Fundamental Analysis Project
Other Measures

 

To improve our predictions, we shall try more complex measures.

Internal + Dividends

We start by adding the dividends to the internal value. The investor when buying stock is possibly also expecting dividends to be paid, something that would mean a return to his investment even if he is not trading the stocks. Our model will look like this:
  • ID = Internal Value +  

We notice that the risk involved is not calculated, ie the dividend is divided with the risk free interest rate.

 As the graph shows, there is an improvement in our prediction, but the R² value is lower.

It seems that the stocks that pay dividends are overestimated due to the fact that we did not calculate the risk factor.

Internal + Dividends (Corrected)

  We will try to calculate the risk as a function of the market cap of a company. Our model is as follows:

  • IDc = Internal Value +
Where  and a, b calculated through non-linear estimation.

The R² value has improved a lot, as the dividend paying stocks are not overevaluated.

Internal Value + Revenue:

Supposing that some companies instead of giving dividends will use their revenues to invest in the company (e.g R&D), we could use a revenue based model instead of the dividends:

  • Internal+Rev = Internal Value +  
Parameter b calculated through least squares.

 This time the estimation is even better, as well as the R² value. The calculation of b though, needs a good breakdown of the companies to have a clear meaning.