METHODOLOGY · v1
How fair value uncertainty is rated
A fair value is an estimate, and some estimates deserve more trust than others. Every covered stock carries an uncertainty level and a band around its fair value, rated daily from four observable inputs. The verdict itself does not change; the band tells you how far the price would have to move before the verdict would.
THE FOUR LEVELS
The band is the fair value times (1 ∓ band). A stock with a fair value of $100 and medium uncertainty has a band of $80 to $120. Price inside the band: the gap is within what the inputs can explain. Price outside it: the gap is larger than the uncertainty of the estimate.
THE SCORE · 0 TO 3 POINTS PER INPUT
Volatility
1 POINT WHEN UNAVAILABLEAnnualised volatility of daily returns over the last year.
0 pts below 25% · 1 pt below 35% · 2 pts below 50% · 3 pts from 50%
Drawdown
1 POINT WHEN UNAVAILABLEThe largest peak-to-trough fall in the available price history.
0 pts below 30% · 1 pt below 50% · 2 pts below 70% · 3 pts from 70%
Earnings surprises
2 POINTS WITH FEWER THAN FOUR QUARTERSStandard deviation of the EPS surprise against estimates over the last eight quarters, in percentage points.
0 pts below 5 pts · 1 pt below 12 pts · 2 pts below 25 pts · 3 pts from 25 pts
Street range
1 POINT WHEN UNAVAILABLEHighest minus lowest Wall Street price target, divided by the median target.
0 pts below 25% · 1 pt below 45% · 2 pts below 75% · 3 pts from 75%
Loss-making penalty
0 OR 3 POINTSThree points when the sum of the last four quarterly EPS figures is zero or negative. A discounted cash flow model is least stable for a company that is not yet earning, so the band widens by one level or more.
WHAT IT IS NOT
The level is not an opinion about the company and not a risk rating of the stock. It measures how much the observable facts that feed any valuation have moved around: the share price, the quarterly results against expectations and the spread of professional targets. All four inputs are public data; none depends on the internals of the fair value model.
Two stocks with the same gap to fair value can therefore carry very different levels, and that is the point: a 15% gap on a low-uncertainty utility means more than a 15% gap on a very-high-uncertainty biotech.
WHERE IT APPEARS
- On every stock page next to the fair value, with the band in dollars.
- In every fair value report, rated from the data at publication, so the report and its band stay consistent after the fact.
- In the stock directory, the sector lists and the screeners as a column.
