How To Invest In a Value Stock: 3 Simple Steps
In this post we’ll talk about three easy simple steps that you can follow to invest in a value stock.
As well as the best value investing strategy and how it all starts with learning to identify fundamentally strong companies.
If you attempt to profit by buying stocks that have simply dropped in price, without first ensuring that they have the underlying ability to eventually recover, there is a good chance you’ll experience some financial loss instead.
In effective value investing formula dictates that we must first look for strong businesses buy when their stock is undervalued and sell when it rebounds or becomes overvalued.
Now let’s dive into each step so you can understand clearly what to do and how you can profit by investing in undervalued stocks.
Value companies are not named for their positive market values.
Since every company’s stock price fluctuates on a regular basis ,in conjunction with individual news events or occurrences within the market, as a whole a fundamentally strong business is known as a value company because it possesses actual inherent worth. In terms of its consistent earnings dividends and cash flows.
So you want to make sure you’ll only invest in companies with a consistent growth in earnings dividends and cash flows.
These companies usually have a sustainable competitive advantage over their rivals.
That keeps them in the game regardless of what their stock price may be doing from day to day.
And it’s this competitive edge that gives businesses a protective economic moat economic mode is something that helps a business remain financially competitive over the long term.
We’ll go into more detail about economic moats in the next module’s even if negative events can cause a fundamentally strong company stock price to dip.
And here’s an important thing.
If that company can maintain its ability to continue operations as usual it will rebound in time to a market price that is more in keeping with its true value.
I want you to note that investors tend to have emotionally short memories they won’t remember what happened with the company in the past and they only care about the present and the future.
So as long as a company continues to demonstrate a consistently growing net income, and cash flow, It could well be a good stock.
It’s very likely to not only eventually regain its former glory after a price drop but to become overvalued some day because investors start to recognize all over again what a great value it represents.
And when looking for fundamentally strong businesses some additional factors you should keep in mind are low debt, and the presence of a strong and responsive management team. Overall if a company has a history of performing well you can predict that it will continue to do so over the long term.
Once you’ve identified businesses that are fundamentally strong and that have a high intrinsic value.
Your next step is to add them to your watch list so you can buy them if and when they become undervalued.
Under normal circumstances stocks that are financially strong and that demonstrate promising future prospects are maybe too expensive to buy.
For this reason a fundamentally strong business doesn’t always represent a good investment because its
stock value will have little potential to increase.
If you buy it when it’s already trading at a price that’s more or less in line with the company’s intrinsic value.
So in short you need to learn how to find undervalued stocks so you don’t end up buying them at the wrong time.
But there’s good news.
A strong company can easily become temporarily undervalued for a number of reasons.
These include onetime events such as internal scandals or negative news reports that caused disillusionment.
But make sure that these events don’t cause the company to lose its competitive edge or its ability to go about its business as usual.
If you wait for such occurrences as a company failing to meet its projected earnings, a downturn in the economy, a significant change in a company’s business environment or similar types of bad news you’ll find many great opportunities to buy a great stock at a very low price.
These events will likely cause a stock price to drop.
And when this happens chances are it will become undervalued or cheaper to buy.
And as a value investor you simply buy low and then sell high to make a profit.
Now that you understand the best time to buy into a financially strong company is when its stock has become undervalued.
You also need to know when to sell that stock in order to make a profit.
Although we know that a high quality company can be temporarily affected by negative market news that causes its stock price to plunge.
We also know it’s very likely to recover over the long term and in the same way the bad news can cause a company stock price to drop.
Good news can have the opposite effect and cause its price to surge during this recovery period.
When a company publicly announces how well they did financially for the previous quarter that makes
investors feel excited and they want to invest their money in that company.
And when the demand increases the stock price simply goes up.
In either case whether business simply recovers its true value in time because of its intrinsic value or becomes suddenly overvalued as the result of some positive event like share buyback.
It will be the time to sell your stock and take your profit.
In the spirit of buying low and selling high.
So I want to pay close attention to these events because they can help the stock price go up very quickly.
And you’ll also have to be quick to sell your stock and take the profit share buybacks and stock splits are common events that can lead to an increase in a company stock price share buyback is a program by which a company buys back its own shares from the marketplace usually because management thinks the shares are undervalued and stock split happens when a company divides its existing shares into multiple shares to boost the liquidity of the shares.
So as a value investor we can take advantage of these golden opportunities to sell our stock at a temporarily high price and make a higher profit in the stock price tends to go up during a bull market or economic upturns and events like mergers and acquisitions can also lead to a significant movement in stocks.
A merger is when two companies merge together in acquisition is when one company buys out another company.
So you need to pay attention to these events especially the earnings announcement because it happens almost every quarter.
So will have at least four times a year to make big profits, in each quarter.