As global stock markets witnessed the recent downtick, many financial experts are of the opinion that it is a good time to buy stocks. While some companies may be directly affected by economic and sector-specific developments, shares of other companies might just have lost value mirroring trends in the indexes. Now could possibly be the time when investors can find companies whose stocks have fallen for no particular reason and whose value and potential has not been fully realized. These stocks have the potential to outperform the market over time. Also, the investor has the advantage of getting them at a lower price.
An investor, much like the shopping style of a bargain hunter, should choose stocks in a practical manner. Most value investors usually look for stocks that are significantly low-priced based on their intrinsic worth. Even though determining intrinsic value can be difficult as there is no standard way to obtain this figure, most do it by analyzing a company's fundamentals. They seek products which they presume are beneficial and of high quality but are under priced. Value investors try to find the useful aspects yet to be discerned by the majority of other investors. Some aspects they look for in companies can be performance, volume of debt and profit margins.
Company’s performance: An investor should look at the return on equity (ROE) for the past 5-10 years of a company to get a reasonable idea of its performance, and whether it has remained consistent throughout. The ROE is the stockholder's return on investment and it can be used to compare one company to another.
Amount of debt: An investor should consider carefully the debt to equity ratio of a company. It is always preferable to choose companies that have a small amount of debt as it can then be established that the earnings growth is being generated from shareholders' equity and not from borrowed money.
Level of profit margins: For a company to be profitable in the true sense, only having a favourable profit margin is not enough. The margin should have also increased consistently for at least the past five years. A high profit margin means the company’s business is running well, but increasing margins indicate that the company’s management has remained highly efficient at controlling expenses. The profit margin is calculated by dividing net income by net sales.
Understanding company business: Going by examples, it is rare that highly successful value investors invest in a business they do not understand. For instance, it is known that Warren Buffet does not invest in today’s technology companies simply because he does not understand what they actually do. This could also indicate that value investing means observing companies that have not only prevailed over the vagaries of time, but also are currently undervalued.