How to pick Value Stocks…!!
Stock picking is an art. Few people get the niche in picking the right stock at the right time. Just accessing your investment based upon the herd mentality is not the right way. There must be a certain procedure to follow before picking any stocks. There are mainly two ways of investing, Growth investing and value investing. Growth investing refers to investment style and strategy, where investors typically invest in companies that have demonstrated better than average returns in recent years. It is highly attractive for any investor because buying the right companies early can lead to life-changing returns. However, the companies which tend to show huge upside potential usually trade at loft valuation. Hence the chances of getting the right stock at fair prices are quite less. But there is another way of investing, where the risk is quite lower compared to the growth i.e. Value investing.
Value Investing is an investment strategy, which involves picking stocks that appear to be trading less than the intrinsic or book value. These are stocks with strong financial but going through a bad business cycle. The strength of the companies may get reflected in the company balance sheet, high cash flow, low debt, and quality management. The fundamental goal of a value investor is to take advantage of the mismatch between intrinsic value and market price. As an investor, one should be careful to evaluate the intrinsic value of a stock. Here’s a list of the screener, one should look before picking a value stock.
- Market Capitalization:
Market Capitalization may not be a big deal for small investors. But it is quite useful for filtering out the tiny guys and filtering out the massive companies that are too big to move rapidly.
- Price to Earnings Ratio:
It is one of the best metrics to access stocks. It is useful for determining its intrinsic value relative to the market value. But before investing, make sure to compare it with intra industries, because different industries have the different risk appetite. Lower the PE ratio of the industry better will be its value.
- PEG Ratio:
Price to Earnings to Growth is a valuation metric if a company is valued. It is a forward indicator, as it takes the future into account. The PEG ratio provides a more complete picture of whether the stock is overvalued or undervalued. It is considered as the price to earnings ratio divided by annual earnings per share growth.
- Price/Book Ratio:
It is also one of the most indicators before picking any stocks. The book value of a company is the company’s total tangible assets less its liabilities. It gives an idea about how much an investor could have in case if the company goes bankrupt.
Apart from checking these financial ratios, a value investor should also look for the company’s management. But the key to value investing is not to follow the bandwagon effect or Herd mentality. In case, if there is a sudden increase in stocks, then it’s better to avoid the stock.
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