Value Investing

stock nub · 12 March 2010

Was looking around the place and couldnt see a thread on value investing, so here we go!

Does anyone follow a value investing approach to stock picking?
If so what do you look for to indicate that the stock is undervalued?

Do you look for things like the stock trading at a discount to book value/NTA, or do you look for shares with have high dividend yields or Low PE, or are you a more of a "trading at less than 10 times free Cashflow" sort of person ?

Feel free to share your experiences/methods behind choosing a particular stock.

UBIQUITOUS · 12 March 2010

stock nub said:
Was looking around the place and couldnt see a thread on value investing, so here we go!

Does anyone follow a value investing approach to stock picking?
If so what do you look for to indicate that the stock is undervalued?

Do you look for things like the stock trading at a discount to book value/NTA, or do you look for shares with have high dividend yields or Low PE, or are you a more of a "trading at less than 10 times free Cashflow" sort of person ?

Feel free to share your experiences/methods behind choosing a particular stock.

Hi nub,

I take a value investing approach and look for stocks that offer extreme upsides.

I look for undervalued stocks based on DCF and and preferably an increasing PEG ratio. I am then prepared to wait for price to catch up with value. Ben Graham wrote in 'Security Analysis' something along that lines that opportunities to find undervalued stocks had become non existent. If he were here today, with short selling & algorithmic trading etc, I'm sure he would take back that view. Opportunities are plentiful to find undervalued stocks.

On the subject of DCF, it's 'rubbish in rubbish out', so I plug in a few different revenue forecasts, betas, and if the discounted value still comes back way above current price, then I think about buying in.

I do not look at P/E when valuing a stock as those that I buy are generally startup spec tech stocks and the P/E has little relevance.

I do not buy stocks for the sake of diversification. I prefer to back my own judgement and buy the best that I can find (I have only bought 2 stocks in the last 3 years - TZL and UNS)

So_Cynical · 12 March 2010

stock nub said:
Was looking around the place and couldnt see a thread on value investing, so here we go!

Feel free to share your experiences/methods behind choosing a particular stock.

As covered in a few threads here...first and foremost the share price has to be falling or recently fallen and now going sideways, second the current SP has to be close to the last major capital raising price (below it even better) and thirdly
the stock has to have a good story and the financial's have to make sense.

Also like business that have high barriers to entry and cant easily be duplicated in china etc...i don't have any hard rules about debt/equity or EPS, ROW etc etc...unlike UBIQUITOUS ive brought into over 25 stocks in the last 3 years, currently hold 20 stocks with 4 open positions, 'open' as in yet to move profit over to the capital column, 19 exits with 17 of those in profit.

Good luck nub

ROE · 27 March 2010

it's a pretty easy topic to talk but practicing is hard I can tell you

picking good stock is not just about the number it requires a person with a certain temperament .. Patient...Independent and Conviction.

You bound to get scare by the herd and act irrationally if you are not independent and don't have strong conviction.

These techniques are not new it been around for many decades
and you find lot of information on the internet and books that cover it
but eventually it comes down to you and how you applied it...

There is no wrong and right in how people do this it come down to personal preferences.

As for me I use Quality over Quantity.
The market and analyst love to chuck around
P/E ratio, dividend yield, as a measurement of cheapness

that tell you nothing about the business or is the business good enough
to with stand a storm...

plus how can you tell if something trading at a PE of 10 is cheaper than a PE of 15 I buy many stocks trading higher than the market average PE
and many at PE 15 compared to PE of 10.

A stock trading at PE 15 or PE of 20 can turn out to be a 10 baggers and the one people think it's cheap at 9 8 or 10 could sit there for years or go to corporate graveyard....

I get PM all the time and I will write a guide on how I think people should look at company if I have time.. number is the last thing on your mind and you probably don't even go there if the company failed the test so save you lot of time and effort, save those effort for company that pass the test and you sure want to buy...takes me 5 minutes if I want to waste more time on the company.

ASX is a big place but when you weed out all the rubbish there isn't many company to invest in really probably about 100 past the test
then it come down to that 100 which 10-20 stocks I really want to buy and sit on my ass for a decade...

Here are some of the one I consider Wonderful a term Uncle Warren would say .... but you got to know what price to pay for ... My favorite quote from Charlie Munger

Price is what you pay, Value is what you get... you ALWAYS want value

WOW CAB BKL TRS REH DMP ARP JBH WWA CCL CCV ONT BBG CSL COH

you would think blue chip would dominate the list but my list of 100 doesn't include many blue chip and I am apply to stack money into these
smaller one.

