How To Find Undervalued Stocks
It is a difficult task to find undervalued companies in stock investment strategies. Anyone will end up making money if he or she will be able to get such shares consistently.
Warren Buffett is one among that prominent exponent of value investing. He adopted a strategy where he had been seeking out and buying stocks of companies that have strong fundamentals and financial figures in order to make money in the stock market. Lower debt and higher return on equity are also good reasons to invest in shares that are out of favor in the market if their price is below their intrinsic value.
Roger Montgomery, one of Buffett’s great adherents in the Australian market, bases his focus on long term investments and his process of selecting a company as his model of investment to make money on stock market. He did not favor widely-used valuation tools such as Capital Asset Pricing Model (CAPM), beta or Equity Market Risk Premium (EMRP). He is also dismissive of PE ratio to be used to value shares.
He is of the opinion that PE ratio tells you about price and doesn’t give any thing about value of the stock which is not dependant on price. The principle here is the price what you pay whereas value is what you get. Prices of assets may be higher or lower than their values. It is better to buy when price falls below a determined value. Many other inputs can be used to determine the value including return on equity, debt level and dividend payout ratio. A check on competency of management is needed along with a check to find out if any money retained is creating equal amount of value addition to the share value.
It will be good to buy if all the above factors come up trumps and the share price below the calculated value. These are pretty complex, intimidating and are required for a successful investing.
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About the author:
Dr. Harsimran Singh was awarded a Ph.D. by a California University for his research work in options trading strategies and he authored 12 books. He traded stock options for 35 years. At times, he traded over a $100 million in a month in his personal account. His research work in options trading has been filed for getting patented with The US Patent Office under Application # 61/999,957.