Spotting undervalued stocks is a skill that many asset managers will pay a star portfolio manager a lot of money. As a result, many of the top stock pickers tend to work for a major asset manager. Yet it is possible to work for yourself and invest in undervalued stocks a la Benjamin Graham.
Spotting undervalued stocks is a skill that many asset managers will pay a star portfolio manager a lot of money. As a result, many of the top stock pickers tend to work for a major asset manager. Yet it is possible to work for yourself and invest in undervalued stocks a la Benjamin Graham. One of his foremost disciples, who is today a revered investor, has never worked for any length of time in a major asset manager. Indeed, he is not based in a major financial centre but in the backwater which is Omaha Nebraska..! If this god, sorry, disciple can do it, why can't you?
Takeaways
What is an undervalued stock
Know what to look for
Why fundamentals are important
OANDA (www.oanda.com) boasts of a high level of trust and reliability, as evidenced by its impressive Trust Score of 93 out of 99. While OANDA is not a publicly traded company nor does it operate as a bank, it is subject to regulation by seven Tier-1 regulators, signifying a highly trusted status. Additionally, it is supervised by one Tier-4 regulator, which means that users should utilize a cautious approach to risk management. eToro.com is a reputable trading platform, famous in the social trading industry. In 2018, the brand decided to conquer the US market and launched the local brand there. First, the company functioned solely as a crypto trading broker. Yet, later it added other items to its list of tradeable assets. Therefore, now it offers stocks and ETF trading as well. With a history dating back to 2007, eToro has amassed a large user base across more than 140 countries. When cryptocurrency emerged, the brand used a unique chance to enter the American market. One of its key features is CopyTrader, the social trading tool and a proprietary product of the project. It allows novices to repeat trades from top traders with just a few clicks. Thus, the tool offers a fresh approach to this asset class. This guide aims to provide a comprehensive eToro review to help traders make informed decisions. eToro offers trading services across many regions worldwide including the USA A standalone copy-trading ecosystem, providing equities, foreign exchange, commodities and cryptocurrencies markets. Provides a global selection of brokerages.
Best Award Winning Brokers
Show Search Filters
OANDA Corporation is regulated by the CFTC/NFA. OANDA is a member Firm of the NFA (Member ID: 0325821). CFDs are not available to residents in the United States.
They are stocks whose intrinsic value is higher than their valuation. In other words, they are unloved stocks. This can be for a variety of reasons, company specific problems, creative accounting, geopolitical risk, sector risk or that the market has misunderstood the investment case and therefore the opportunity.
As an individual investor you have the freedom to invest your stock portfolio as you please, and are not bound by internal firm conflicts which invariably damage the investment process. This means price discovery is possible for you.
This freedom allows you to invest in companies that may be unpopular, (Tobaccos and arms) or out of fashion (Oil companies). Although not expressly a rule, investing where others shun their noses is often the most rewarding. This is a well trodden path for a contrarian investor.
It pays to be a contrarian.
What is the point in paying for overvalued stocks which have already fulfilled their (upward) potential and will likely be punished (sell off) severely if they fail to meet their financial projections?
There are many individual investors who buy and sell stocks based on tips and emotions. This hare like approach rarely leads to long-term success. Buy and hold investors often outperform day traders.
Tortoise like operators who perform fundamental analysis on different companies, and start to build up a knowledge of a company, such as its strengths and weaknesses are the ones who will prevail.
As the aforementioned disciple of Benjamin Graham, Warren Buffet famously bought into American Express which had just suffered a grievous blow.
It has been victim of a fraud (a major weakness) but had a stellar brand (a huge strength) to leverage if it took the right long-term action. This meant reimbursing victims of the fraud. This painful but long-term thinking ensured it kept its stellar brand and Warren Buffet was able to profit handsomely.
Critically he fought to stop those trying to make a quick buck whose choice of action was short-termism (by refusing to reimburse victims) and would have destroyed the brand. Sometimes a profit warning can be a positive!
Another famous and dominant US brand is Mcdonald's, the eponymous fast food chain. In the film The Founder, which is a documentary film on the birth of Mcdonald's, the lead character sees one opportunity, without realising the bigger, more rewarding opportunity.
This is where the tortoise like hard work comes in.
The more you understand about business, the more you understand the upside risk in front of you. Having been initially attracted by the fast food nature of Mcdonald's service, 'the founder' realises that there is more money to be made by being a real estate magnet.
Of course, investing means a lot of 'noise'. This is where different commentators, hedge fund managers and investment banks will give you their opinion on a stock. At the heart of it though is mathematics. How much profit does the company behind the stock make? In particular how much cash? Always treat an income statement with a heavy dose of cynicism but learn to love the cashflow statement. If the company is generating free cash flow of £200m but has current liabilities of £400m, is this company in such a good financial position? Indeed what is the margin of this company's key product?
If the margin is in double digit % then it can withstand some competition by lowering price (if it chooses to compete on price). If its margin is 2 or 3% and its costs increase, will there be any (profitable) margin left?
Giving yourself a margin of safety is also sensible. As a (simplified) rule, a company with no debts, strong cashflow and good margin is always worth a look. On the downside, it may well be expensively priced! You will only know by looking at the financials and then looking at the share price and its P/E ratio to see if it is undervalued.
Different people will have different views as to what undervalued stocks look like. Some undervalued stocks are nothing more than value traps. They are cheap, undervalued and will never get any better… i.e. traps! Do not waste your money or time on them.
At the core of identifying undervalued stocks is a great deal of work researching every part of the company. Once you feel you can predict (to some extent) how a company reacts or handles particular issues, then you have gained a good knowledge. This will come in handy when that stocks sells off and allow you to identify with confidence any undervalued stocks!
You May Also Like…
