Morningstar Advisor - October/November 2013 - (Page 58)

Gray Matters The Predictive Power of Fair Value Estimates By James Xiong, Warren Miller, and Thomas Idzorek Investors would be smart to focus on stocks that trade at a discount to this metric. Shares of discount brokerage Charles Schwab SCHW have been on a roll, rising 76.8% over the past 12 months through July 31. That’s a far cry from where the shares stood in mid-2012. At that time, a share price of $12.50 represented almost a 50% discount to Morningstar’s assessment of their fair value. Investors who realized that discrepancy and stood by the shares have been rewarded for their patience as Schwab has been buoyed in part by 58 Morningstar Advisor October/November 2013 its proprietary mutual fund and exchangetraded fund businesses, higher total administration fees, and rosy forecasts that its net interest income could benefit from higher future interest rates. Morningstar derives a fair value estimate for companies such as Schwab that are on its current coverage list. Our fair value estimates for stocks are proprietary data points that represent our equity analysts’ estimates of what they are worth. The fair value estimate is calculated as the present value of a future stream of cash flows to equity holders discounted to account for the systematic risk of that income. By comparing a fair value estimate to the price of a stock, an investor can determine whether a stock is over- or undervalued.

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Contents
Contributors
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

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