One of the first things every stock investor is good at is to do a comparable analysis or comparable company analysis. It’s for the stock valuation. The process of creating a comparable company analysis is fairly straightforward. The information the report provides is used to determine a ballpark estimate of value for the stock price or the firm’s value.
In this article, I would walk you through how to use CCA, and introduce Finviz and FMP. By the end of this piece, you can master how to find comparable companies, collect and manage data in an automatic format for the stock valuation.
- Comparable Company Analysis – What, Why & How It Works?
- Core Dimensions to Screen Stocks for CCA
- How to Find Comparable Companies – Finviz & SimilarTech
- What Key Metrics to Check and Evaluate
- Collect and Format Data Automatically Using FMP (Financial Modeling Prep)
- Stock CCA Help Private Equity Investment Valuation
Stock Valuation – Comparable Company Analysis – What, Why & How It Works?
Comparable Company Analysis, or we call the short term CCA. It is the process of evaluating a stock’s underlying value by comparing the financial metrics of other similar companies’ stocks in the same industry.
The methodology of this approach is that similar companies in the same industry have similar opportunities and challenges in finance and operation. Thus, the financial metrics to compare among them is to find the momentum of the trend, and the underlying opportunities.
To make this approach workable and successful, we have to prepare two things beforehand.
- Similar Companies: This is the first and foremost task we have to undergo while following the CCA approach. CCA is all about comparing one stock to a bunch of others. So it is essential that we choose the right similar stocks. Otherwise, we would end up overvaluing or undervaluing the target stock. For example, if we are trying to calculate the intrinsic value of Global-e, we must take into consideration the stocks that belong only to the cross-border eCommerce solution sector. But it’s not other sector’s stocks like Tesla in the automotive sector.
- The right Valuation Multiples: This is nothing special but it’s just the process of picking the metrics that you use to compare between stocks. Like the first process of choosing stocks, you need to pick the right multiples. Otherwise, it would be the same that it might lead to either undervaluing or overvaluing the stock. The most common multiples that the peers use are the PPS, market cap, P/E Ratio, EV/EBITDA, EV/EBIT, revenue, EV, and so on and so forth.
Stock Valuation – Core Dimensions to Screen Similar Stocks for CCA
As mentioned above, it might be overvaluing or undervaluing the stocks if you compare the orange with the apple. So the more niche you calibrate and filter the information, the more valuable information you can grab. As a result, you can have a better analysis of an underlying stock. Thus, for having a more reliable CCA, you can refer to these dimensions to run a screen.
1. Industry Classification
You don’t want to compare an apple with an orange. In a way, it might be feasible if you persist as they are still in the same category. However, it totally doesn’t make sense to compare Tesla with Coca Cola. This is a classic description. So before looking into the dataset, you need to select an industry of the stock you are interested in. For example, Alibaba Group (Symbol: BABA) sits in the Internet Retail.
Country-based is one of the most important and must-have considerations. It’s because the original country in a way reflects the business strength and growth opportunities. That includes the language, technology, product and management teams. Also, due to recent international political factors like the USA and China relationship, there are more considerations from the country-based when you compare the stocks. It’s for the purpose of avoiding uncertainty due to non-economy elements.
3. Market cap – Mega, Large, Middle, Micro
The size of a stock in a way reflects on one dimension which is the market cap. Market cap is equal to shares outstanding multiply price per share. It sorts out mega, large, middle, micro. It reflects how many shares are issued by the company. The size varies stock by stock. It does make sense you compare a stock with a similar market cap.
Stock Valuation – How to Find Comparable Companies – Finviz & SimilarTech
Now you understand how to filter the comparable companies. Here there are good platforms I recommend to use to find comparable companies.
FINVIZ is a browser-based stock market research platform that makes market information easily accessible to traders and investors. The platform offers free and premium tools that traders can use to generate ideas and find opportunities for trading stocks, forex, and futures. Visitors on the website get access to the latest financial news, market maps, comparative tools and charts, portfolio tracking, advanced screeners, and sector performance tools.
