What To Look For In a Value Stock is a great thing to know. It is much easier to have conviction as an investor or a stock trader when you know what value in a stock looks like. So…
If you want to what to look for in a value stock, just read this short blog post. I will share what I look for in a value stock, and how you can do the same with a simple value stock screen. So why should you trust that I know what to look for in a value stock?
I have been value investing for about 5 years now, and I’ve actively managed my own portfolio for much longer. I dedicate time every day to looking for value in stocks. And I’m always refining my definition of what value in a stock looks like. But enough preamble, let’s cut to the chase so you can find value in stocks for yourself.
List of What To Look For In a Value Stock:
There are a couple of key things to look for in a value stock. If you don’t know what they are, let me just say that everything on this list of “what to look for in a value stock” is equally important. There are no short-cuts in the stock market…
- Margin of Safety: A margin of safety is the key thing to look for in a value stock. In the most fundamental sense, the margin of safety refers to owning an asset for less than it’s worth. It’s tough to find stocks trading below their net asset value per share (NAVPS) – but if you do, you know that’s what value in a stock looks like. You can also consider book value and quick ratio to test for price to assets and short-term liquidity respectively. When you’re figuring out what to look for in a value stock make sure you look at the reason for the margin of safety (because sometimes stocks are cheap for a reason).
- Discounted Future Growth: Low expectations about future growth are often something you can look for in a value stock. For one reason or another (such as cyclical industries or a strategic turn-around) future growth may be discounted, which often leads to an attractive margin of safety. If a company has a low PE ratio and a low PEG ratio then you might be looking at value in terms of discounted future growth. As with the margin of safety, when you are looking for value stocks you should be careful to understand the story of “why” the earnings growth of the stock are discounted. For example, a lot of coal companies are cheap from a value perspective, but their industry faces big regulation and competition from clean energy. You need to decide if the positive valuation outweighs any negative catalysts if you are looking for value in a stock.
- Don’t Ignore Technical Analysis: A lot of value investors ignore technical analysis when they are looking for value in a stock. And while you might agree technical analysis should play a secondary role when deciding what to look for in value stocks; remember, price action always tells an interesting story. In my experience if you let the technical price performance of the stock help you decide when to buy and sell you can avoid value traps and stay focused on looking for value stocks that are starting new positive trends or gaining momentum. Interestingly enough, often the technical analysis picture will line up with the fundamental valuation and the growth narrative. In general, higher highs are a good sign.
- Management and Catalysts: When you are deciding what to look for in a value stock you should not ignore management and potential catalysts to the stock price. The best value investors are in touch with management whenever they are looking at the value of a stock. That’s because a shareholder friendly management focused on high margin growth can turn an under-valued stock into an exciting growth opportunity. Evaluating a value stock requires listening to quarterly conference calls and reading annual reports. These documents are full of value hints to look for as a value investor. They will often indicate potential catalysts such as possible takeovers, business unit spin-offs, re-capitalizations and new product launches that could unlock a lot of value in your best stock ideas.
What to Look For in a Value Stock [VIDEO]
So there you have a short-list of factors and ratios to should keep in mind when you’re thinking about what to look for in a value stock. You’ll notice some of the things to look for in a value stock are very quantitative, while other indicators are much more subjective. In both cases…
Figuring out exactly what to look for in a value stock takes a lot of practice. If you’re still trying to brush up on the stock analysis terminology, you may be interested to watch these free value investing videos. Another great way to learn is to read from other value investing books. Other than the stock criteria mentioned in the list above, what do you look for in a value stock?
And By The Way: If you’re having trouble coming up with your own value investing ideas, subscribe below by entering your email address for exclusive stock ideas and analysis.