Julia · 27 March 2010

ROE, your list of stocks is interesting. I have several of these.
None were chosen on any indepth analysis but rather because they were in a recognisable uptrend when I bought them.

I've just had a look at the charts for those I was less familiar with to see if the same held true for them, and with only two exceptions, yes it does.

So we can be choosing the same stocks by quite different approaches and I expect we do what we find most comfortable. Personally I wouldn't have the patience to analyse a company in as much detail as you're obviously happy to do.

I remembered a long ago post from Bunyip about this which made a lot of sense.

"Researching stocks takes a lot of time and it prevents me from doing other things."

I agree - researching stocks is time consuming.
But there's a simple solution to your problem.....don't do any research. There's no need to - tens of thousands of traders and investors have already done the research for you, and their findings are reflected in the trend of the stock.

AMP fell from $13 to $3 between March 2002 and August 2003. Shortly after it's downtrend began it was patently obvious, even to someone of little experience in chart reading, that the stock was heading south east on the chart.......a downtrend.
Why was it downtrending? Because traders and investors were quitting the stock en masse.
Why would they do that? Because tens of thousands of them had researched the company and found out that it was in trouble, and it's future prospects were none too bright.
In which case, you could have made money from the AMP downtrend by selling the stock short, or buying put options.
Or if you owned the stock, you could have bailed out long before it's value was decimated.
The point is that you could have got quite an accurate summary of the fundamentals of AMP without spending one minute of your time doing fundamental research. Just look at the chart.....all the information you needed was graphically displayed for you.

Look at the current price action of AMP. Nice uptrend in place, particularly when viewed on the weekly chart.
Why is it uptrending? Because tens of thousands of investors, having done their research, have formed the opinion that the stock has good fundamentals. No need for you to research AMP to profit from it - the research has already been done for you. If an uptrending stock shows temporary weakness by pulling back for a few days as profit takers bail out,
and then the uptrend resumes as buyers come back in, it presents you with an ideal opportunity to hitch a ride on the trend and make some money.

The same sort of simple analysis and trading strategy can be applied to any liquid stock that starts uptrending or downtrending strongly.
WPL is a good example.....uptrend began in early 2003. Three years later, the stock is more than four times it's 2003 value.
Once you saw WPL heading steadily north east on the chart, making higher peaks and higher troughs, did you really need to spend hours or days of your time doing fundamental research on it?
Thousands of investors had already researched it for you and their findings were very positive, otherwise why would they be piling into the stock and pushing it higher week after week?

A common fallacy among stock market players is that if you want to profit from the market, you have to read the financial papers, company reports, brokers newsletters etc to keep yourself up to date with the latest developments in the economy and within individual companies.
Its simply not correct.....I've been trading the markets for 10 years or so and for the last eight of those years I haven't read a financial publication, a brokers newsletter or a company report.
The most reliable information is in the charts. Learn how to interpret them, learn how to identify trends, learn how to recognise retracements, watch for the trend to resume following the retracement.
You won't need to spend your time doing boring company research, and you won't need to hand your hard earned money over to Fat Profits either.

If you want some good books on how to identify trends and how to hitch a ride on them, I'd suggest.....

"Dave Landry On Swing Trading" by Dave Landry

"Secrets For Profiting In Bull And Bear Markets" by Stan Weinstein

The trading methods expoused by both these men are simple to learn, easy to implement, and require very little time input from the trader or investor.

Bunyip.

So_Cynical · 27 March 2010

Julia said:
ROE, your list of stocks is interesting. I have several of these.
None were chosen on any indepth analysis but rather because they were in a recognisable uptrend when I bought them.

I've just had a look at the charts for those I was less familiar with to see if the same held true for them, and with only two exceptions, yes it does.

So we can be choosing the same stocks by quite different approaches and I expect we do what we find most comfortable. Personally I wouldn't have the patience to analyse a company in as much detail as you're obviously happy to do.

I remembered a long ago post from Bunyip about this which made a lot of sense.

Bunyip said:
Researching stocks takes a lot of time and it prevents me from doing other things."