It provides a free version and elite version. Basically you can use the free version to screen all stocks’ information as well as the elite version provides. The Elite version has more than 50 presets and some includes pre-market and real-time quotes, advanced charting, backtesting, alerts, no-ads platform, real-time maps, emails on new alerts, and up to 100 screener presents.
SimilarTech is a Sales Insight Platform (SIP) that tracks technology adoption and usage analytics in real-time. It is a comprehensive SaaS technology and analysis tool that provides business insights through web crawling. This technology provides partners with crucial insights into technologies from across millions of sites to leverage information and grow businesses. The company offers analysis tools to spot trends, research markets, generate leads and prospects. Track and list an entire category of web technologies, follow real-time traffic data and accurate international coverage.
Buying a stock in a way represents you believing the company business can continually grow. The growth mainly of course reflects on sales, profit and customers. These growth numbers and CAGR can directly reflect on the financial performance of the stock, such as income statement, cash flow statement and balance sheet. So you can find similar companies with the sales and strong growth trend
What Key Metrics to Check and Evaluate
Now you have already filtered a list of comparable companies on hand. Basically you need to check these sets of data and each set of data would have these key metrics to compare the stocks.
Stock Market Data
Whenever and whichever stock you are watching, these are the 4 fundamental number you need to check, which are:
- Price per Share
- Earnings per Share
- Market Cap
- Enterprise Values (EV)
Compared with market cap, enterprise values can be more valuable as it includes the net debt, minority interests with minu the cash.
Basically we need to check 4 fundamental numbers from the income statement of a company, which are:
- Revenue (sales)
- EBITDA (cash flow/profitability before interest, tax, depreciation and amortization)
- EBIT (cash flow/profitability before interests and tax)
In this part, it tells you the company current health status and the growth momentum over the past years, which means the CAGR. Afterall, potential stocks all have one common thing that is having potential growth of profit. The stock price grows or not in a way is related to the company core business opportunities in the markets.
There are 4 core valuation multiples in CCA to find which stocks have more potential compared with similar companies in the public market. Those are:
Collect and Visualise Data in a Dashboard Automatically Using FMP (Financial Modeling Prep)
You will not want to manually download or even copy and paste these comparable company stocks’ information from Yahoo Finance. Here I recommend you a platform and API endpoint to automatically collect the data and visualise in a Google Sheets. It’s the Financial Modeling Prep.
Financial Modeling Prep is a new concept that informs you about stock markets information (news, currencies and stock prices). We always strive to give you the best and most updated information. We also give you free financial modeling methodology through our academy. Most investment banking firms follow our guidelines to get discounted cash flow statements of companies to see if they are undervalued, overvalued or simply at par value.
You can find all financial models and valuation techniques that are used in corporate finance to get companies intrinsic valuation. Most private equity firms use financial modeling for decision making when it comes to holding, buying or selling a particular stock.
Regarding how to leverage the FMP API by using Python, I would release the instruction in the other article very soon.
Stock CCA Helps Private Equity Investment Valuation
Stock CCA is not only used for the similar listed companies in the target markets. You can also refer to the CCA stock metrics and data to evaluate the private equity investment. The pros of this approach have two.
First thing first, you can compare the potential private company financial performance with the listed comparable company. Basically you can assume the price per share, market cap, and EV are the sample. Then you look into the valuation multiples to see if it’s a potential company to invest.
Secondly, the DCF method is very popular in private equity investment evaluation. As I talked earlier about the eCommerce business evaluation, you can calculate the NPV and IRR to understand the return value after some years. In DCF, WACC and CAGR are one of key numbers you need to have. From the stocks, you can grab the risk premium and WACC industrial information. But also you can have the stock fiscal year sales number in the historical record. So you can calculate the historical CAGR as an anchor for you to calculate the terminal value, instead of using the search volume.
For the details about the eCommerce business piece using traffic CAGR, please check out this article.
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