– Undervalued Stocks & undervalued shares and how to spot them
“The way humans hunt for parking and the way animals hunt for food are not as different as you might think” – Tom Vanderbilt, Traffic: Why we drive the way we do and what is says about us
Hunting is an innate instinct in all predatory animals, none more so than us humans. Imbibed into our DNA on the plains of Africa eons ago, our skill in hunting combined with the evolutionary gifts of long distance running, one of the best stamina in the animal kingdom, teamwork and the power of sheer will and patience has allowed us to ascend and maintain the top spot in the natural food chain. Scientific and technological progress as well as a developed civilization with ample food sources may have done away with the need to hunt for survival, but the instinct remains nonetheless.
The affluent class satisfies that urge with game hunting while most of us make do with simulated hunts for a variety of stuff in our lives from parking to the best shopping deals to absolute bargains in our purchases. We wish to extend the same to our investments as well as we strive to identify and acquire the most undervalued stock or all the top undervalued stocks today.
This instinct for hunting has introduced us to a concept of value. Value is the perception of experience or worth of an instrument or gesture marking its desirability in relation to the cost incurred in acquiring/experiencing that instrument/gesture. To simplify, value is what you derive after paying for something. If the value derived is perceived to be of greater worth than the cost paid to derive that value, it leaves us with a feeling of happiness and satisfaction whereas a perceived value less than the cost paid leaves a feeling of dissatisfaction and frustration.
Value is often subjective since it is basically a game of perception and each unique individual will have its own unique thoughts and perceptions and thus its own unique idea of value. For e.g. a person who loves sleeping and places great faith in a good night’s sleep will be willing to splurge thousands of dollars on a comfortable mattress perceiving the worth of the value derived from that sleep to be much higher than the cost of the mattress. The same might not hold true for an individual who is able to sleep anywhere. For them it makes no sense to splurge 1000s of $$$ in a mattress when a cheap one costing a fraction of that can do the job just as fine.
Thus value can manifest in an infinite variety of ways and when combined with the human instinct for hunting can lead to a lot of satisfaction and happiness if done right. When making an investment, it is of prime importance that you know the real value of stock and here at fairvalue-calculator.com we also provide you with a stock valuation calculator which will help you find stock value and eventually lead you to finding value shares and share price.
Human beings are suckers for value. The instinct for hunting is a strong one and when combined with a hunt for value can lead to a dopamine hit just by the anticipation of a successful hunt. The anticipation of deriving value leads to a dopamine hit even before value can be derived. This can be harnessed to make hunting for value a pleasurable activity which when directed towards investments and portfolio building can lead to a committed and successful investment journey, a journey which you can undertake with us here at fairvalue-calculator.com where you can find our intrinsic value calculator online as well as an intrinsic value calculator excel for all your investment needs.
The pandemic has really highlighted the need for a financial backup for our needs, be it a retirement nest egg or just an emergency corpus to help us tide over the hard times. Hundreds of thousands of jobs were lost and medical bills racked up for those unlucky enough to be caught in the ravages of the virus. While the government came around with a stimulus package, it was not enough for several of those who were pushed to debt, and for those in debt to default. A need was felt for an investment corpus that would help one keep afloat without pushing them to debt or other hardships. Even without the pandemic, investments were always necessary for one to be able to live a comfortable life after retirement. One cannot be expected to work till death, but one will definitely incur expenses beyond retirement and for that a nest egg is must. You can begin your investment journey here with us at fairvalue-calculator.com where we help you build an investment portfolio identifying future shares and share price with the future fair value of those shares so that you can avoid overvalued businesses and purchase the top undervalued stocks today. In fact, the pandemic has opened up several opportunities for investments with stock prices plummeting to multi year lows, one can find the most undervalued stock by clicking on undervalued stocks.
Before we begin our hunt for value, let me introduce you to the style of investing that specializes in hunting value known as value investing and its proponent Benjamin Graham who made it popular using the famous ben graham formula value.
What is Value Investing?
Shares signify ownership in a company. A stock of a company is a document that entitles the individual whose name is written on that document to ownership rights of that company in proportion to the value of its investment in the company. For e.g. a company has issued 10,000 shares at $10 per share leading to company value of $100,000/-. An individual buying 100 shares has to pay $1,000 to acquire those shares and automatically becomes an owner of that company to the tune of 1%. He then gets the rights to vote in various company decisions, enjoy a share of the profits and generally participate in the growth of the company in proportion to its holding which is 1%.