I agree - researching stocks is time consuming.
But there's a simple solution to your problem.....don't do any research. There's no need to - tens of thousands of traders and investors have already done the research for you, and their findings are reflected in the trend of the stock.

AMP fell from $13 to $3 between March 2002 and August 2003. Shortly after it's downtrend began it was patently obvious, even to someone of little experience in chart reading, that the stock was heading south east on the chart.......a downtrend.
Why was it downtrending? Because traders and investors were quitting the stock en masse.
Why would they do that? Because tens of thousands of them had researched the company and found out that it was in trouble, and it's future prospects were none too bright.
In which case, you could have made money from the AMP downtrend by selling the stock short, or buying put options.
Or if you owned the stock, you could have bailed out long before it's value was decimated.
The point is that you could have got quite an accurate summary of the fundamentals of AMP without spending one minute of your time doing fundamental research. Just look at the chart.....all the information you needed was graphically displayed for you.

Bunyip.

This thread is suppose to be about value investing...while trend following is a valid, well tested, simple and easy to understand method of trading, i would think trend following principles would be of limited use when it comes to investing in a sideways market like we have now and quiet possibly will have going forward for quiet some time.

I wonder what Bunyip's thousands of investors and traders would make of many charts at the moment :dunno: what's to be concluded from a sideways chart? should stocks trending sideways simply be dismissed because the uptrends are short lived and the stock seems somewhat range bound.

I think sideways trending stocks can present easy opportunity's to profit and or build positions in great company's, that investors and traders and report writers have mixed feelings about....the chart below is of a ASX 100 stock that's clearly been going sideways and slightly down for 3 years.

I've read a few broker reports and media story's about this stock over the last few years (all negative) and yet i could care less, i want long term exposure to this stock, and was determined to ignore the negativity and buy the dips and take profits early to establish free carry shares, which i have done with great success.

Also interesting to note with this stock, buying any of the significant lows (dips) over the whole 3 years (circled blue) would have presented opportunity's to exit in profit soon afterwards 100% of the time.

Discretion and confidence in the obvious can be rewarding.
~

ROE · 27 March 2010

No two person think alike on value investing let a lone people with opposite view like technical vs fundamental vs trend

this is an age old debate that will go on for many more decades

I don't know which one is correct and I don't know many other techniques of buying and trading shares...I just know only 1

I found Value Investing to be the only logical choice for me, other techniques doesn't seem to get me excited plus I'm bad at reading charts and trends.

in Foxes vs Hedgehog I'm probably the Hedgehog and seek out Hedgehog
directors and many company I buy has leaders that exhibit hedgehogs characteristics.

This guy sum up foxes and hedgehog pretty well for those who want to know

http://www.ianbell.com/2009/05/19/the-fox-and-the-hedgehog-which-one-are-you/

Julia · 27 March 2010

ROE, you're quite right: we all do what suits us best.

So Cynical: I wasn't trying to have an argument about what's the best approach, for goodness sake. Just found it interesting that ROE's list of stocks, chosen on his careful fundamental analysis, was closely aligned with my own, chosen on a trend basis.

Re range trading: I'd prefer to use my funds in a stock that is actually still going up or sit on the sidelines in a sideways market. You only miss a small amount of profit by waiting for an uptrend and don't get stuck in something that's going nowhere if you're wrong.

But its absolutely a personal preference. It's just a discussion, not a competition about who is right or wrong.

robusta · 28 March 2010

ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?

bunyip · 29 March 2010

So_Cynical said:
This thread is suppose to be about value investing...while trend following is a valid, well tested, simple and easy to understand method of trading, i would think trend following principles would be of limited use when it comes to investing in a sideways market like we have now and quiet possibly will have going forward for quiet some time.

I wonder what Bunyip's thousands of investors and traders would make of many charts at the moment :dunno: what's to be concluded from a sideways chart? should stocks trending sideways simply be dismissed because the uptrends are short lived and the stock seems somewhat range bound.

~

At present there are at least 35 companies in the ASX Top 300 that are in strong uptrends, and have been for months. A search outside the Top 300 would reveal many more uptrending stocks.
For trend followers it's business as usual.
Even when markets are a bit choppy like they've been over the last few months, trend trading can usually still be used to good advantage by those who know how to find decent trending stocks.
Sector analysis is the key to zeroing in on the strong trenders. Even when most sectors are dead, you can often find one or two with some life in them. The stocks in these sectors are where the good opportunities can be found.

