The basic concept is straightforward: If you know the true value of something, you can save a lot of money when you buy it on sale. Whether you buy a new Mobile on sale, or at Full price, you’re getting the same Mobile with all the features
Stocks work in a similar manner, meaning the company’s stock price can change even when the company’s value or valuation has remained the same.
- Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
- Value investors actively ferret out stocks they think the stock market is underestimating.
- Value investors use financial analysis, don’t follow the herd, and are long-term investors of quality companies.
Characteristics of great value stock
- Well-established businesses with long histories of success
- Consistent profitability
- Stable revenue streams
- Dividend payments
You should research on the company by research and checking its financial metrics
- Reading the Financial Statements
- Finding out what it does
- Understanding the industry – is it cheap because it is in a declining industry?
- Identifying the potential challenges the company might be facing
- Keeping current with news about the company
- Price-to-Earnings Ratio
Compare the P/E ratio with industry peer
- Price-to-Book Ratio
Find a stock with a P/B ratio that is less than 1. This means that it is currently priced cheaper than its equity or book value.
- Price-to-Earnings Growth (PEG) ( P/E ratio / Earnings Per Share Growth)
PEG looks more into future growth compared to P/E ratio which is based on historical figures.
- Net-Net Value ( Current Assets – Total Liabilities )
If the current assets can cover all of the company’s liabilities, the net-net value will be positive and that will be an investment worth looking at
- Debt-to-Equity Ratio
A company with a low debt-to-equity ratio is better for investment
- Price-to-Free Cash Flow
Cash is the most liquid current asset the company can have.
Price-to-FCF Ratio = Price / Free cash flow per share
Lower numbers indicate that a company is under priced.
Value investing strategies take time to follow, but the time and effort you spend are worth it