This graph is inspired by Charlie Munger's affection for log-scaled price and earnings graphs, often calling them short of miracles and the best tool of a financial researcher.
The valuation chart helps you understand whether a stock is trading above or below its historical fair value. It combines price data with fundamental metrics to give you a clear picture of valuation over time.
Choosing a Valuation Method
Use the dropdown to switch between three valuation methods:
- P/E (Earnings): Traditional earnings-based valuation. Works well for mature, profitable companies with stable earnings.
- P/FCF (Free Cash Flow): Based on cash actually generated after capital expenditures. Often preferred for capital-intensive businesses or companies with significant non-cash charges.
- P/CF (Cash Flow): Based on operating cash flow before capital expenditures. Useful when comparing companies with different capital requirements.
Fair Value Calculation
The fair value line is calculated as:
- P/E method: TTM EPS × Median Historical P/E
- P/FCF method: TTM Free Cash Flow per Share × Median Historical P/FCF
- P/CF method: TTM Cash Flow per Share × Median Historical P/CF
Key Metrics Explained
The metrics row below the chart provides quick context:
- ROIC: Average Return on Invested Capital over 5 years. Above 15% is generally excellent.
- Book: 5-year CAGR of book value per share. Positive growth means the company is building shareholder equity.
- GM: Average gross profit margin. Higher margins (especially above 50%) often indicate pricing power.
- Yield: Current annual dividend divided by stock price.
- $1 Test: For every $1 of retained earnings, how much market value was created. Above 1x suggests management is creating value.
- EPS Est: Estimated future earnings growth based on reinvestment rate and returns.
- vs FV: Current premium or discount to fair value. Negative means trading below fair value.
Tips for Interpretation
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Mean reversion: Stocks tend to revert toward their fair value line over time. Extended periods above or below often correct.
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Consider the context: A stock trading below fair value isn't automatically a buy — investigate why it might be cheap.
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Multiple methods: If different valuation methods disagree significantly, dig deeper into why (e.g., heavy capital expenditures, one-time charges).
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Relative strength matters: A stock can be fairly valued but still be a poor investment if it consistently underperforms the market.
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Log scale benefits: The logarithmic scale makes percentage moves comparable across different price levels. A 50% gain looks the same whether from $10 to $15 or from $100 to $150.