In a very basic form Value Investing can be explained as “Investing in stocks at a value which youconsider is currently undervalued or mispriced than its intrinsic value becauseof market inefficiencies and you have the patience for it to reach theintrinsic value or may even surpass that”. This strategy requiresdiligence, careful study of markets, understanding of directly or in-directlyaffecting factors and above all patience.
Value investing is a long-termstrategy and may not promise immediate rewards. Investors think of Value stocksas having limited downside but good upside potential and hence they invest. Therisks and return of investing in Value stocks is covered in Section 4.3.1Having said that it not a game of gamble. The speculations are backed byfinancial measures such as P/E ratio, P/S Ratio, FCF (Free Cash Flow). P/E(Price to Earnings) ratio shows how much the investors are willing to pay foreach dollar of earnings in a given stock. Using this we can compare the stock’scurrent P/E ratio with the industry wide ratio, historic ratio and deduceforecasting to an extent.
P/S (Price to Sales) ratio compares stock price toits total sales. A lower reading for both the ratios is generally consideredbetter. FCF is a good metric to follow with a value-stock candidate, becauseit’s what a company can use to increase dividends, buy back more stock, makeacquisitions, or pay down debt — all good things for investors.A good example of Value stock would be of Coca-Cola European Partners Plc . Currently trading at around$38. It has twelve months trialing P/E ratio of 19.
74 which is below theconsumer staples sector P/E ratio of 22.29. This indicated that the stock iscurrently undervalued right now compared to peer and a good entry point forinvestments. P/S ratio stands at about 1.
89 which is lower than S&P 500average of 2.79. This makes Coca-Cola European a good choice on value.