1/

Get a cup of Bru coffee.

Today I will help you understand a simple implied growth calculator to find a stock buy level. Let's get started.

(A short thread)

2/

As you might know, The value of a stock is the present value of its lifetime cash flows.

For the long term buy and hold investor, the real cash flow from the stock is dividend income over its lifetime.
3/

In 1959, M J Gordon proposed a formula for this. The formula is

Value = D/(r-g)

Whereas

D = Expected dividends.
r = Required rate of return.
g = Dividend growth rate in perpetuity.

A detailed derivation of the formula is given at the end.
4/

Now, let's be honest, it is next to impossible to predict the growth rate in perpetuity for a firm.

So we twist the formula a little bit. Rather than finding out value, we find the *implied growth rate* This helps us to make deals with Mr. Market.
5/

Here is some math:

Value = D/(r-g)

r-g = D/value

D/value is nothing but dividend yield, so we substitute the same.

r-g = Dividend yield

g = r-Dividend yield

*Implied growth = Required rate of return - Dividend yield*
6/

Since we got implied growth formula, we can use it in some real-life firms.

Let's take Hind Unilever as a case study. The stock is trading at 83 x of FY 20 earnings. A traditional PE investor right away calls it overvalued.
7/

However, taking an r of 10% and a dividend yield of around 1%, the implied growth comes at 9% in perpetuity.

You have to make a bet here. If you think that the firm dividends grow at that rate forever, you buy or else you avoid.
8/

Let's take another example ITC Ltd. Assuming an r of 10% and a dividend yield of 5%, the implied growth comes at 5%.

Whereas the long-term dividend growth rate for ITC Ltd is 13%. So it looks like the stock is undervalued for some reason.
9/

Also, not all firms pay dividends. So you can use free cash flow in place of dividends.

And take an average number to reduce outlier risk.

Do note that r is not some magical number. So feel free to use your own required rate of return.
10/

Here is the maths behind the Gordon growth model.

Thank you for reading. Enjoy your weekend.

The End.

More from Trading

Many of you have seen the famous Westrum Organizational Typology model, so prominently featured in State of DevOps Research, Accelerate, DevOps Handbook, etc.

This model was created Dr. Ron Westrum, a widely-cited sociologist who studied the impact of culture on safety


Thanks to Dr. @nicolefv, I was able to interview him for an upcoming episode of the Idealcast! 🤯

It was a very heady experience, and while preparing to interview him, I was startled to discover how much work he's done in healthcare, aviation, spaceflight, but also innovation.

I've read 4+ of his papers, so I thought I was familiar with his work. (Here's one paper:
https://t.co/7X00O67VgS)

I was startled to learn he has also studied in depth what enables innovation. He wrote a wonderful book "Sidewinder: Creative Missile Development at China Lake"


Dr. Westrum writes about China Lake Research Labs: "its design and structure had one purpose: to foster technical creativity. It did; China Lake operated far outside the normal envelope... Sidewinder & others were "impossible" accomplishments,

I love this book because it describes traits of organizations that routinely create and maintain greatness: US space program (Mercury, Gemini, Apollo), US Naval Reactors, Toyota, Team of Teams, Tesla, the tech giants (Amazon, Google, Netflix, Google)

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हिमालय पर्वत की एक बड़ी पवित्र गुफा थी।उस गुफा के निकट ही गंगा जी बहती थी।एक बार देवर्षि नारद विचरण करते हुए वहां आ पहुंचे।वह परम पवित्र गुफा नारद जी को अत्यंत सुहावनी लगी।वहां का मनोरम प्राकृतिक दृश्य,पर्वत,नदी और वन देख उनके हृदय में श्रीहरि विष्णु की भक्ति अत्यंत बलवती हो उठी।


और देवर्षि नारद वहीं बैठकर तपस्या में लीन हो गए।इन्द्र नारद की तपस्या से घबरा गए।उन्हें हमेशा की तरह अपना सिंहासन व स्वर्ग खोने का डर सताने लगा।इसलिए इन्द्र ने नारद की तपस्या भंग करने के लिए कामदेव को उनके पास भेज दिया।वहां पहुंच कामदेव ने अपनी माया से वसंतऋतु को उत्पन्न कर दिया।


पेड़ और पौधों पर रंग बिरंगे फूल खिल गए और कोयलें कूकने लगी,पक्षी चहकने लगे।शीतल,मंद,सुगंधित और सुहावनी हवा चलने लगी।रंभा आदि अप्सराएं नाचने लगीं ।किन्तु कामदेव की किसी भी माया का नारद पे कोई प्रभाव नहीं पड़ा।तब कामदेव को डर सताने लगा कि कहीं नारद क्रोध में आकर मुझे श्राप न देदें।

जैसे ही नारद ने अपनी आंखें खोली, उसी क्षण कामदेव ने उनसे क्षमा मांगी।नारद मुनि को तनिक भी क्रोध नहीं आया और उन्होने शीघ्र ही कामदेव को क्षमा कर दिया।कामदेव प्रसन्न होकर वहां से चले गए।कामदेव के चले जाने पर देवर्षि के मन में अहंकार आ गया कि मैने कामदेव को हरा दिया।

नारद फिर कैलाश जा पहुंचे और शिवजी को अपनी विजयगाथा सुनाई।शिव समझ गए कि नारद अहंकारी हो गए हैं और अगर ये बात विष्णु जी जान गए तो नारद के लिए अच्छा नहीं होगा।ये सोचकर शिवजी ने नारद को भगवन विष्णु को ये बात बताने के लीए मना किया। परंतु नारद जी को ये बात उचित नहीं लगी।
Master Thread of all my threads!

Hello!! 👋

• I have curated some of the best tweets from the best traders we know of.

• Making one master thread and will keep posting all my threads under this.

• Go through this for super learning/value totally free of cost! 😃

1. 7 FREE OPTION TRADING COURSES FOR


2. THE ABSOLUTE BEST 15 SCANNERS EXPERTS ARE USING

Got these scanners from the following accounts:

1. @Pathik_Trader
2. @sanjufunda
3. @sanstocktrader
4. @SouravSenguptaI
5. @Rishikesh_ADX


3. 12 TRADING SETUPS which experts are using.

These setups I found from the following 4 accounts:

1. @Pathik_Trader
2. @sourabhsiso19
3. @ITRADE191
4.


4. Curated tweets on HOW TO SELL STRADDLES.

Everything covered in this thread.
1. Management
2. How to initiate
3. When to exit straddles
4. Examples
5. Videos on