Investors who use fundamental analysis are often broken into two categories:
- Value investors place a higher priority current stock price.
- Growth investors place a higher priority on the future prospects.
- Let’s discuss Value investing now and explore Growth next week.
- Value stocks are companies that are currently trading below what they are really worth.
- Value investors seek out larger, more established companies that are priced below their revenues or EPS (Earnings Per Share).
- Value investing strategy therefore revolves around finding undervalued stocks.
- Value investors focus on companies that are leaders in their industry and that pay steady dividends.
- Value stocks have low P/E (Price-To-Earnings) ratios and pay above average dividends, but trade at a price that is low or below their book value (total tangible assets minus total liabilities).
- Value investing involves investing in great companies at a good price (not simply cheap stocks).
- Caution: Cheap stocks may be priced low due to the company’s underperforming management, outdated products, expired patents, or pending lawsuits. In other words, it’s safer to buy 10 shares of highly rated Company A at $300 per share than 1,000 shares of mediocre Company B $3.00.
- Value stocks of cyclical industries may do well early in an economic recovery (but typically lag in a sustained bull market).
- Value stocks tend to outperform during bear markets and economic recessions (while growth stocks tend to excel during bull markets or periods of economic expansion).
- Value stocks outperform growth stocks during recession.
- Simplify your approach by using these basic metrics:
- Above-average dividend yield,
- Low price-to-earnings ratio,
- Price that is less than the company’s book value.
- Examples of value stocks include CVS, PG Procter & Gamble, JNJ Johnson & Johnson.
If stock trades were baseball, I’d bat for a single instead of a homerun; I’d go for a hit, not swing for the fences.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].
