Trading in Equity Markets requires thorough research and understanding of how equities work. Stock markets have their period of highs and lows. Many investors might take the decision based on the majority while some will do the groundwork and only then invest in a particular stock. Value investors are the type of investors who prefer buying stocks of a company which is traded at a value lesser than the intrinsic value of the company. These are the undervalued stocks. Value investing is a part of trading in equities.
Value stocks are the ones which offer you a certain margin of safety. This margin is based on the extent to which the market price of the stock is below its intrinsic value. These value stocks can be the ones which are not yet popular. The company of this stock might have a brilliant idea which can disrupt markets, a high cash flow, huge distribution networks, etc which might not be reflected in its stock price.
These 7 value investing principles of equity can help you choose the right stocks.
1.Companies Should Have a Low Debt Level
High debt can never help a company create value. Hence when you are looking out for companies for value stocks for investing in equities, you should look for the companies which have low debt ratio and equity base and a high interest coverage ratio.
2.Focus on Business Models
When you are looking out for companies with a good value stock, you should keenly look at the business model and also the market they cater to. The ideas or products can be market disruptive or might make a new market altogether. In such cases, you get the advantage of the first move and a big win in the long run.
3.Management of The Working Capital
The working capital of the company gives you an idea of the condition of the company. The current ratio can help you identify the real value of the stock.
4.Look for Stocks in A High Growth Zone
A value of a stock is only created when it gets into the high growth zone. This is the sign where you know the stock is changing for good as the market value increases and it becomes a premium stock. High growth means there is a high valuation in the PE ratio.
5.ROE and ROCE Should Be Above the Industry Mean
ROE measures your earning for equity shareholders and ROCE measures the earning for the capital. According to Warren Buffet, if ROE and ROCE are above 15% then the stock has the potential to be a value stock.
6.PEG Ratio: A Better Barometer for Value Stocks
You should look for companies with a good PEG ratio than a PE ratio. PE is static as compared to a PEG and hence PEG becomes a better parameter for consideration. You should choose companies with a low PEG ratio.
7.Check the Dividend Yields
If the company has a high dividend payout ratio, then this means that there are limited investment opportunities for the company. Here you should check the plow back and the ROE at which the plow back happens.
Value investing is something which you should look at as long term investment. Short term gains in value investments are hard to find. Equity trading requires patience and so does value investing.