Intrinsic

A data-driven app to construct value investing portfolios for the Brazilian Stock Exchange, grounded in the principle of margin of safety.

Methodology

This application:

• Computes the intrinsic value of stocks using a two-stage dividend discount model (DDM), based on the formulation in Corporate Finance (4th Edition) by Ross, Westerfield, and Jaffe.

• The model distinguishes two cases based on the implied growth rate g = (1 - d/e) * ROE:

  • If g < gt (terminal growth rate), the Gordon Growth Model is used:

        intrinsic_value = d * (1 + g) / (r - g)

  • If g ≥ gt, a two-stage valuation is applied:

    1. A 𝑛-year high-growth period with growing dividends discounted annually.
    2. A terminal value, adjusted by a payout ratio scaling to reflect convergence from the initial payout ratio 1 - g/ROE to the terminal one 1 - gt/ROE.

    payout_scale = (1 - gt/ROE) / (1 - g/ROE)
    adjusted_terminal_dividend = D_n * payout_scale
    terminal_value = adjusted_terminal_dividend * (1 + gt) / (r - gt)

• Computes the margin of safety (MoS):

MoS = 1 - (market_price / intrinsic_value)

• Filters for stocks with MoS > 50%, favoring only deeply undervalued companies.

• Assigns portfolio weights as:

weight = 2 * MoS - 1

This ensures a zero weight at exactly 50% MoS, increasing linearly with higher safety margins.

• Accepts user input for total capital, and computes how many shares to buy per company based on price and portfolio weight.