Value and Growth are two fundamental approaches in stock picking. Using the Growth approach, stocks are chosen based on their earnings growth potential. The Value approach selects stocks that appear undervalued. The best approach is to combine the two approaches, which is the approach we take. In this article, we’ll look at just the Value approach. Firstly it’s important to define what a value stock is. Investopedia says “A value stock is a stock that tends to trade at a lower price relative to its fundamentals (e.g., dividends, earnings and sales).” Common traits of value stocks include a high dividend yield, low price-to-book ratio and low price-to-earnings ratio. Value investing isn’t easy. When looking for a value stock, you’re looking for a stock that the market has valued incorrectly and doesn’t like. You’re buying a stock that is cheaper than it’s really worth in the faith that the market will reprice the stock. The problem with this type of investing is that you might be waiting years for the market to recognise its true value. The share price might also fall further before rising. Then there is the likelihood that you may have missed something and the market has valued the stock correctly. A cheap stock is usually cheap for a reason. So many value fund managers fail to achieve superior results because of these reasons. Contrarian or deep value fund managers look for value in stocks that have been absolutely smashed in the belief that there is something the market has missed and this will eventually come to light and reverse course. On the flip side, if done right, value investing can yield substantial gains. The pay-off can be huge. High-profile value investors like Benjamin Graham and Warren Buffett live and breathe value investing. So the message here is to pick value not cheap rubbish. Easier said than done. So to help you, we’ve put together a list of 10 UWJ rules to help you pick value not rubbish. 10 Value Rules Intrinsic Value – Use Thomson Reuters intrinsic value. Only buy when the stock’s market value (share price) is less than its intrinsic value. PE ratio – The P/E ratio shouldn’t be above the market’s PE. According to…

This article is for members only

To read this article - sign up for a FREE 14 day trial NOW

Blurred Text