (Note: The chart reads right to left, apologies)

Aswath Damodaran valuation project

Of the ~108 submissions included in this year’s results, 64% were sell recommendations, 7% were hold, and only 29% were buys. The ratio of buy recommendations to sell recommendations is 0.45, painting a pretty bullish picture, especially in the context of widely accepted bullishness across most of equity-land. Note again that this is the lowest level of the buy/sell ratio ever recorded in the set, significant lower than in the Spring of 1999, and the Spring 2007. One caveat is that each group of students had to pick one company that was losing money. This does not mean the recommendation thereof is necessarily a sell (just like profitable firms aren’t necessarily buys). I think it’s useful to include these unprofitable firms in any analysis, since many studies of sentiment based on eg P/E ratios necessarily ignore money-losing firms, severely distorting the bigger picture.

I was also very interested to see the distribution of recommendations based on how over/under-valued they were. As you may have surmised from the above, there were quite a few more significantly over-valued stocks than undervalued ones…

Aswath Damodaran valuation project

These are Damodaran’s sides/charts, so the axis labels aside, the clear takeaway from the above is that about 2/3rds of the stocks analyzed are fairly to over-valued (>0% over-valued).

Also of note is the significant number and proportion of firms that are overvalued by more than 50%, which I consider a more interesting than the relatively massive number of firms that are just 10-50% overvalued. You could probably dig into both of these groups and find a few good short candidates, if you’re willing and able to do the work, at least.

Now, for the moment you’ve all be waiting for; the most over and under-valued firms!

First, these are the 25 most over-valued firms based off DCF modeling:

Aswath Damodaran valuation project

To anyone paying attention, there are at least a handful of names here that should not come as a surprise. Many “hot” stocks, some distressed ones, some former and still clinging-on “hot” stocks, etc. Regardless, when you look at just how overvalued these stocks are, based off the MBA students’ analysis, I think if you’re long, you really have to take some time to understand why. These valuations are full of assumptions, some of which you may/may not agree with, but this is as good a time as any to reexamine your own assumptions and resulting analysis.

Now, the 25 most under-valued stocks:

Aswath Damodaran valuation project

There’s also some familiar names on this list, as well as plenty that I’ve never seen cross my Twitter/Stocktwits stream even once! I’ll be looking at a few of these myself as potential longs, especially the ones I seldom if ever see mentioned.

See full PDF below.

by Jordan Terry, Slide Share