A bargain at the supermarket is a high quality item at the cheapest price. This is also the value stock investing strategy. This strategy relies on your willingness to study carefully the fundamentals of the companies finances.
This is also known as fundamental analysis.
Stock fundamental analysis is a strategy of knowledge and patience. A value investor tries to find companies that have solid fundamentals and display promise for continuing to maintain those strong numbers into the future. Part of the job is discovering companies that may be undervalued by the markets.
And the other part involves holding on to those stocks for the long run, without getting scared off by occasional short-term dips in the price of the stock.
In the early part of his career at Berkshire, Warren Buffet focused on long-term investments in publicly quoted stocks, but more recently he has turned to buying whole companies. His mentor, in fact, was the "Father" of value investing, Benjamin Graham.
Value stocks have the following characteristics:
To obtain this, divide the total value of a companies assets (as shown on its financial books) by the number of its outstanding shares available. To derive the book value per share, divide this number by the market price of one share of the company's stock.
Low stock price to earnings (P.E. Ratio):
Divide a company's earnings (from it's financial books) by the total number of outstanding shares to derive its earnings per share. Divide this number into the current price of the stock to calculate the P.E. This ratio gives you an idea of how expensive a stock is in comparison to its current earnings.
For example, if a stock was priced at $100 and had a dollar's worth of earnings per share, then the stock would be trading at 100 times this year's earnings. Companies trading at less than 10 times earnings, may be bargains.
Higher than average dividend payout:
A dividend is any cash a company takes out of its earnings to pay to shareholders. This is usually paid quarterly in the form of a cheque. The dividend payout ration is measured in percentage, and is calculated by Total Dividends issue divided by net income for the same period.
And what is an average percentage payout? Hmmm...that's a relative question, and it depends on the current market environment we are in at the time. 2 to 3% could be considered average.
If you've worked for a biotech company for several years, you probably have a better-than-average understanding of the biotechnology business. And if you buy basic items like cars, clothes, appliances and food, you know a thing or two about consumer goods.
Well known investor Peter Lynch strong advocated such a strategy whereby retail investors can outperform institutions simply by investing in what they know before Wall Street catches on.
Another strategy that value investors favor is to buy companies whose products or services have been in demand for a long time and are likely to continue to be in demand.
Looking at stock quotes won't tell you which companies these are – you'll have to do some critical thinking. Of course, it is not always possible to predict when innovation will make even a longstanding product or service obsolete, but we can find out how long a company has been in business and research how it has adapted to change over time.
At this point it may be worthwhile to analyze management and the effectiveness of corporate governance as well as its financial statements to determine how the firm reacts to changing business environments.
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