Value investing is a trading strategy that dates back nearly a century. First taught at Columbia Business School in 1928, the concept became a household name thanks to Warren Buffet.
Buffet became one of the richest men in the world by making investments in companies with able management and steady revenues. He never bought companies with inflated valuations or trendy business models, so he made his entire fortune without the likes of high-growth stocks like Amazon (AMZN) and Google (GOOGL).
The good news is that you can use value investing to help you find profitable trades too. Ideally, you want to find stocks that are trading below their intrinsic value. The trick is judging the intrinsic value of the stock, something Buffett has mastered. Basically, the idea is to buy stocks at a lower price than they are worth in the long-term.
Finding Value Stocks With Finviz
Most value stock analysis is centered around a few key ratios. You can easily search for stocks that have good value ratios using a free stock screener. All you have to do is set the screener to filter down to the companies that meet your criteria.
If you’ve never used a stock screener, finviz has an excellent free screener that is good enough for most retail investors. In the screenshot below, you can see the layout of the finviz stock screener. Here is one example of one way to set your screen to return good value stocks.
As you can see in the image, the P/E ratio – which measures share price over earnings – is set to less than 15. Find companies with healthy balance sheets by setting debt/equity to less than 0.1. Finally, the price per free cash flow is also set to low because companies with more cash have more ammo to make investments and fuel growth.
Also, consider setting P/B (price to book) ratio to less than 3. This ratio measures how much a company is worth on paper in relation to its share price. A number of less than 1 tells us that a stock is trading for less than the company is actually worth, according to its accounting books.
EPS growth is another figure that you should look at. If earnings are expected to grow in the future, it is likely that share prices will grow along with them. EPS growth of 20% or more is a good place to start, but you can reduce it to 15% to get more results.
News, Outlook, and Their Impact On Value
Fundamental analysis is only one way to find a stock. Even if you find a dozen value stocks that look great on paper, it does not help you unless you know what is going with the business. You may find a company that looks great on paper but that is facing serious issues that will have a long-term impact on business.
Fundamentals are only half the story. To get the complete picture, you need to find out what story the company is telling, where it’s driving share prices, and how the market feels about the company going forward.
Public companies use press releases, earnings calls, and various other means to tell their stories. When they put out their figures, investors expect to hear a story behind what they’re reading. A narrative is a story behind a company’s stock.
Narrative and Value
A negative narrative can often weigh down share prices beyond reason if the market is antsy. Sometimes, a bad vibe can affect a stock long after the perceived threat has passed and, other times, the narrative is flat wrong.
Judgment calls play a much larger part in successful stock trading than most pros care to admit. Your judgment can be the difference between winning and losing in the stock market. If you think the market has the narrative wrong, you might be right! When the rest of the market has given up, it could be a chance for a keen value investment. If you’re right, you will be the one laughing last.
The best way to discover opportunities like this is to stay in the loop. Follow stock market news and keep up on all the latest stories, but don’t take opinions at face value. If you see an interesting value stock, get a clear picture of the company you are considering buying by reading the recent news.
If you don’t, the ‘value stock’ you’re looking at could be a sinking ship.
Discovering The Best Value Stocks
The best value stocks have good fundamentals and narratives that are going the wrong way. Find value stocks of interest by following the latest stock market news. Then, do your research to determine whether it’s a good investment.
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