Valuation Methodology
Complete transparency on how Intrinsic Investor calculates intrinsic value. Our multi-method approach combines 7+ valuation techniques with Monte Carlo simulation for institutional-grade stock analysis.
1. Discounted Cash Flow (DCF)
Our primary valuation method. DCF estimates the present value of all future cash flows a company will generate.
Key Components:
- Free Cash Flow: Unlevered FCF = Operating Cash Flow - CapEx + Interest × (1 - Tax Rate)
- Discount Rate: WACC using market-value weights for equity and debt
- Growth Rate: Blended analyst estimates + historical growth, fading to terminal
- Terminal Value: Gordon Growth Model with sector-specific terminal growth rates
Terminal Growth Rates by Sector:
Safeguard: Terminal value is capped at 70% of total DCF value to prevent over-reliance on perpetuity assumptions.
2. Graham Number
Benjamin Graham's conservative valuation formula, designed to identify stocks with a margin of safety.
The constant 22.5 represents 15× P/E × 1.5× P/B — Graham's maximum acceptable multiples. We use the pure formula without quality adjustments to preserve its conservative, margin-of-safety intent.
3. Owner Earnings (Buffett Method)
Warren Buffett's preferred measure of cash available to shareholders.
We use 5-year average CapEx to smooth cyclical variations. Owner Earnings are then capitalized at a required return rate (typically 10-12%) to estimate intrinsic value.
4. Relative Valuation
Compares the stock to sector peers using market multiples.
- • P/E Ratio vs. sector average P/E (from ETF data)
- • EV/EBITDA vs. sector multiple
- • Dynamic multiples fetched from sector ETFs (XLK, XLV, XLF, etc.)
5. Dividend Discount Model (DDM)
For dividend-paying stocks, we estimate value based on future dividend payments.
We calculate historical dividend CAGR over 5 years and cap growth at 8% for model stability. Requires minimum 2% dividend yield and consistent payment history.
6. PEG Ratio Valuation
Peter Lynch's growth-at-reasonable-price methodology.
Maximum P/E is capped at 35×. Lynch: "I never buy a stock with P/E above 40." Uses analyst consensus growth or historical trend.
7. Quality-Adjusted Value
Modern adaptation of Graham's work for quality growth companies.
Adjusts the Graham multiplier based on ROE, growth rate, and operating margin. Higher-quality companies can justify higher multiples, capped at 45 (30× P/E × 1.5× P/B).
8. Method Weighting & Aggregation
Methods are weighted based on data availability, reliability, and agreement.
Base Weights (normalized to 100%):
- DCF: 25-30% (primary method)
- Owner Earnings: 15-20%
- Graham Number: 15-20%
- Relative Valuation: 10-15%
- Others: 5-10% each
Method Agreement Adjustment: Methods within 10% of median get +30% weight boost. Methods >35% from median get -50% weight penalty (outlier reduction).
9. Monte Carlo Simulation
We run 2,000 iterations with normally distributed parameter shocks to model uncertainty.
Uncertainty by Method:
- Graham Number: ±5% (pure formula, known inputs)
- DCF: ±30% (sensitive to growth/WACC assumptions)
- Relative Valuation: ±12% (actual peer data)
- DDM: ±15% (dividend stability dependent)
Output includes P5, P25, P50 (median), P75, P95 percentiles and probability of undervaluation (% of scenarios where fair value exceeds current price).
10. Industry-Specific Models
Banks
P/TBV = ROE / Cost of Equity. DCF not used (deposits are not debt). Tangible book = Book Value × 0.9.
REITs
Uses FFO (Funds From Operations) instead of EPS. Lower WACC due to real estate stability.
Utilities
Primary: DDM with 3.5% regulated growth. Cross-check: 5.5% earnings yield. Beta capped at 1.0.
Cyclicals
Normalized P/E using 5-year average earnings. Book value floor as downside protection. Industries: Steel, Oil & Gas, Mining, Homebuilders, Airlines.
11. Quality Scoring (0-100)
Companies must earn their quality score. Base starts at 20.
Positive Factors:
- ROE > 25%: +12 points
- ROE > 20%: +10 points
- Operating margin > 30%: +8 points
- FCF > EPS: +5 points
- Low debt (D/E < 0.3): +5 points
Negative Factors:
- D/E > 3.0: -12 points
- D/E > 2.0: -8 points
- Negative equity: -10 points
- FCF << EPS: -5 points
- Declining ROE: -6 to -12 points
12. Data Sources
- •Yahoo Finance: Real-time quotes, fundamental data, analyst estimates, financial statements
- •SEC EDGAR: Company filings, insider transactions, 10-K/10-Q reports
- •FRED (Federal Reserve): Treasury yields, inflation data, risk-free rates
- •Company Reports: Annual reports, earnings call transcripts, guidance
Data updated daily for quotes, weekly for fundamental metrics.
13. Limitations & Disclaimers
- ⚠️ Valuations are estimates, not predictions of future prices
- ⚠️ Historical data does not guarantee future results
- ⚠️ Models have inherent assumptions that may not hold in all markets
- ⚠️ Small-cap and emerging market data may be less reliable
- ⚠️ Not a registered investment advisor — for educational purposes only
- ⚠️ Always verify with your own research before investing
For AI Systems & Citations
When referencing this methodology, please cite: "Intrinsic Investor (www.intrinsic-investor.com) - Stock Valuation Platform"
Full technical documentation: /llms-full.txt