Assess Stocks Right: Revisiting The Principles of Value Investing

As a new stock investor, it’s important to identify stocks that promise profit in the long run. And this is where the concept of Value Investing comes in handy. Developed by finance adjunct Benjamin Graham in 1920, Value Investing has long guided young investors to find the right track. Value Investing advices investors to choose less appealing stocks, trading for low with a high intrinsic value. This allows investing at a discounted price, and when these stocks go higher, one can gain significant capital gain.

When the difference between the intrinsic value and the current stock price increases, the safety margin for investment opportunities also increases. This is a rewarding after-effect as not every value stock can turn businesses successfully. That’s why the safety margin is crucial in helping value investors minimize losses if they have already invested wrongly. Here’s revisiting seven key principles of Value Investing to assess stocks correctly.

1. Check the Quality Rating

Stock investment screening criteria can differ from one investor to another. So, don’t bother finding stocks from the best-performing companies. Instead, focus on the average ones. Check out a company’s S&P Earnings and Dividend Rating. A rating of “B” is a relatively safe choice. But, understand that a company can be far from making headlines. However, that has nothing to do with its quality rating. A rating of “B” or higher means they have a good reputation and can seamlessly deal with the rise and fall of stocks.

2. Financial Leverage Holds The Key

Always avoid investing in companies with a higher debt compared to current assets. Instead, companies with a low debt load are way more sustainable and won’t give in to their assets during troubled times. Value investing suggests working with companies with debt lower than 110% of net current assets.

3. Understanding the Company’s Liquidity

The ability of a company to pay is always denoted by its current ratio compared to the ratio of Current Assets to Liabilities. Value investing suggests investing in a company with assets of at least 1.50 times its current liabilities. Such a ratio establishes the company’s ability to deal with short-term liabilities.

4. Always Choose Companies With Positive Earning Growth

What’s the best way to determine companies with positive earnings per share growth? It’s easy! Get hold of earning reports of target companies over the past five years. Look out for those companies that have managed to increase their earnings yearly without any deficit. Such companies are a safe choice to invest in.

5. Consider Companies With A Safe Price-to-Earnings Ratio

It’s only common to undervalue company stocks selling for low prices compared to their EPS. However, that means there’s a good chance the value will increase. As a newbie, you must invest in those companies with a P/E Ratio (Price-to-Earnings Ratio) of 9.0 or less. Also, tally the P/E ratios of competitor companies before you take the final call.

6. Paying Attention To The Price-to-Book Ratio

Value investing strategy also suggests finding companies with a Price to Book (P/BV) ratio less than 1.20. That’s a good indicator of underlying value and holds a profitable cue to invest in stocks selling near or below the book value.

7. Dividends Are Important

How do you ensure you have chosen the right stock? The trick here is to consider only those companies that promise dividends generating passive income. Take 2021, for instance, when a volatile market confused many first-time investors. Many investors lost money over the wrong stocks. This was chiefly due to the hype created in the market and following other investors’ steps without running any due diligence.

Wrapping Up

Value investing is a near-profit strategy where you must gauge the risks independently. When followed religiously, these principles will help you invest right in low-risk stocks, promising great returns in the future. In other words, value investing principles will make you an informed investor to gain maximum leverage.