The STRIDE Blog

New Year's Resolution: Find Undervalued Stocks

stride-new-years-undervalued-stocks-featured.jpegThe New Year has come and gone, and 2017 is racing forward. After the ups and downs of last year's market fragility, investors can only be wondering what the market outlook for 2017 is. Well, I've done some digging...

At a quick glance, this year is looking mild... low growth, but no pitfalls seemingly underway either. With Brexit, the US elections, and all the other turns of 2016 in the past, the immediate future is looking like it may be a year to claim back some stability. 

What is the UK and EU Market Outlook for 2017?

  • Low growth, but no pitfalls. Value is to be found, but you may have to dig deep to find it. Developed markets keep to modest growth forecasts, but they're held steady by sound economic fundamentals (which is seemingly offsetting the current weaknesses in the U.K.).
  • U.K. inflation might overshoot after the Pound's losses (post-Brexit). Yet, inflation in the EU looks like it may slowly stabilise and return to target levels.
  • Vintage Value Investing reported that "The medium-term outlook for global equities is in the 5-7% range (we’ve seen over the past several years that low economic growth doesn’t have to mean poor equity returns)." I think that's quite a modest viewpoint though, and that there may be some more fun to be had.

By the end of last year, the market moved away from its overly pessimistic outlook to an overly optimistic expectation of growth. But, market sentiment is not often accurate, and while both of these feelings have grounds in reality - both of them may have been a bit extreme.

Global growth should stabilise, not stagnate. Tightening labor markets should place modest upward pressure on otherwise low inflation. But further monetary stimulus (like negative interest rates) will prove unproductive in spurring growth. - Vintage Value Investing

This means that, in 2017 more than ever, investors need to be looking for value investments that they can hold for long-term growth, and not quick wins.

How to Find and Screen Undervalued Stocks in 2017

Screen stocks like a pro

Screening stocks is a blend of art and science, because you first need to identify which kind of stocks you're after before finding them. To know this, you'll have to understand the type of investor you are, and know what your long-term goals are. Yet, once you've got this in the clear, it's still a process of fundamental analysis and holistic company valuation.

1. Fundamental Analysis

The most important financial ratios to value a stock with are:

  • Price to Earnings ratio: Calculated by dividing a stock's share price over its earnings per share.
  • Price to Book ratio: Calculated by dividing a stock’s share price over its net assets (assets less intangible items).
  • Debt Equity ratio: Calculated by dividing the total liabilities of a company over the shareholders’ equity.
  • Price to Free Cash Flow ratio: Calculated by dividing the marketing capitalisation value of a company over its total free cash flow.
  • Price to Earnings to Growth (PEG) ratio: Calculated by dividing the price to earnings ratio by the earning’s growth rate.
  • The Enterprise Multiple (EV/EBITDA) ratio: Calculated by dividing the enterprise value of a company by its EBITDA (Earnings before interest, taxes, depreciation, and amortization).

2. Company Valuation

Valuating a company requires you to take into account more than only the fundamentals. You need to understand what you might be buying into, and to do that, you need to have a holistic view of the value of the company. That means dissecting both its physical value and its intellectual value, analysing its relationship between revenue and profit, and discovering what its comparable value is like.

The primary determiner of comparable value is investigating what competitors have been sold for. You can usually quite easily find this information (generally it's in the public domain). Yet, you could also leverage the market that competitors have captured against the company in question’s value. Ask yourself, "Will these competitors raise or drop value for this company?".

If you're looking for a bit more education around screening stocks, then the best bet would probably be to test out a stock screening platform to help you along the way. Most platforms have these ratios and valuations built into them, so that you can see which stocks are right for your 2017 portfolio at just a quick glance.

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Topics: Valuation

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