What Is Fully Valued?
The term fully valued is applied to a security, investment, or company whose price is believed to reflect its full and fair value. An entity that becomes fully valued is said to have reached the target set by the market, analysts, or investors. For instance, a stock becomes fully valued when the market recognizes the company's fundamental earnings potential. As such, it won't rise or drop much either. An asset is no longer fully valued but becomes overvalued when it rises or undervalued when it falls.
- A fully valued security is priced right at its fair market value, leaving little room for short-term price changes.
- Fully valued securities are contrasted with those that are deemed overvalued and undervalued.
- An asset becomes overvalued when a security trades above its intrinsic value and undervalued when it trades below its intrinsic value.
- Traders may be incentivized to sell their holdings back to their fully valued price and vice-versa if the price becomes undervalued.
- Opinions about fully valued securities tend to vary among investors and analysts who may employ different pricing models or use different assumptions or projections.
How Fully Valued Works
As noted above, the term fully valued is applied to any security, company, or investment that reaches its full earning potential. Targets are set by the market—usually by analysts and/or investors. Here's how it works.
Fully valued securities belong to issuers with disciplined plans for achieving dramatic long-term growth in terms of profits and revenues. They must also have inherent qualities that make it difficult for new entrants to share in that growth. As such, investors who believe they hold fully valued stock should hold it until there is either a fundamental change in the company's nature or it grows to a point where it can no longer expand at a faster rate than the economy as a whole.
Experts can value a stock differently, so a stock that is considered fully valued by one may not be perceived as being fully valued by another. Fundamental analysis of the underlying company generally precedes a determination of whether or not a stock is fully valued. While a fully valued stock is less likely to experience significant appreciation in value, some investors may be willing to invest in fully valued stocks for their stability as well as any dividends they might pay.
Fully Valued vs. Overvalued vs. Undervalued
A fully valued entity can be contrasted with those that are on either end of the scale: undervalued and overvalued.
- Being undervalued means that the entity is one that sells at a price significantly below its assumed intrinsic value
- Being overvalued means the current price is not justified by its earnings outlook or price-earnings (P/E) ratio as the price is expected to drop
In the market, traders will often seek to buy undervalued securities, bidding them back up to full value. Likewise, overvalued stocks may be candidates for short sellers, bringing them back in line once again as they are sold.
Examples of Fully Valued
In October 2017, TheStreet.com reported that John "Jack" Bogle, founder of the Vanguard Group, said that the market seems to be "fully valued." Bogle, interviewed by TheStreet.com, affirmed that "valuations of stocks are, by my standards, rather high."
CNBC reported in December 2017 that billionaire hedge fund pioneer Leon Cooperman said that the stock market is not overvalued yet. Instead, the chair and chief executive officer (CEO) of Omega Advisors characterized it as "reasonably fully valued."
Luke Lango of InvestorPlace.com wrote in March 2018 that, above the $65 level, Nike stock (NKE) looked fully valued, "considering relatively muted top-line growth prospects and ongoing margin compression concerns."
What Does it Mean to be Fully Valued?
Investments are considered to be fully valued when they achieve their full and fair value. Targets for the full and fair value are normally set by analysts and investors. For instance, a company's stock may become fully valued when an analyst believes that the company reaches the potential for its fundamental earnings.
How Are Stocks Valued?
Valuing stocks is an important part of investing. This skill can help investors determine whether a company's stock is priced too low or too high compared to its growth and performance. The easiest way to determine the value of whether a stock is under-, over- or fully valued is by figuring out its price-to-earnings ratio. You can figure this out by dividing the current stock price by the company's recent earnings per share (EPS) value. If you're a value investor, you'd probably want companies with a lower P/E ratio. Growth investors, on the other hand, generally prefer a higher ratio.
What's the Difference Between Overvalued and Undervalued?
An investment becomes overvalued when its current price does not reflect its earnings outlook or its P/E ratio. That's because there's a good likelihood that the price is going to drop. Being undervalued, on the other hand, means that a company's current stock price is expected to rise as it trades below its intrinsic value.
The Bottom Line
Some investors use professionals to help manage their investments. But if you're seasoned, you probably make buy and sell decisions on your own. Whichever category you fall into, it's always a good idea to review your investments and ask yourself where they fall on the value spectrum. Those that the market deems overvalued are trading well above their intrinsic value while those that are undervalued have the potential to rise above where they're trading. But if you have investments that are fully valued, there's a good chance they won't rise or drop too much in the near future.