When you see a stock trading at $150, the natural question is: is that a good price? Fair value tries to answer that by estimating what the stock should be worth based on the company's financial fundamentals rather than market sentiment.
The Basic Idea
Fair value is an estimate, not a fact. It says: "Given this company's earnings, growth rate, and what analysts expect, the stock should be worth roughly X dollars." If the market price is below that estimate, the stock might be undervalued. If it is above, it might be overpriced.
No single method gets it perfectly right, which is why most serious analysts blend multiple approaches.
Method 1: Earnings Multiple (PE-Based)
This is the simplest approach. Take the company's earnings per share and multiply by a "fair" price-to-earnings ratio for its sector.
For example, if a technology company earns $5 per share and the sector median PE is 28x, the PE-based fair value would be $140.
The tricky part is choosing the right PE multiple. Different sectors trade at very different multiples — technology stocks typically command higher PEs (around 28x) while energy companies trade much lower (around 12x). This reflects growth expectations.
Method 2: Analyst Price Targets
Wall Street analysts publish target prices based on their own detailed models. Taking the average (consensus) of these targets gives you a crowd-sourced estimate of fair value.
The advantage: analysts have access to management guidance, industry data, and financial modeling tools. The disadvantage: analysts can be biased (especially if their firm has a business relationship with the company) and they tend to cluster around similar numbers.
Method 3: The Graham Number
Developed by Benjamin Graham, the father of value investing, this formula creates a ceiling price based on earnings and book value:
Graham Number = square root of (22.5 x EPS x Book Value Per Share)
The 22.5 comes from Graham's belief that a stock should not trade above 15x earnings or 1.5x book value (15 x 1.5 = 22.5). It is a conservative estimate that works best for established, profitable companies.
How Stock Feeder Blends Them
Stock Feeder's fair value estimate combines all three methods, weighted by the quality of available data:
- •If strong analyst coverage exists (many analysts), the analyst consensus gets more weight
- •For companies with stable earnings, the PE-based method carries more influence
- •The Graham Number acts as a conservative floor
The result is a single dollar figure displayed alongside the current market price, with a clear label showing whether the stock appears undervalued, fairly valued, or overvalued.
What Fair Value Cannot Tell You
Fair value is backward-looking and model-dependent. It cannot predict:
- •Sudden news events — an FDA approval, a scandal, or a surprise earnings miss
- •Market-wide shifts — a recession drags down even fairly valued stocks
- •Momentum and sentiment — sometimes stocks stay "overvalued" for years because growth keeps accelerating
Think of fair value as one input in your decision, not the final answer. It is most useful when combined with other metrics like growth projections, dividend yield, and competitive positioning.
A Practical Framework
Here is a simple way to use fair value in your research:
- •Check the fair value estimate on the stock page
- •Compare it to the current price — is there a significant gap?
- •Look at the valuation checks — how many are passing vs failing?
- •Consider why the gap might exist (growth expectations, risk, market conditions)
- •Use it as one data point alongside the composite score and financial health metrics
A stock trading 20% below fair value is interesting. A stock trading 20% below fair value with strong fundamentals and a high composite score is compelling.