What Does Discount / Premium to Fair Value Mean, and Why Is Negative Cheap?

Discount / premium is the percentage gap between the current price and the model's fair value: negative means the price sits below fair value, positive means above. It measures the distance between a price and an estimate, not whether the stock is objectively cheap or expensive.

How it is calculated

In words: current price minus fair value, divided by fair value, times 100. With a fair value of 100 and a price of 80 the result is −20%, read as "20% below the model's estimate"; a price of 130 gives +30%.

The sign runs opposite to the classic "margin of safety". Value investors usually record "below estimate" as a positive margin, while Stock Compass uses "negative = cheap" throughout, because the figure sits next to the fair value on the card and a minus sign reads instantly as "price is under the estimate". The fair value itself comes from the internal model (earnings, cash flow, peer valuation) — see fair value.

Rules of thumb

Reading	What it usually means
Below about −30%	Far under the estimate; ask what the model may be missing first
−30% to −10%	Clearly below the estimate
−10% to +10%	Within normal estimation error
+10% to +30%	The market pays more than the model would
Above +30%	High expectations are already priced in

These bands are reading conventions, not laws. The zone label on the card (deep value, value, fair, somewhat expensive, expensive) is assigned by the valuation model on the server, and its exact cut-offs can differ from this table. Cyclicals look cheapest at the top of the cycle when earnings peak; high-growth companies can show "expensive" for years.

What it does not tell you

• Whether the model is right. It inherits every assumption behind the fair value; at low confidence the error can be larger than the gap itself.
• When the gap will close. A price can sit below the estimate for a long time, or keep getting cheaper.
• How peers are priced. If a whole sector trades at a discount, −20% on one name is not necessarily unusual.

In Stock Compass

On the stock card's valuation block it follows "Fair" as a signed percentage next to the zone label. When model confidence is low the row turns grey and italic with a "Low conf" badge; cyclical, ROE-anomaly and model-diverges warnings appear as small tags.

In the verdict's valuation dimension the summary sentence is built from it: "Price is 20% below the model's fair value (undervalued)". If the model rates its own confidence low, or an ROE anomaly is flagged, a positive rating is downgraded to neutral rather than hidden. It is also checked against the analyst target: when the two carry opposite signs or differ by more than 25 points, the card lists an explicit conflict and says which side is more reliable for this stock.

In strategy rules the indicator id is margin_of_safety_pct; an example condition is margin_of_safety_pct < -10 (at least 10% below fair value). Writing "> 20" would select stocks 20% overvalued, not a 20% margin of safety. A cheap valuation paired with a falling price is the classic trap — see stop chasing the market.