Sideways markets? Nobody forces you to stay in a stock that's drifting sideways, going nowhere. Not only do you tie up your capital in a non-performing stock for prolonged periods, but at the same time you miss the opportunity of having that capital gainfully employed in a stock that's rising strongly.

I'm not here to argue the pros and cons of one method over another. I simply wanted to answer your view that 'trend following principles would be of limited use when it comes to investing in a sideways market like we have now and quiet possibly will have going forward for quite some time.'

bunyip · 29 March 2010

Julia said:
ROE, you're quite right: we all do what suits us best.

So Cynical: I wasn't trying to have an argument about what's the best approach, for goodness sake. Just found it interesting that ROE's list of stocks, chosen on his careful fundamental analysis, was closely aligned with my own, chosen on a trend basis.

That stands to reason, Julia, because by analysing trends you are in effect conducting a form of fundamental analysis.
When you identify a strongly uptrending stock, what you've done is find one that the fundamental analysts like. How do you know they like it? Because they're proving it by buying enthusiastically at increasingly higher prices.
They only do that if they've examined the company's fundamentals and they like what they've found.

kermit345 · 29 March 2010

bunyip, isn't that a little too over-simplified. Your basically assuming that everyone who purchases shares has completed detailed and correct analysis on a company.

Couldn't some of those buyers producing the up-trend be buying in because their mate Joe Blogs recommended it to them (Joe may have no idea about the stock either and just saw that stock name in some new article).

Obviously this is a bit of an extreme example. However to assume that all buyers within a stock have completed correct fundamental analysis is a bit over the top in my view. People may just search for stocks that have gone up by greater than 5% in the last week and say 'hey that SP has gone up, i'll jump on board too' with know real knowledge of the stock at all.

That may support trend analysis, but I don't think that supports fundamental analysis. Assuming all market transactions are completed by people who have completed their analysis is a large assumption I myself wouldn't be willing to make.

Heading home from work at the moment, will do another post later with my views on value investing. Just wanted to reply quickly to what bunyip's post.

bunyip · 29 March 2010

kermit345 said:
bunyip, isn't that a little too over-simplified. Your basically assuming that everyone who purchases shares has completed detailed and correct analysis on a company.

Couldn't some of those buyers producing the up-trend be buying in because their mate Joe Blogs recommended it to them (Joe may have no idea about the stock either and just saw that stock name in some new article).

Obviously this is a bit of an extreme example. However to assume that all buyers within a stock have completed correct fundamental analysis is a bit over the top in my view. People may just search for stocks that have gone up by greater than 5% in the last week and say 'hey that SP has gone up, i'll jump on board too' with know real knowledge of the stock at all.

That may support trend analysis, but I don't think that supports fundamental analysis. Assuming all market transactions are completed by people who have completed their analysis is a large assumption I myself wouldn't be willing to make.

Heading home from work at the moment, will do another post later with my views on value investing. Just wanted to reply quickly to what bunyip's post.

No, I'm not assuming 'that everyone who purchases shares has completed detailed and correct analysis on a company.'

On the contrary, pure technical analysts don't do any fundamental research on a company at all, preferring to leave it to the fundamentalists to do the research.
Blue chip stocks are moved primarily by fundamentals.
By identifying trending stocks, a TA is able to see where the consensus of opinion lies with fundamental analysts.

The two main analysis camps are technical and fundamental. Then there's the 'haven't got a clue' camp who buy on tips from their mates or the taxi driver or whoever.
In his book 'How I Made Two Million Dollars In The Stockmarket', author Nick Darvas talks of how he lost money hand over fist by trading on tips.

Technical analysis is basically the study of price and volume and chart patterns. The bloke who buys a stock because it's gone up 5% is employing the first step in technical analysis - the study of price.

The large institutional buying is all fundamentally based, and a majority of private investors do some form of fundamental analysis as well.
But there are a growing number who realise that you can still make damn good profits by simply following the strong trenders, without doing any fundamental analysis at all.

My definition of 'value investing' is buying stocks at prices that make you money from the day you buy them.
Have you really bought 'value' if you buy a stock that you consider is cheap based on fundamentals and price, but it spends months or sometimes years going nowhere, tying up your capital without decent performance for prolonged periods of time, and preventing you from investing that capital in stocks that could be making you 50 or 100% a year?
To my way of thinking, you haven't got 'value' in that situation - all you've done is buy a dud that's caused you to miss out on making big money from stocks that are performing strongly while your dud is asleep.

