Value Investing refers to a philosophy or practice of buying stocks that are fundamentally sound, with a stock price below its obvious value. There are various indicators that Value Investors use to determine that a company is both sound and the stock price is undervalued. The value investor is perhaps more concerned with the business and its fundamentals than other influences on the stock’s price unlike any other style of investor out there.
Fundamentals, such as dividends, earnings growth, cash flow, and book value are more critical than market forces on the stock’s price. Generally buy and hold investors are value investors. They will hold a stock for long term periods and are not concerned with short term swings in the stock price.
When the Value Investor determines that the fundamentals are sound, but the stock is trading at a price below its obvious value, he or she knows that this is a potential investment candidate. The assumption is that the market has incorrectly undervalued the stock. When the market corrects that mistake, then it means that the stock’s price should increase towards the obvious value point.
How do Value Investors find a potential investment?
In the bottom 10 percentile for its sector is price to earnings ratio less than 1 is debt to equity ratio less than 1 is price to book value PEG value of less than 1 Did you know that stock value is trading at 60-70% of its intrinsic value?
The P/E or price to earnings ratio can be calculated by dividing the current price of the stock by the annual earnings per share. Having a higher P/E would mean that the more earnings growth investors will expect and the higher premium they are willing to pay for that anticipated growth.
To calculate debt to equity, you need to divide the total liabilities by the shareholders equity.
Price to Book Value is calculated by taking the current price per share and dividing by the book value per share.
The PEG is calculated by taking the P/E and dividing it by the projected growth in earnings.
A complicated process is the intrinsic value of a stock and it is also considered an inexact science by most investors. Generally, the intrinsic value of a company or an asset is determined based on an underlying perception of the value. Brand Name, Goodwill, and barriers to entry in a market are some of the factors that will determine the intrinsic value of a stock. The MorningStar.com is what you may be interested in for helping you determine a stocks intrinsic value. What they do is calculate a number called ‘fair value’ and this is similar to intrinsic value.
Many investors have increased their wealth substantially using a value-based approach to investing. This overview of Value Investing suggests a philosophy that works well over time if you buy carefully and use patience to hold for the long term.