How ShareValue Calculates Valuation Score
Now that you understand the individual metrics, let's see how we combine them into one actionable score.
The Valuation Score Formula
Our Valuation Score (0-100) is calculated by:
- Gathering multiple valuation metrics for each stock
- Comparing to sector peers (not the whole market)
- Weighting by relevance (some metrics matter more for certain sectors)
- Normalizing to 0-100 scale
Valuation Score = Weighted Average of:
• P/E vs. Sector Average
• P/B vs. Sector Average
• P/S vs. Sector Average
• PEG Ratio
• Other proprietary factors
Why Sector Comparison?
We compare within sectors because:
Grading on a Curve
Imagine grading students:
- A 90% in Advanced Physics might be the top score
- A 90% in Basic Math might be average
Context matters. A P/E of 25 is "cheap" for tech but "expensive" for utilities.
By comparing within sectors, we grade each stock against its true peers.
The Scoring Process
Step 1: Gather Metrics
For each stock, we collect:
- Trailing P/E
- Forward P/E
- P/B Ratio
- P/S Ratio
- PEG Ratio
- Enterprise Value metrics
Step 2: Calculate Sector Percentiles
Where does this stock rank within its sector?
Example for P/E:
- Stock's P/E: 15
- Sector median P/E: 22
- Stock is cheaper than 75% of sector → 75th percentile for valuation
Step 3: Weight and Combine
Different metrics get different weights based on sector:
| Sector | P/E Weight | P/B Weight | P/S Weight |
|---|---|---|---|
| Technology | High | Low | Medium |
| Financials | Medium | High | Low |
| Retail | Medium | Low | High |
Step 4: Normalize to 0-100
The final score is scaled so:
- 100 = Most undervalued in sector
- 50 = Average for sector
- 0 = Most overvalued in sector
Key Takeaways
- Valuation Score combines multiple metrics
- Comparison is within sectors, not market-wide
- Weights vary by sector relevance
- Higher score = more undervalued relative to peers
Interpreting the Valuation Score
| Score | Interpretation | Action |
|---|---|---|
| 80-100 | Significantly undervalued vs. peers | Strong buy candidate |
| 60-79 | Somewhat undervalued | Worth investigating |
| 40-59 | Fairly valued | Hold if owned |
| 20-39 | Somewhat overvalued | Be cautious |
| 0-19 | Significantly overvalued | Avoid or consider selling |
What the Score Doesn't Tell You
1. WHY It's Cheap
A high Valuation Score means cheap, but not why. Could be:
- Market mistake (opportunity!)
- Legitimate concerns (value trap)
- Temporary issues (patience required)
2. Future Performance
Cheap stocks don't always go up. The market might be right.
3. Quality
A cheap bad company is still a bad company. That's why we have the Quality Score.
Valuation + Quality = The Sweet Spot
The best opportunities often have:
- High Valuation Score (underpriced)
- High Quality Score (good business)
This combination suggests a good company at a bargain price—exactly what value investors seek.
Real-World Example
Stock XYZ in Technology Sector:
| Metric | Stock XYZ | Sector Median | Percentile |
|---|---|---|---|
| P/E | 18 | 28 | 78th |
| P/B | 4.5 | 6.0 | 65th |
| P/S | 3.2 | 5.5 | 72nd |
| PEG | 1.1 | 1.8 | 70th |
Weighted Average: ~72nd percentile
Valuation Score: 72
Interpretation: This tech stock is cheaper than ~72% of its sector peers on multiple metrics.
Limitations to Remember
Valuation Score Caveats
- High score doesn't guarantee the stock will go up
- Cheap can stay cheap (or get cheaper)
- Sector comparison assumes peers are fairly valued
- Doesn't capture qualitative factors (management, competition)
- Past metrics don't predict future performance
Using Valuation Score Wisely
Do:
- Use as a screening tool to find candidates
- Combine with Quality, Growth, and Health scores
- Investigate WHY a stock scores high
- Compare similar companies' scores
Don't:
- Buy solely based on Valuation Score
- Ignore low scores on other pillars
- Assume high score = guaranteed winner
- Compare scores across different sectors
Next up: Sector differences in valuation—why context is everything.