Finding undervalued stocks and invest into them is by all means not an easy task. You need to exercise your own acumen and apply value investing principles. Value investing is about finding stocks that are selling below their true worth. The concept involves buying these stocks, holding on to them and waiting until they rise in value. The trick is, how do you spot these undervalued stocks in the stock market. In this article we will look at some hints the stock market gives us to indicate which value stocks would be good options for value investing.
How To Spot Undervalued Stocks
To spot good and undervalued stocks, sometimes you need to look beyond the price per share. Something to look for are companies that buy back their stocks. When companies do this share buy back, the real intention is to reduce the actual share numbers available. This then means that each individual stock is worth more, because it is a larger portion of the company.
In US stock market, the Wal-Mart company practiced this concept. Its profits have soared in the past decade; however their stock price has actually fallen. However, each share is backed by a much larger portion of the company. When the stock price does start to rise, the shareholders will be the ones cashing in on the benefits. Cheers to the value investors who made early entries.
There are also another scenario where share buyback are actually preparing for a delisting. Under such scenario, you need to assess if the company’s business performance and market situation. In Singapore, one of a good examples to quote is Osim. The founder of OSIM International, Ron Sim had been practising share buyback for many years and had his final round on 7 March 2016. An unconditional offer at S$1.32 per share for all ordinary shares issued.
Major Change In Company’s Direction
Another good way to spot good undervalued stock possibilities is to look for companies that are going through major change or turnaround. Many times the current stockholders are there first and take the most advantage, however new investors with a keen eye can get in before it is too late. When companies transform and become new separate entities, many times they become smaller in size with fewer debts. If they are managed well, then this can spell good news for the stockholder.
Finally, companies who are undergoing a change of management can often provide good opportunities. Sometimes this undervalues the stock until the new regime had earned confidence and respect. Getting in when this happens can provide large profits in the long run.
When To Find Undervalued Stocks?
Stock crashes or major corrections
Whether you like it or not, what goes up may come down at some points before it proceeds to the next stage. And this happens to good valued stocks as well. This will be my favourite time and answer to when to do value investing. Of course, you need to prepare your own war chest to scoop the undervalue stocks at the right time.
Unexpected bad market news
Sometimes, good and fundamentally strong companies can also be affected by bad market news. For e.g. DBS was badly hit by the oil and gas slump. It went down to $13.02 on 7 Feb 2016 and recovers back to the current $26.48 on 12 Jan 2018.
Not meeting market expectations
If a stock reports quarterly results that fall short of expectations, shares can drop more than the situation calls for.
Certain sectors tend to perform better at different stages of the economic cycle. Sectors that are out of favor are good places to look for bargains.
These are a few suggestions for spotting good value investment stock options. If a company is showing one of these characteristics, look into it further. Don’t just rely on this information to make you a profit.
Sometimes stock is valued low because it deserves to be. The business condition might change which affects certain businesses badly. Therefore, you should not invest simply because you find a stock price is attractive. This is really speculation. Get advice from a professional before you put large sums of money in. If done correctly, value investing can be very profitable. It can provide great economic profit for the future.
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