Another important aspect to keep in mind when using relative valuation models, is that many of the inputs used are DYNAMIC.
What does that mean? And why is it important?
It means that the model will need to be updated frequently in order to maintain its accuracy and relevance. In my last telehealth relative valuation model, some of the inputs used in the model were: stock price, shares outstanding, and cash positions.
Since I posted that model, the prices of the companies in the peer group have changed, some significantly.
Not only that, but one of the companies (DOC) just announced a large bought-deal so its cash position has also changed.
When the prices and cash positions of these companies change, the peer group average EV/Sales multiple will also change, which will ultimately lead to different outputs than the original model.
Here is an up-to-date relative valuation model which reflects the stock prices, share counts, and cash positions of each company as of market close on October 21st, 2020. I have also expanded the peer group to include CRBK, VHI, and NEWU.
You can see that the peer group average EV/SALES’21 was 9.0x, so I used this multiplier to derive the valuation figures and these are the results...
Overvalued (Premiums) : $WELL (46%), $DOC (22.5%), $JNH (42%)
Undervalued (Discounts): $CRBK (50%), $NEWU (31%), $VHI (55%)
Once again, I am not making any predictions about where stock prices are going.
That is not the point of relative valuation. I am simply comparing the values of each company relative to the peer group average EV/SALES'21 multiple.
For overvalued stocks, there are often good reasons for why the market is assigning a premium on those shares. And for undervalued stocks, there is often a good reason for the discount. My analysis here is solely looking at the EV/Sales multiple and does not include other things like management team and each company’s unique position in the market.
- SmallCapInvestor
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Small cap companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.