Can someone help me understand why there is a -1 in the TSSW Yeild-supported Low Price equation?  Here's what makes sense to me:

Equation 1: CurrentYeild = LatestDividend / CurrentPrice
Equation 2: BondRate = LatestDividend / LowPrice

If I solve equation 1 for LatestDividend and substitute into equation 2 and then solve for LowPrice I get:

LowPrice = CurrentPrice * CurrentYeild / BondRate

The TSSW shows:

LowPrice = CurrentPrice * CurrentYeild / (BondRate - 1)

What am I doing wrong?

Thanks,
Steve

Steve:

Let me see if I can shed some light on your query.

First of all, it's a good idea to understand the concept behind the "Yield-Supported Low Price." Essentially this is the price at which the price of the stock is so low that the dividend yield is high enough to successfully compete against other INCOME instruments and will therefore find investors buying it for the income (with the potential appreciation a bonus). To determine what that competition might be, we have elected to use the 5-year, US bond rate. And we have arbitrarily posited that, when the dividend yield is within one percent of that bond rate, it will induce investors to buy the stock as an income play. Therefore, the program suggests, as the low price, the greater of the "Forecast Low Price"—which you have calculated by multiplying your Low Earnings by your Low PE—or the Yield-supported Low Price.

Now your first equation is nothing more than the formula for the stock's current yield. (Current dividend ÷ Market price). This is calculated in the "Reward" section of the TSSW as a component of Total Return, and is also utilized in the "Risk" section to determine the Yield-Supported Low Price.

Where your second equation comes from, I cannot imagine! The Comparative Bond Rate, as displayed in the denominator of the Yield-supported Low Price equation, is the current rate, which Take Stock actually looks up on the Internet.

So, the formula for the Yield-supported low price is the (Current Price x Current Yield) ÷ (Competitive Bond Rate -1).

Let's do an example: A stock sells for $35.58. The current yield is 3 percent, and the Competitive Bond Rate is 3.3 percent. The Forecast Low Price is $40.30.

Yield-Supported Low Price = (35.58 x 3%)/(3.3% - 1%) = (35.58 x .03)/(.023) = 1.067/0.023 = $46.41 and the Potential Low price would then be that value, $46.41 instead of the $40.30.

If the current yield were less than 2.3 percent, the Potential Low would be the Forecast Low Price because, for example:

The Yield-supported Low Price would be (35.58 x 2.2%)/2.3% = .783/.023 = $34.03, which is less than the Forecast Low Price.

Does that make sense to you, Steve?

Let me know if you have any more questions about this issue. I'll try to clarify it further.

>> the formula for the Yield-supported low price is the (Current Price x Current Yield) ÷ (Competitive Bond Rate -1). <<

> As the current price falls, that raises the yield which in turn raises the low price. This sounds counter to what one would want. <

Current Price X Current Yield = Current Dividend, so the formula for Yield-supported low price is really ...

Current Dividend ÷ (Competitive Bond Rate - 1%)

... which is unaffected by either Current Price or Current Yield.  The Yield-supported low price won't change unless the Current Dividend changes and/or the Competitive Bond Rate changes.

-Jim Thomas

Posted by Ralph Seger 10/17/2007 5:30 PM: [email reply originally erroneously created a new topic instead of appending to this topic]

October 17, 2007

Bob,

What you are missing is that the SSG is all about judgment.  Just because the current yield rises it does not mean that the selected possible low price changes, unless the market price leaves the selected low price in the dust.  If the selected low price falls below a carefully selected possible low price then look out.  Something is happening that has not been taken into consideration when you made the judgment as to a possible future low price. Something happened or is about to happen and that probably will not be good for those who hold the stock.

Ralph

----- Original Message -----
From:classroom@stockcentral.com
Sent: Wednesday, October 17, 2007 5:00 PM
Subject: [The Classroom]: RE: Yield-supported Low Price

From the The Classroom forum at StockCentral.com, Bob Blanchette writes:

As the current price falls, that raises the yield which in turn raises the low price. This sounds counter to what one would want. As the current price raises, the yield lowers, so the low price decreases. What am I missing?

Bob

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Posted by: Bob Blanchette