Today a guest post by Howie Bick from The Analyst Handbook
Has Value Investing Changed?
Value Investing is an investment strategy that searches and looks for companies or investments that are mispriced relative to the market. Value Investors look to purchase securities or investments, at below market value, with the hope that the company or investment will capture the potential upside at a later date.
Value Investing at its core, is based on a company’s price, and a company’s business. Analyzing a company from a value point of view, takes a long-term approach, to forecast or predict the type of return a company will generate, based on its risk profile. A lot of what value investing has to do with, is understanding a company’s current earnings, the sentiment it has in the market, and the type of future cash flows a company might receive in the future.
Determining those metrics, and then discounting the future cash flows at an appropriate discount rate, will show you the price or value a company is worth today. Comparing it to its current stock price, and the price it trades for on the market, is how you see whether a company is underpriced or overpriced.
In recent times, a lot of people who consider themselves value investors, or are looking for value stocks, tend to look for companies that offer high amounts of yield, or large amounts of dividends. They like to judge companies based on the amount of yield they offer and determine their value relative to other companies’ dividends.
A lot of companies who have strong and sustainable business models do have stable cash flows, and higher dividend yields. But it’s important to note, that just because a company has those two elements, does not make it a value stock.
In the times we’re in, and the market we’re in, it’s worth taking a look at what value means, and whether some of the so-called value stocks, with high dividend yields, should be considered value investments.
Many of the companies who prided themselves on high dividend ratios are going to be forced to figure out tricky predicaments. Depending on the type of business models they have, the type of income they’ve generated, and the way the business has held up, will determine what the types of income they’ll be able to distribute.
Some might decide to look at value investing from a different perspective after all this. Seeing how this storm has affected companies and businesses, some might try to make the argument that your capital is more protected, and there’s more value to be had in better performing companies. Prioritizing a company’s business model, it’s senior management, and the type of business it has, rather than the price of the share. Thinking that the investment has more value to it, because it performed better than many of the companies who prided themselves as value companies.
The fundamental concepts behind value investing, and value investing itself, have not changed. Even though some value companies might not have performed as well as others right now, the fundamentals of value investing remain the same. Value Investing is all about seeing underpriced or mispriced assets relative to its price and capitalizing it. Trying to find underlying investments that still have room to grow and develop from the current price point it’s at. Even though, some value companies might take a hit, and see more of a decline than other companies, the principles of value investing remain unchanged.
Bio: Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. The Analyst Handbook also has a blog. Prior to founding The Analyst Handbook, Howie was a financial analyst.