How to Evaluate Stocks – Value Investing


Value investors look for stocks on the cheap. They compare stock prices to different measures of a company’s business such as its earnings, assets, cash flow, and sales volume. The idea is that if you don’t pay too much for what you get, there’s less chance of losing money.

Value stocks have low prices compared to how much they earn and the worth of their assets. They are companies that have been overlooked on their journey to success, have fallen on hard times after more successful years, or are in a slump for any number of reasons. Hopefully they’re on a comeback, and the value investor is purchasing shares at the bottom of an uphill climb. Here’s where value and growth are tied together. In both cases, investors want to buy companies with a bright future. The difference is that growth investors usually buy those companies when they’re already steamrolling ahead to that bright future, while value investors usually buy those companies when they’re still getting ready to start or are recovering from a tumble.

stock-evaluation

Using O’NeiPs baseball analogy, value investors comb the locker rooms for bandaged players trying to rehabilitate. They don’t cost much, and you might uncover a future star. Of course, you might get exactly what you paid for: a broken player, or a broken company.

The value investor is a bargain hunter extraordinaire. From my interviews with professionals and novices alike, I gather that value investing more closely resembles what we’ve been taught from the time we were kids. What did you look at when buying candy? Probably which kind you could get the most of for your Pocketful of allowance money. In school, you probably bought the package of notebook paper with the most sheets for your dollar. When relatives came by for the holidays they might have swapped stories of the great bargains or “steals” they purchased recently. We’re used to examining price with an eye toward value. It’s no different in the world of investing.

Value investors pay particular attention to dividends. A com­pany that pays dividends contributes to an investor’s profit even if the stock price does not rise. That’s comforting. Also, among big companies, the dividend yield is a great indicator of how bar­gain priced a company is.

Combining Growth and Value

Growth investing and value investing are not mutually exclu­sive. Many growth investors use some measure of value to time their purchase of growth stocks. Most value investors use some measure of growth potential to evaluate a troubled company’s chances of recovery.

Growth investors tend to get in when things are heating up and bail out at the first sign of slowing growth. Value investors tend to be very careful about where their money goes and let it ride out fluctuations once they decide where to invest. The con­trast in these two styles is why I think value investing is more suitable to the average individual investor. Most individuals do not have the time or resources to monitor split-second changes in their stocks to act accordingly. It seems that conducting thorough research periodically and letting the chosen stocks do their thing is the best approach for most individual investors. That being the case, why go through the hassle of all the trading that accompa­nies pure growth portfolios?

These are my thoughts I try to provide equal space to each style. I think most of us end up com­bining the styles in our personal portfolios, but with a tendency one way or the other. I’ve enjoyed excellent results from both growth and value investments, although I tend toward value.

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  5. How to Calculate Earnings per Share (EPS)

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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