Value stocks are one of the best ways to earn very good returns on your hard-earned money from a medium to long term perspective. In this detailed review, we will discuss how to find value stocks.
Let’s start with the basics of value stocks first.
Value stocks are those stocks the intrinsic values of which are much higher than their stock prices in the current markets.
So, value investors are continuously searching for such stocks for their portfolio. The question that how to find value stocks arises and what are the things to keep in mind while searching for these value stocks.
There are many signs which hint towards the value stocks some of which are going to be discussed here:
The stock prices of companies of the same sector may seem to be much higher than the value stocks and the reason could be some temporary thing like not able to achieve investors’ over expectations in terms of earnings, etc.
The company has been stable for some time now and has a good track record of giving dividends every year. Also, the company might have been paying its debts and the market has not factored that thing in yet.
Another obvious sign of value stock can be that it is a relatively new stock i.e. its IPO has been launched recently because of which people have not been able to recognise its true potential until now.
Some companies have not been performing well but now, they have shown a tremendous turnaround and the market has not been able to catch up with this new change yet. Because of this reason, the stock price could be much lower than it should actually be.
Benjamin Graham is known to be the father of Value Investing and is the author of two of the best books written on value investing ever.
The name of the first book is “Security Analysis” and the other book is “The Intelligent Investor“. It is considered that if you read these books and imbibe the knowledge imparted in them, then, you could turn around your life in terms of finance in a very short span of time.
We are going to discuss some of the criteria (according to these books) that should be fulfilled by stocks in order to be considered as value stocks.
The first criterion in order to understand how to find value stocks is that the rating of the company should at least be average. A company with a very high rating could be already accurately valued or overvalued but a company with an average rating could have a better chance to be a value stock.
After this, you need to check some of the very basic things of stocks like a healthy debt to equity ratio, current ratio, price to earnings ratio, earnings deficit etc.
A healthy debt to equity ratio means that the debt should not be too high as it would eat away into the profits and it should not be too low as that would show lack of expansion and growth plans in the company.
A good current ratio would mean that the company has sufficient cash to meet its needs of expansion, repaying its debts, giving dividends, etc. You should prefer to invest in those companies which do not have an earnings deficit.
Also, other important things to look for in a good company is the kind of dividends it pays to its investors and the quality of management it has.
Above all, in order to knowhow to find value stocks, you should have the confidence to believe in your research and stick to your decision even when the market is not paying any attention to your stock.
A lot of information required for the selection of value stocks can be easily accessed through annual reports of a company. An annual report contains all the important financial as well as non-financial but essential information about a company.
There are certain sections of the annual report which are very important in knowing about the quality of a company such as:
management discussion about the company and sector as a whole,
financial statements which include balance sheets, profit and loss statement, cash flow statement etc.
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