Thread: Is WACC any good (or just a crappy model)?

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  1. #1

    Default Is WACC any good (or just a crappy model)?

    I am not sure if weight assisted cost of capital (WACC) is any good. What are your thoughts?

    After reading https://valuetrap13.wordpress.com/20...wacc-a-mole-2/

    I have rather been persuaded towards not using the model for valuation at all.
  2. #2

    Default

    I've looked at that model and abandoned it pretty quickly as it was too tedious to dig out information needed for the formula calculations. I sometimes use CAPM but don't like that either since it uses 5 year projected earnings growth in it's calculations and I simply don't trust those far out estimates. What I've found when looking at a value stock is checking a few things easily available at most stock summary pages. If a stock has a P/B ratio of 3 or less, P/S ratio of 2 or less and a PEG of less then 2 it most likely is in the value territory. Debt./ Liquidity can be looked at quickly by looking at Current Ratio >1.5 and Quick Ratio. >1 then the stock is most likely pretty healthy. Doing value stocks though usually requires more patience and long term thinking when getting into these positions because the very metrics that make them a value means the market is not pricing it in yet and the stock price is usually in a pullback mode for some reason. A lot of times it is simply because the sector/industry it is in is not in favor at the time. The question becomes how long will it take to move the price back up to it's value.

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