Undervalued, underrated, and undervalued value stocks are the hidden gems that you need to dig deep to find in the stock market. Here’s what value investing gets to the point.
Value investing is like going to the flea market and finding a piece of jewelry worth thousands of dollars.
In the investment field, that would mean stocks are undervalued and undervalued, and are trading at prices below what they think are worth. Investors who invest in value stocks seek to pay for the intrinsic value of the stock – the value of the stock.
To determine if a company is undervalued, investors need to analyze the fundamentals of the stock. In this article we look at:
Why investors choose value investing
With value investing, investors don’t look for a strategy to get rich quick. Rather, value investments can help build a long-term portfolio that is solid and financially rewarding.
Of course, this doesn’t mean that value investing can’t multiply your portfolio, especially if you buy a stock at a low price and manage to sell it high.
1. For growth
With Value Investing, you will find great value for money hidden gems that can provide you with great returns.
The goal is to find those gems that have disappeared under the radar before the market catches the wind and drives the price up. It’s like finding a hole in the wall where great coffee is served at reasonable prices before the food bloggers discover it and share it with all of Singapore.
2. For dividends
Not every stock pays dividends. Of course, if you’re an investor looking for a stock with a dividend yield, you should opt for a stock that offers a high dividend yield relative to the stock price.
Popular stocks like bank stocks are known for their dividend yield. These stocks aren’t cheap either, however, trading at around $ 10 (OCBC) and $ 26 (DBS) per share.
In addition to popular stocks like these, there are other companies that pay high dividends like YZJ Shipbldg SGD and Venture.
ALSO READ: What is Value Investing?
How do you know a company is undervalued?
Now that you know value investing is like finding a diamond in the rough, the next question, of course, is, how do you find such companies?
1. The abbreviations
Value investing is a lot of home improvement. You’ll have to search the deep sea to find the value stocks and make the purchase yourself.
Of course, there are acronyms for this, whether it be at value investing workshops or browsing online materials offered by blogs and websites that have the stocks filtered for you. You can even find ETFs that focus on value investing, like the Vanguard Value ETF, the iShares Russell Top 200 Value ETF, and the Fidelity Value Factor ETF.
2. The investment figures
If you are on the DIY path, you need to understand that value investing relies on fundamental analysis rather than technical analysis. Here are the investment metrics to look out for.
- Price-performance ratio
Look for companies with low P / E ratios such as 10 or less, especially when compared to competitors. This will help filter out companies that are trading at a bargain price relative to their fundamentals.
Popular companies like Tesla and Shopify are high-growth companies with extremely high P / E ratios as investors are optimistic about their growth.
For example, Tesla’s 2020 P / E ratio was 934.3 while Shopify’s was 477.22. Ascendas REIT’s P / E ratio is closer to SGX at 24.21 while DBS’s P / E ratio is at 14.92.
- Price-to-book ratio (P / B)
A low P / B ratio is also ideal, for example a ratio of less than 1.0. It compares the company’s valuation by the market based on its share price with its book value. A low P / B ratio indicates that it may be undervalued.
- Price-Earnings Ratio (PEG)
Value stocks are often companies with high growth potential. The PEG ratio is an increase compared to the P / E ratio and depends on the company value in relation to the expected growth. This is done by taking into account the P / E ratio divided by the expected growth rate in earnings per share.
The higher the expected earnings growth, the lower the PEG rate. This helps consider the company’s future growth opportunity to determine if it is really undervalued. You’re looking for a company with a low PEG ratio – less than 1 would be ideal.
If you’re a dividend investor, watch out for a stock’s dividend yield. The dividends you receive should take into account the price you are paying for the stock.
A high dividend payout per share doesn’t necessarily make the stock a “buy”, especially if it trades at high prices. On the contrary, a low dividend payout per share for a cheap stock could result in a higher dividend yield and prove to be cheaper.
The higher the dividend yield (in percent), the better. The trick is to buy into these high dividend yielding companies before other investors discover it, which drives the stock price higher.
- Earnings per share (EPS)
The more stocks the better … or does it?
EPS highlights a company’s profitability and is calculated on the basis of profit divided by the number of shares outstanding. A higher EPS means a higher earnings per share and therefore a higher value. Value investors can look for companies with positive and increasing EPS, which shows growth in the company’s profitability.
ALSO READ: 10 Things I Learned From Christopher H. Browne’s Little Book of Value Investing
Where do you find these numbers?
You can often find these numbers in your brokerage app or online on sites like Yahoo Finance, Bloomberg, or InvestingNote.
One final note on investment metrics, these aren’t the only numbers to analyze. Beyond the five metrics mentioned above, some investors take it a step further by looking at other fundamentals, such as finding companies with low debt-to-asset ratios to avoid companies that are heavily debt-financed.
What role does value investing play in your portfolio?
The answer to this question depends on your risk appetite, personal preferences, and financial goals.
When deciding on your portfolio allocation, you need to consider how comfortable it is to allocate a larger portion of your portfolio to stocks, since value investments are heavily focused on stocks.
To go hand in hand with value investing, here are some other strategies you can use.
1. Start sooner rather than later
While value investing is an attractive proposition, it takes time and effort to find the companies and eventually take a position.
What you are missing out on during this wait is the opportunity cost when you have some of your capital in the market. If you start earlier, you can use the power of compounding to grow your wealth.
However, this does not mean that you should blindly pick a stock to invest in. To manage both your risk and opportunity costs, you can invest in an asset class that offers more diversification with low risk.
This could be, for example, opening a portfolio with a robo-advisor, buying an Exchange Traded Fund (ETF) or starting a regular savings plan.
2. Diversification
It’s not uncommon for a single stock to catapult your portfolio from rags to riches. There are overnight millionaires who emerged from the GameStop saga.
However, reliance on a single-valued stock carries a high level of risk.
You shouldn’t rely on a single stock for investment success, much like you can’t rely on a single subject for good overall grades in school. Instead of keeping your eggs in a single basket, diversify your portfolio across asset classes, industries, and regions.
A quick way to diversify your portfolio is with ETFs, be it Singapore ETFs or US ETFs. If you want to deal with several different asset classes and regions, open a brokerage account that offers such access.
After all, the topic of value investing cannot do without the mention of the well-known value investor Benjamin Graham. Beyond this article, bookworms might consider picking up his famous book called The Intelligent Investor.
This article was first published on SingSaver.com.sg.