The question now arises whether the $10 paid per share is the real value of the stock? There are several intrinsic value calculators online as well as various intrinsic value formula excel that can be used to determine the top undervalued stocks today. While we shall be learning this in depth in subsequent articles, it is enough to know that the fundamental idea for successful investments is for investors to pay less than intrinsic value per share. This forms the basic crux of investing in value.
The principle of hunting for value plays out very strongly in value investing. Investors develop their perception of value and then go out to hunt for their perception that the stock is undervalued. Value can be calculated in a variety of ways using various assets that the company has. Assets can be tangible (physical assets like buildings, factories etc.) or intangible (patents, licenses etc.) For e.g. a steel company like US Steel will have its assets in the form of land, buildings and machinery whereas a software company like Adobe will have its assets in the form of software licenses. Some companies will have assets in both tangible as well as intangible form. For e.g. Coca Cola will have assets in bottling plants as well as its secret formula. Valuing physical assets is relatively easier than valuing intangible assets like formula.
Want to value the land where the coca cola plant is? Simply enquire the local real estate company for land prices in the surrounding area. This will give you a fair estimate of the value of the land on which the plant is located on. Similarly one can enquire construction crews to determine cost of setting up that building, machinery suppliers for machine prices and so on and so forth which will allow for determining value of physical assets of the company. Historical growth in prices in these assets will allow for trend of value as well.
Intangible assets are a different ball game however. It is really difficult to estimate the value of Coca-Cola’s formula. It can be worth billions or it can be worth nothing at all in case someone comes up with an identical one. Similarly it is often difficult to estimate value of patents in pharmaceuticals. A patent for a medicine might be worth billions today but tomorrow if a better medicine is invented, this patent will be next to worthless as the demand of the medicines will now shift to the new one. Fret not though, we at fairvalue-calculator.com have our own ways and methods to estimate fair value of shares which will help you in identifying the top undervalued or overvalued stocks today. We shall also be teaching you the p e ratio plus providing a p e ratio calculator so that you can calculate fair value basis p e ratio which is the easiest and simplest way of estimating the real value of a stock. You can also build your own P E calculator in excel once you understand the P E ratio.
In the globally local world today, advancing technology has changed the definition of value. While traditional assets like land and gold are still present, they have been overshadowed by newer definition of assets including those in the digital space. Licenses and patents form the biggest assets of the world’s largest companies which is complete opposite to those half a century ago where land and machinery used to be. Let us explore the history of value investing and trace its evolution from then to the present day to understand its current nature and learn to become better investors ourselves.
History of Value Investing:
It began with the famous economist John Maynard Keynes trying to time the markets while managing the endowment fund of King’s College, Cambridge. Having failed at it, he then shifted his focus to acquiring relatively unknown companies that gave large dividends. Most of the companies operated in cyclical industries currently experiencing a cyclical decline like automobiles and mining and this enabled him to consistently beat the markets at end.
This was the start of the concept of value with contrarian flavor and the seminal work published by Benjamin Graham and David Dodd in 1934, “Security Analysis” cemented the concept firmly. The book called for investing in securities currently trading below their intrinsic value with consistent profits, low book value, low p e ratio and low debt. Benjamin Graham then went on to manage a fund using this very principles which enjoyed great success. The publishing of the book, “The Intelligent Investor” in 1949 led to the world bestowing the title of “Grandfather of value investing” on him. Warren Buffett calls “The Intelligent Investor” the best book on investment ever written with the book serving as an inspiration for him and prompting him to join Graham’s firm and work with him. Benjamin Graham served as the mentor for Warren Buffett who then led the charge on the next generation of value investing.
Warren Buffett went on to affirm the fact that success in the market is not limited to a well-defined process. There is no solely correct strategy in the market. Buffett used the principles of value investing learnt from his mentor and applied his own beliefs and values to it to formulate a value investing strategy that saw him become the legendary investor that he is today. While Graham’s strategy involved buying what he thought that stock is undervalued and selling them off once the market recognized their fair value, Buffett’s strategy involved identifying securities that will grow multifold in the future and identifying their undervaluation today. He then proceeded to purchase and hold on to these undervalued companies for decades and still holds several of them to this day.
