The profit lies in purchasing
There are definitely reasons to sit up and take notice when prices are falling – for example when a former stock market star crashes because the board of directors made strategic mistakes. Or if the company’s business model no longer fits in with the times. “However, the real value of the company is often not recognized by the market. The current market value on the stock exchange reflects how valuable the majority of investors currently assess the company. This assessment sometimes contains a lot of fantasy for the future. This fantasy can come true later, but it doesn’t have to. The fair value, on the other hand, has taken out the imagination, so to speak. It corresponds to the total value of the individual parts of a company. That value would be redeemed if the company were sold in pieces.
What is value investing?
Value investors are the sniffer dogs and truffle hunters in the stock market. You trust in a particularly intensive fundamental analysis of the companies and search for stocks with earnings and substance at a preferential price.
- The earnings-to-price ratio should be at least twice as high as the yield on an AAA bond.
- The price-earnings ratio (P / E) should be less than approx. 40% of the highest P / E ratio in the past five years.
- The dividend yield should be at least two-thirds the yield on an AAA bond.
- The price / book value ratio should not exceed two thirds if possible.
- The market capitalization should not exceed two thirds of the net working capital.
- The outside capital should not exceed the equity.
- Present assets should be at least double the amount of short-term liabilities.
- Capital lent does not surpass twice the net working capital.
- The average increase in earnings over the last ten years should be at least 7% .
- In the past ten years, the profit may have decreased by a maximum of 5% or more compared to the previous year.
Value investors take action when a clear majority of these rules are met by a company. Graham’s most successful student is still active today.
What do value investors look out for?
Stocks that rank below their fair value are interesting for value investors. For a profitable sale, it is sufficient if more investors discover and invest in the potential of the shares in the future. On the other hand, price setbacks are less likely if the valuation was not previously inflated. T
- a low price / earnings ratio (P / E),
- an attractive price / book value ratio (P / B),
- high and constant dividend yields.
What is the price / earnings ratio (P / E)?
The price / earnings ratio is the best known metric. The calculation is dividing the price of a share by the company’s earnings per share. With a share price of 60 dollars and earnings per share of 8 dollars, the P / E ratio is 7.5. Price / earnings ratios of less than ten are considered favorable.
But sometimes they should be viewed with caution, because this metric is estimated based on the expected profits. Investors are currently paying attention to the P / E ratio for 2019. But the profit for 2019 is of course far from guaranteed.
The price-earnings ratio therefore lives to a large extent on comparisons. The current P / E of a share is regularly compared with its historical P / E values. Significant deviations can be due to significantly increased profit prospects or sharp drops in profits – or they can be based on an undervaluation or overvaluation of the share. A comparison within an industry also provides important information on the attractiveness of a share. With two similarly strong companies, value investors usually prefer the company with the lower P / E ratio.
What is the price / book value ratio (P / B)?
Almost all investors look at the P / E ratio, but the price / book value ratio (P / B) is particularly important to value investors. This key figure compares the share price with the book value per share, which is shown in the company’s balance sheet. The company would achieve book value if it were wound up and all assets were sold at market prices. Company debts are deducted from this.
The higher the P/B value, the more expensive a company is. A P/B below one, on the other hand, is a strong incentive to buy for value investors. The reason: The company is then worth less on the stock exchange than the sum of its individual parts. On the other hand, a low P/B alone is not enough for a buy recommendation, because it can have different causes: Sometimes the return prospects have deteriorated, sometimes a company is undervalued because investors have not yet discovered it.
Constant dividend yield
Value without a regular dividend is inconceivable; Because a valuable company includes regular, calculable distributions. Value investors therefore make clear demands on dividend policy. The distributions should be made very regularly and not out of substance. The absolute amount of the dividend is less important than a constant development of the distributions. In particular, dividend cuts or even dividend defaults deter value investors.
The overall picture counts
A single attractive indicator is not enough for value investors. Only when a low P/E ratio, attractive P/E ratio and good dividend yields are paired is the investment considered interesting. In most cases, they are right, as the long-term performance of the investments of recognized value investors.