There’s a famous Warren Buffett quote that is often wrongly attributed to Benjamin Graham:
In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.
In other words, markets don’t accurately reflect the intrinsic value of publicly traded companies at every moment in time. They do a decent job of it over long periods of time, but day-to-day, they often produce wild and irrational price swings due to investors’ whims, emotions, and unproven theories.
Case in point, the Dow. Despite the fact that the global economy is at a standstill — and that U.S. COVID-19 deaths are still hitting new highs every day — the index has rallied almost 25% from the lows it hit in mid-late March.
Last week, we talked about how to spot dead cat bounces, and this market is a perfect example of the weak fundamentals, resistance levels, and short squeezes which characterize them.
Investors are “voting” optimistically for a short-term recovery without “weighing” the long-term value of the Dow’s components.
So what is that long-term value? No one knows for sure, but today, we’re estimating the long-term price targets of three of the biggest blue-chip stocks based on publicly available earnings data, analyst estimates, and news.
Apple (NASDAQ: AAPL): $210 Today
The iPhone maker has won some good press in recent days for donating large supplies of personal protective equipment (PPE) to medical workers around the world. But analysts agree that it could also be one of the hardest-hit Dow components when the smoke clears from this volatile market.
That’s because Apple doesn’t just make its iPhones in China; it also sells quite a lot of them there. As a result, it has felt the impact of the coronavirus pandemic on its sales ever since the initial outbreak in Wuhan.
With that in mind, several investment banks have modeled a 15% drop in Apple’s revenues as a result of this crisis. With the company’s long-term average price-to-sales ratio, that works out to an intrinsic value of $210 today — far below the current share price of $265.
Apple should recover relatively quickly once the virus is contained, but it could take the company a while to regain all the ground it’s likely to lose. Many analysts have lowered their one-year price targets from $400 to the $335 range.
ExxonMobil (NYSE: XOM): $35 Today
The world’s largest publicly traded oil and gas company is also expected to be hit hard by the coronavirus pandemic — and by the global oil price war which broke out shortly after the pandemic began.
After all, ExxonMobil’s price is strongly correlated with the performance of crude oil, and crude oil is near a 17-year low.
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The last time a barrel of oil sold as cheaply as it does today was in 2003 — when ExxonMobil traded in the $35-ish range. With that in mind, $35 seems like a reasonable estimate of the company’s current intrinsic value. That would mean that ExxonMobil could still have a ways to fall from its current price of $43.85.
Even if the coronavirus pandemic magically clears up tomorrow, it will take a while for ExxonMobil to recover from the current oil glut. Many analysts are predicting a one-year price target of $45 — just a couple of dollars above the price today.
Walmart (NYSE: WMT): $135 Today
Walmart was the largest private employer in the world before the coronavirus pandemic, and it will probably only get bigger as a result of it. That’s because the Arkansas-based retailer is one of a few businesses that could massively benefit from the current crisis.
Given that Walmart stores sell essential items like groceries and hardware, none of them have been forced closed, even in hard-hit areas with strict lockdown measures in place like New York.
In fact, Walmart could actually see its revenues increase as a result of this crisis, as consumers stock up on supplies and eschew restaurant outings in favor of home cooking.
Based on the firm’s projected revenues, and its historical average price-to-sales ratio, we can predict an intrinsic value of $135 today, about 10% above the current price of $121. Some analysts are predicting one-year price targets as high as $150.
All of these calculations are attempts to find the intrinsic value of blue-chip stocks in an otherwise-irrational market. For more useful value investing ideas, check out The Wealth Advisory.
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Until next time,
Samuel Taube
Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.