ROE · 29 March 2010

robusta said:
ROE that is a great list of companies. I was wondering how do you determine how much to pay for them? They all seem to have great growth prospects but a company like ONT seems to be pretty tightly held. Do you just buy it anyway in the knowledge that it will be a great return in the long run, or are you patient and prepared to wait to buy on bad news or a change in market sentiment?

As long as it trades at a discount to what I think it's worth I buy
I don't have to wait for share price to fall, that why stock can trades
at PE 20 or PE 15 I still buy

I don't care too much about liquidity as I'm not a trader I buy in to stay in the business and collect increasingly more dividend as time goes by.

but eventually the stock will hit a premium to what it is worth I'm selling out...this is true at a later stage when everyone discover them and buy into it... 2 stocks of mine has a bit of a run lately due to goods coverage
and they making a bit of headlines with double digit growth rate when most company going backward....nearly time to bail out and stack money into 2 others stock I think trading at a 30%-40% discount..

When I bought ONT I bought at market price I get whatever available
until my quota is reach for that stock..cos the dam thing is trading 35% discount to that I think it worth

You tend to find them in small caps as most analyst stay away and it's all for your picking when you find one..

Hard to find bargains in CBA and QBE and BHP because just about every man and his dog has research going for these guys...

but everyone now and then every man and his dog can get it wrong about a bluechip that when I buy into bluechip...doesn't mean I'm better than them it just mean I have different views and calculate it differently.

Most of the time the market is efficient, only occasionally it isn't and that
what I want to do occasionally.

It was close for me to buy WOW but then the management has to come out with their share buy back stuff and reverse the trend

oh well I will wait till I get a good shot

doctorj · 29 March 2010

ROE said:
As long as it trades at a discount to what I think it's worth I buy
I don't have to wait for share price to fall, that why stock can trades
at PE 20 or PE 15 I still buy

How much of a discount do you look for and over what period do you typically look to realise that value?

robusta · 29 March 2010

Thankyou for the insight ROE I hope I have the patience to wait for a great value stock to come along and the knowledge to spot it when it does.
Love your style

ROE · 30 March 2010

doctorj said:
How much of a discount do you look for and over what period do you typically look to realise that value?

30% or more is always good....according to my analyst WOW is trading at a discount but not at the discount I want, maybe I should break rank and give WOW a bit of slack else I cant get it but I wait a bit more and see.

for you to predict earning or growth you must fist find quality company because only they can provide you with reliable number projection going forward... stock like Qantas where it earning go up and down depending
on oil and many other events I cant predict its earning so cant value it...

robusta · 30 March 2010

ROE said:
You tend to find them in small caps as most analyst stay away and it's all for your picking when you find one..

Hard to find bargains in CBA and QBE and BHP because just about every man and his dog has research going for these guys...

Do you require a larger discount when investing in small caps because of the danger of key personel losses and often a shorter trading history to research?

ROE · 31 March 2010

robusta said:
Do you require a larger discount when investing in small caps because of the danger of key personel losses and often a shorter trading history to research?

Nope I find Small caps with qualities I like performs no worse
than the big blue-chip, some operate in a captive market where it actually command far better return than blue-chip.

I give you an example, ONT is a small company but I think it has a very good moat..it operates in market where it very profitable for one large operator but another one come in will kill the return so it stop anyone from trying and let ONT slowly expand its market and make incredible return year after years

I don't know what you call these I would call them captive market moat
so it goes down as some kick ass wonderful company for the right price.

and for those who like Airlines (I dont) Regional Express would command a moat, you would think QAN do better but I reckon REX is better because it operate again in a market where a single player profit handsomely, two players become crowded and killed all return
so it left REX to kick some ass

doctorj · 31 March 2010

robusta said:
Do you require a larger discount when investing in small caps because of the danger of key personel losses and often a shorter trading history to research?

Good question. I think it's perfectly reasonable to demand more upside (ie. a greater discount) when looking at more risky situations. There are many reasons why smaller companies are more risky and you've already mentioned a few.

ROE said:
Nope I find Small caps with qualities I like performs no worse
than the big blue-chip

It is interesting to note that you're return on smaller caps matches that of your larger cap holdings - is there also an increase in the volatility of returns?

Value Investing

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