# Calculation of Value of Stock by ClassOf1

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Sub: Finance                                                                            Topic: Stock Valuation

Question:

Calculation of Value of Stock.

Explain about undervalued stock and overvalued stock with an example and compute the following:

1. Long position in the undervalued stock.

2. Short position in the overvalued stock.

3. Total return.

4. Compare the individual returns to market returns over the same period.

And also summarize the investment performance.

Order History

EXH: EXTERRAN HOLDING INC.

COP: CONOCOPHILLIPS

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Sub: Finance                                                                            Topic: Stock Valuation

Graph of Portfolio

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Transaction History

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Sub: Finance                                                                            Topic: Stock Valuation

Solution :

We believe that CONOCOPHILLIPS is an undervalued stock as EPS for the nine months have been
roughly at \$3.3 which would result to an annualised EPS of \$4.5 per share thereby resulting in a P/E
ratio of roughly 11.70 as compared to the industry average of roughly 20( as per Reuters finance). The
1 year forward P/E ratio is at 8.62( as per yahoo finance). CONOCOPHILLIPS has had a long term
history of performing well. In light of the above we have taken a long position on the stock.

EXTERRAN HOLDING INC. is engaged in the full-service natural gas compression business. It is trading
at a 1 year forward EPS of 39.09 (as per yahoo finance). The industry P/E is at 13.43.Its current 9
month EPS is at -\$3.76( as per Reuters finance). In light of the above we believe that EXTERRAN
HOLDING INC. is an overvalued stock and hence we have taken a short position on the stock.

Computations:

Return on Long Position

Loss \$53(\$68-\$15) on an investment of \$1589.80.

Return = (\$53*100)/\$1589.80 = -3.33%

Annualised return = -3.33*365/38 = -31.98%

Return on the short position

Profit \$124.50 on an investment of \$1188.

Return = (\$124.50*100)/\$1188 = 10.48%

Annualised return= 10.48*365/38 = 100.66%

Total return
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Sub: Finance                                                                            Topic: Stock Valuation
Profit of \$71.50(\$124.50-\$53) on a total investment of \$2777.80

Return = (\$71.50*100)/\$2777.80 = 2.57%

Annualised return= 2.57*365/38 = 24.72%

Comparison of individual return with the market

The S&P 500 closed at 1091.06 on Oct 20 the creation of the position date and at 1087.27 on Nov 27
2009 , the unwinding date. The return on the S&P 500 was negative at -.35% which if annualised
would result in a return of -3.34%. Our return on the long position for CONOCOPHILIPS was worse
than the market return at -3.33% for the period and -31.98% annualized. The return for EXTERRAN
HOLDING INC. was way ahead of the market at 10.48% and annualized at 100.66%. Our total return
was at a healthy 24.72% annualized as compared to -3.34% on the S&P 500.

Report of the broker

30 shares of CONOCOPHILLIPS was bought at a total cost \$1589.80 net of commission. The total sale
consideration was at \$ 1521.80 which would lead to a loss of \$68. But since a dividend of \$ 15 was
received, hence the loss would reduce by the amount amo
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