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Aswath Damodaran’s 2015 MBA Valuation Class Project Results

Jordan S. Terry

May, 11th, 2015

Each year since 1999, students in Professor Aswath Damodaran’s capstone valuation class at NYU’s

Stern School of Business are required to complete a large valuation project. Students pick from any

listed stock globally (with a few exceptions), and perform a discounted cash flow (DCF), relative, and in

some cases, a real-option valuation.

Since Damodaran began tracking the results of the valuation project, they have been interesting, to say

the least. Perhaps the most surprising if not important result is that this year, the recommendations

were the most bearish they have been since 1999 when he first started tracking the them! (Note: The

chart reads right to left, apologies)

Of the ~108 submissions included in this year’s results, 64% were sell recommendations, 7% were hold,

and only 29% were buys. The ratio of buy recommendations to sell recommendations is 0.45, painting a

pretty bullish picture, especially in the context of widely accepted bullishness across most of equity-

land. Note again that this is the lowest level of the buy/sell ratio ever recorded in the set, significant

lower than in the Spring of 1999, and the Spring 2007. One caveat is that each group of students had to

pick one company that was losing money. This does not mean the recommendation thereof is

necessarily a sell (just like profitable firms aren’t necessarily buys). I think it’s useful to include these

unprofitable firms in any analysis, since many studies of sentiment based on eg P/E ratios necessarily

ignore money-losing firms, severely distorting the bigger picture.

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I was also very interested to see the distribution of recommendations based on how over/under-valued

they were. As you may have surmised from the above, there were quite a few more significantly over-

valued stocks than undervalued ones…

These are Damodaran’s sides/charts, so the axis labels aside, the clear takeaway from the above is that

about 2/3rds of the stocks analyzed are fairly to over-valued (>0% over-valued).

Also of note is the significant number and proportion of firms that are overvalued by more than 50%,

which I consider a more interesting than the relatively massive number of firms that are just 10-50%

overvalued. You could probably dig into both of these groups and find a few good short candidates, if

you’re willing and able to do the work, at least.

Now, for the moment you’ve all be waiting for; the most over and under-valued firms!

First, these are the 25 most over-valued firms based off DCF modeling:

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To anyone paying attention, there are at least a handful of names here that should not come as a

surprise. Many “hot” stocks, some distressed ones, some former and still clinging-on “hot” stocks, etc.

Regardless, when you look at just how overvalued these stocks are, based off the MBA students’

analysis, I think if you’re long, you really have to take some time to understand why. These valuations

are full of assumptions, some of which you may/may not agree with, but this is as good a time as any to

reexamine your own assumptions and resulting analysis.

Now, the 25 most under-valued stocks:

There’s also some familiar names on this list, as well as plenty that I’ve never seen cross my

Twitter/Stocktwits stream even once! I’ll be looking at a few of these myself as potential longs,

especially the ones I seldom if ever see mentioned.

Damodaran makes a few important points about the performance of the winners over time:

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So, how do the recommendations perform over time, you ask?

For those quick to dismiss the recommendations of about-to-graduate MBA students, it’s worth noting

that buy recommendations have outperformed the S&P 500, AND sell recommendations have

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underperformed it. As the Professor joked in class earlier today, perhaps he should just start a hedge

fund based on these picks!

I’m certain a fair number of those reading are still quick to dismiss the results of these analyses purely

because of who performed them. That’s your prerogative, but you should consider that they’ve done so

under the watchful eye of the world’s leading authority on valuation (Damodaran), and that many of

these students will be the research analysts, bankers, and traders, (etc) whose work will soon be

influencing markets come this autumn when they begin (continue) their careers on Wall Street.

Additionally, the performance of these student projects over time exhibits fairly consistent trends, as

seen above, so while one particularly recommendation may not work, the law of large numbers certainly

comes into play.

Sometimes, the wisdom of (small, select) crowds can be very, very valuable!

As always:

CAVEAT EMPTOR!