This is the primary question that investment analysts ask themselves every day. What is this stock worth? If it’s worth a lot more than the current price, then they consider it a buying opportunity. But coming to that conclusion is a difficult process that can at times be more art than science. Here is an example.
Today the huge banking firm Citigroup is trading at roughly $47 a share (disclosure, I do not own any Citigroup stock). Is that a good price? Let’s look at what two analytical firms say. CFRA (the old S&P research arm) says that Citigroup is worth $26 a share using their quantitative model. Sounds like the stock is really expensive. But if we look at what Morningstar has to say, they think that Citigroup is worth $78 a share. In other words, Morningstar says that Citigroup is worth 3 times what CFRA thinks it’s worth.
How is that possible? How can these two companies come to such different conclusions? And who is right? Part of it is timeframe. CFRA is basically saying that we added up the value of the parts, and that’s what we come up with today. Morningstar on the other hand, is looking at some of Citigroup’s plans to spin off various subsidiaries and what those sales will yield.
The real answer is, there is no one answer. If there was, you would have very little movement in stock prices, as everyone would instantly agree to what the ‘true’ value is. But the more valuable thing is asking the question, why? Why are these valuations so different? Understanding the answer to that question will take you a long way down the path to deciding for yourself whether Citigroup is a table pounding bargain, or a loser to be dumped as quickly as possible.