Finding Profit Investing In Your Values
Ok, now this is a statement that will probably have you scratching your heads. Not everyone in the stock market should be value investing. What? That’s like saying not everyone should be investing in the stock market to make money isn’t it? Who wants to buy stocks that have no value? Ok, now that I’ve rocked your world a bit, I let you in on the secret; value investing has nothing to with the quality of your stock portfolio. Value investing refers to a methodology that shapes the way an investor approaches selecting stocks.
While value stock investing doesn’t specifically refer to the quality of a stock, it has nothing to do with buying junk stocks. This is not bargain basement, penny stock investing. Value investing is about finding stocks that for one reason or another have been priced incorrectly by the stock market.
The investor in value investing is like more focused on specific businesses and their fundamentals than other variables which tend to influence stock prices. Factors such as earnings growth, dividends, cash flow and book value are more important in value investing than stock prices. Value investing is buying and holding stocks for long term investing. If the fundamentals are sound, but the stock’s price is below its obvious value, the value investor knows this is a likely investment candidate. The market has incorrectly valued the stock. When the market corrects that mistake, the stock’s price should experience a nice rise.
Just because a stock experiences a drop doesn’t mean that it is a struggling stock or a candidate for value investing. This happens, yet most of the time the market is right and a stock gets hammered because of any number of sound fundamental reasons, such as declining earnings, declining revenues, or something fundamental changes in their market or product line. A pharmaceutical company has a top seller yanked off the market by the government, an event that fundamentally changes the company.
On the other hand, other pharmaceutical companies may see their stock clipped also, even though they are not part of the recall. That may make them worth a look by a value investor. The value investor is looking for situations such as this where neither the events leading up to a drop in price nor fundamental analysis of the company warrant the drop and will likely be corrected in the market at a later date.
So where do you look for potential purchases if you are value investing? Below are just a few possible locations:
A company with a projected earnings growth ratio below one. A PEG ratio below one suggests that a stock may be undervalued.
A debt to equity ratio of less than one.
Long-term strong earnings growth. A 5 to 10 year period of 6% to 8% earnings is realistic.
A price to book ratio of less than one.Once you identify your target, don’t pay above 60% to 70% of the stock’s intrinsic price. While this is a difficult process, intrinsic value is basically book value plus the value of a company’s intangible assets such as patents, trademarks, research, development, brand and such. These are things that stabilize a company and drive expectations for future growth.
For many successful traders, value investing is a great way to find solid profits in undervalued companies. Value investing requires patience and research but don’t worry, you won’t find yourself at any flea markets looking for deals!
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