Several streams of value investing emerged following the Graham era with a stream focusing on quantitative value investing. Joel Greenblatt is the most famous proponent of this style of investing. He is a hedge fund manager, writer and an astute value investor who introduced his most famous magic formula investing. His formula involved purchasing shares with high earnings yield and high return on capital and this strategy had enjoyed success at the time of publishing of his book.
Another value investing proponent, John Templeton went the global way. During the depression of 1930s, he called his broker and purchased 100 shares of all the companies on NYSE trading at less than a $1. He repeated this strategy during World War II and this saw him becoming a very wealthy man once the US economy picked up both during and post the war. He was a firm believer of value in emerging markets and invested in out of favor markets across the globe with him being the first one to invest in Japan in 1960s. His Templeton Growth Fund was a well-known globally diversified fund before it was acquired by Franklin Resources to form what is now known as Franklin Templeton Investments.
One of the most recent and young proponents of value investing is Michael Burry made popular by Christian Bale who portrayed him in the hit movie “The Big Short”. He was the first investor to recognize and profit from the Great Financial Crisis of 2008 and he has firmly declared his inspiration to be “Security Analysis” by Graham-Dodd.
Cash flow remained of paramount importance. Revenue numbers can be fudged and balance sheets massaged but cash flows can not be hidden. They tell you the real story of the company and one must always look at cash flow numbers especially free cash flow numbers. Free cash flow (FCF) takes into account capital expenditures providing you numbers that are available to business. Free cash flow plays an important role in market price of stock or stock price as well. One can use FCF and project it to the future via estimations to determine market price or stock price using various DCF methods. Cash flows are a solid measure of the health and thus stock price of the company.
Other measures include book value and enterprise value
Growth rate plays a key role as well. Earnings growth, especially earnings per share growth need to be consistent and present. Without earnings there is no value and earnings are a must for a company and thus you as investors to be successful. Company's success depends on lot of other factors beyond the scope of the article.
Stock market is a mysterious place moving in cycles and in the stock market, cycles come and go on a frequent basis. Value investing while being successful in the past has struggled to perform since the emergence of tech company's stock in late 90s and 2000s. Tech company's stock tend to be growth oriented and do not fall in the traditional parameters of value. As discussed before, the concept of value has also undergone a change and the companies currently in demand and with momentum on their side are the tech stocks. This has led to the underperformance of value investing strategies as compared to other investment strategies.
Another issue with the value investing strategy is the margin of safety. While margin of safety is essential for investment as it serves as a downside protection measure, the evaluation of margin of safety is often performed incorrectly by investors. The distinction between low prices and fundamentals was much larger half a century ago as compared to today due to the availability of information. There was no internet in the 1930s or 40s. All information was available via newspapers or one had to go to a library for it. Companies were reachable via letters and telegrams and information was not widely available. This information disparity resulted in mispricing of securities which was then capitalized by value investors who then demanded companies to deliver value either in the form of dividends or share repurchases. Laws regarding insider trading were a bit lax as well so an enterprising investor could find out stuff about the company much before others resulting in an unfair trade advantage. The same information disparity does not exist today. Today we have all the information we require at our fingertips. Companies can be contacted directly. Laws are stricter which do not allow for partial sharing of information. All information is released and disbursed simultaneously. So while a quantitative margin of safety would have worked before, the same will not work now.
Instead what one requires is a qualitative evaluation of margin of safety. Today general value criteria like low price to earnings ratio or low price to book ratio signify a problem with the company or its operations more than mispricing especially if the company is mid-sized to large. Mispricing does exist in smaller, relatively unknown companies but not in well-known companies. Basing your margin of safety on low p e ratio or low pb ratio for a large company would be incorrect as you are ignoring the fundamental problems with the company. One has to evaluate the business operations, its sustainability and potential for growth along with financial health and strength to determine margin of safety.
If history has shown one thing it is that it repeats. Investing styles come and go but the traditional hallmarks remain. Growth and momentum investing which received a great boost over the last two decades due to the quantitative easing policies by central monetary authorities of several developed nations in the world is now in trouble as the world authorities wake up to the dangers of free money. Constant printing of money has its limits and as inflation begins to heat up, interest rates are bound to rise and with it a slowdown in growth and momentum investing. Value has begun making a splash once again and as such is set to dominate investing once again. Here at fairvalue-calculator.com over the journey of the next 10 articles, we shall brief you on all there is to know about investing, undervalued or overvalued stocks, real value of stocks, finding value stocks, finding future value of stock and provide you with various calculators like stock valuation calculator, intrinsic value calculator, stock value calculator, p e ratio calculator or P/E Calculator,stock value estimator and many others. We shall also be providing you with knowledge to create your own intrinsic value formula excel and give you brief ideas on various ratios and formula like graham formula, P/E Ratio formula, etc.
