Our outside analysts have developed The Cohen Price TargetTM, which uses a combination of academic and market-based valuation approaches. The following four equal weighted (25%) components used in calculating our target price, include the assumption of capital raised. Our outside analysts from whom we purchase our reports all use the following components when applicable to a given company.
1. The first 25% equal weighted component: is the market multiple based valuation methodology. This method uses the industry average 2010E Price-to-Earnings ratio to calculate the potential stock price (and/or Price to Book if an asset based company). We take the average Price-to-Earnings multiple of a given industry. This means that on an average, stocks in this industry should currently trade at a multiple times their 2010 expected earnings. These earnings in a small cap company are usually only generated by a small company raising cash to meet its master budget. The index, therfore, reflects capital invested in any micro/small cap company.
2. The second 25% equal weighted component: Cohen Capital Employed based valuation. Most start-up and micro/cmall cap companies require significant capital to meet our projections. Our Cohen Price TargetTM reflects the Company’s ability to raise additional capital. Based on our capital projection and long-term price target from our Cohen DCFTM valuation model, we derive a Price-to-Capital Employed ratio. We then multiply this ratio with our capital employed per share assumption to derive this target price.
3. Our third 25% equal weighted component: is our use of the Cohen Price Performance IndexTM, which calculates the average price increase of all the stocks covered by Grass Roots Research and Distribution Inc. and Cohen Research after their release. Currently, for the week ending June 8, 2010, the Cohen Price Performance IndexTM is up by 96.7%, meaning that we expect the stock to follow the same trend and rise by 96.7%. To date, since May 2009, 96.7% of all of our researched stocks post report release have traded above the price of our initiate coverage report within 30 days. The Index assumes that all of its companies had capital employed in each company. In general, almost 100% of our researched stocks went up close to 100%.
4. Our fourth 25% equal weighted component: is our Cohen Discounted Cash Flow (DCF) method of valuation. Our Cohen DCFTM valuation includes a complex trademarked formula proprietary to our firm, that includes an assumed long-term sustainable growth rate, cost of capital and assumed capital invested in a given company. Our DCF price target values a company today, based on projections of how much future cash will be generated from a given company. We assume that a company is worth all of the cash it can make available to investors in the future. It is called 'discounted' cash flow because cash in the future is worth less than cash today, and therefore must be discounted to today. We forecast various line items including assuming a given amount of capital is raised, to calculate the free cash flow we project a company to generate during our 5 year forecasted time period. If a company does not raise our estimated cash requirements, it is highly unlikely to reach our forecasts and can go out of business. After using a formula to discount free cash flow, we divide the total forecasted equity of the company by the shares of stock outstanding to calculate our Cohen DCF valuation, or theoretical price per share target. We believe the Cohen DCFTM formula is a more accurate measurment of operating cash than the traditional DCF used by most Wall Street research analysts. A DCF, or 5 year forecasted free cash flow projection, can not be calculated without forecasting the three statements (IS,BS,CF) for 5 years. We are the only firm in the investor awareness industry that forecasts all of our companies for 5 years in three assumed cases. We believe this in depth level of securities analysis is a must for all of our companies, and is a foundation of the Cohen Research MethodTM.