Good afternoon,
Please note the attached is only for academic research, the below is not investment advice. Due to the S&P/Nasdaq being overpriced by about 35% by my calculations. I looked at all the companies in the Nasdaq 100 this weekend. I then put rough prices on them based off their multiples and a quick review of their financials.
I am not comfortable with a buy and hold strategy at the market’s current valuation, so I wanted to put together a long, short strategy for my portfolio. Attached is my work.
They are ranked from most overvalued to least overvalued. I did this by estimating proper share prices based on multiples. Each valuation in column AC, which the rankings are hinged upon, is overvalued by roughly 35% in my opinion, but I valued them based on this over-priced market.
I also assigned each one a Buy, Sell or Hold Rating in Column B. The ratings were exactly 50% accurate today when the index moved up 51 to 51. This was on a day when the overvalued index was up another 1.55%. I expect the ratings will perform better as the index normalizes.
I also pulled some option prices for the Buys and Sells to start building my long, short portfolio and included them in the Model in Column M. I put my own target prices for them in Column I. I did this using my own formula. I have been staying away from the Black Sholes Model since the 1 year anniversary of market crash in February/March of 2020 as I no longer trust the trailing 1-year Beta as an accurate measure of risk.
As a side note for academic purposes, I have heard that stocks tend to trend in one direction for longer periods of time than they spend reversing directions. As such some advise only to buy stocks going up and only sell stocks going down while keeping target prices in mind.
As a substitution to Beta, I factored out specific risk factors that should be encapsulated in the trailing 1-year Beta from their financials, derived an expected volatility measure from it, and based my bell curve assumptions on that estimation. The new equation for Beta correlates with the trailing 5 year monthly Beta, but I am still working to dial it in. Please note for academic purposes the options priced are American Options, mostly over a year out.
Please take a look, and feel free to reach out if you have any advice, questions, or are interested in updated models of this type in the future. I can be reached at sales@unreformedandbroker.com .
Warmest Regards,
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