Finally you shall have a look at all the premium tools we have to offer which will save you time and effort and at the same time give you the best information which will help you support your investment decisions and make the most out of your investments. Some of our premium tools include:
1) Market Analysis: In our market analysis tool we highlight the current status of the market whether it is cheap or expensive or neutral. Additionally number of undervalued or overvalued shares in our current database are provided along with a recommended cash % number. This number will increase as the markets get more expensive in order to preserve some dry powder for you to deploy when markets fall. Finally you will be able to measure the performance of fair value recommended stocks vs the overall market.
2) Sector Analysis: Our sector analysis tab provides you as our premium member with an overview of all the sectors along with key valuation numbers highlighting whether the sector is overvalued or undervalued. This allows you to narrow down the universe of investible stocks in your search for good investments. You can then figure out within the sector, the stock is undervalued or not Key figures like P E ratio, Price to sales ratio, P/B ratio, PEG ratio and dividend yield are provided along with a relative strength metric. Additionally, each sector is color coded to allow for a quick visual description of value
3) Quality Check - Our quality check tab provides you with a checklist that will help you make better investment decisions. It covers various qualitative and quantitative aspects of the business ensuring that you are not blinded by good numbers alone and that there is substantiating quality behind the business.
4) Screener: At fairvalue calculator, we have a comprehensive screener for our 42000+ stocks that will allow you to screen for stocks using various financial ratios and valuation numbers. The list can then be further filtered and sorted allowing you access to a list of investible stocks for further study
Additionally your premium membership entitles you to a comprehensive dashboard which is updated with stocks in various ready to invest categories like high dividend yield, high growth and broken down by country as well with US and Europe being the main ones. You can also use the search bar to search for the company of your choice. A premium membership allows you access to all of these features plus several more so come join us today and allow us to be your guide on your successful investment journey
We shall be running you through some undervalued companies in various sectors (mostly out of favor sectors because that is where the undervalued companies usually lie). All your queries like what is the most undervalued stock or most undervalued stock today, best undervalued stocks to buy now, most undervalued stocks or most undervalued shares and top undervalued stocks amongst others will be answered. We will also be introducing various financial ratios through which we calculated fair value of stocks and discovered these stocks so that you can do it for yourself right here on our website fairvalue-calculator.com. You can find all undervalued stocks of 2021, and even over valued stocks.
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In this we will go in depth to understand real value and also understand how you can use fairvalue-calculator.com to determine real value. We will lead you through various examples of types of assets and how to value them along with an introduction to our various calculation methods and provide you access to our free stock valuation calculator online. Our premium membership entitles you to more premium calculators and we even run the calculations for you through stock real value calculators.
We will run you through the various methods that have been used on our website. You will understand what is intrinsic value? The process behind calculating intrinsic value of stock via various methods is also explained highlighting the pros and cons of each. We will also teach you how to prepare intrinsic value of stock excel and intrinsic value formula excel and teach you how to use intrinsic value formula with example. Various methods like DCF, PEG Fair value, multiple fair value etc. will be taught.
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We will run you through the process of finding value stocks and calculating for stock value. Using our screeners, we can find stock value and create a watchlist for us which can then be used for investments
This is an interesting article. Markets are always forward looking and in this we shall be running you through elements used for estimating future value of stock. One can also build their own future value of stock calculator and future value of stock with dividends calculator or simply a future value calculator. We explain about estimating sales and flows for next year, listening to company earnings call, management calls, analyst calls and reading transcripts to determine estimates for future stock price formula.
The basics of fair value calculation begin with the simple price to earnings ratio or pe ratio. Our free calculator section has all the details that your require to understand pe ratio and how is pe ratio calculated? Will also provide earnings per share calculator with pe ratio, teach how to calculate pe ratio and finally explain how ratios can tell is a stock is overvalued or undervalued.
Here we will show you the entire process from selecting the universe of stock to shortlisting investment candidates. We will also show you how our premium membership provides an stock value estimator and can help you with investing online and at the same time make you a better investor.
In this we introduce you to the legacy of value investing with the graham formula, stock valuation formula, the intelligent investor formula and market value per share formula which we then look at from a modern perspective and determine how to apply them today.
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