Mark Laudi, CEO of InvestorCentral gave an insight presentation about value investing during the ATIC on 18th - 19th April 2009. He has a 5 points checklist in selecting which stock is worth value investing and these 5 criteria should be a good guidance for those who is interested in value investing but has no clue of how and where to start from. The 5 criteria are :-
1. Book Value
Each stock has it own book value; the value of the company's asset. In value investing, one would like to purchase the stock when its share price is traded at a discount to its book value. By doing so, the investor will have a lower risk as compared with buying above its book value. Book value of the company can be found in their financial sheets easily. Baring from the company is not fundamentally strong situation, a purchase into a fundamentally strong company like DBS, UOB, SingTel, etc at a below book value price is not something that could be missed.
2. Yield
Yield in term of dividend the company is paying to shareholders. Comparing one putting money into bank earning interest from Fixed Deposit (FD), the interest return in best situation one can get at the moment is probably 1% yield. At that yield, it is rather impossible to offset the inflation hence investing in stock with a dividend yield that is higher than bank interest rate and able to offset inflation would be good for long term investing.
3. Cashflow
Cashfow is an essential component of a company's health. With a strong cashflow, the company will have the monies in hand to help them ride over difficult periods like the current global financial crisis. Normally cashflow information could be extracted from the balance sheet of the company. One can take the difference between net operating profit and expenses as the free cashflow a company has.
4. Managment
How well a company perform and hence turn shareholders investment into profit lies on the shoulder of the company CEO and his/her managment team. They are the one who make decision and direction for the company. This criteria is also one of the most difficult to decide on. Good corporate governer is definitely a must have as it provide transparency to the shareholders. There is a Governance & Transparency Index ( GTI ) recently launched which could be found in Business Times and the Corporate Governance & Financial Reporting Centre. This should give investor a guide of the company ranking in the index. In order to know the managment better, investors are strongly advisable to attend the company's AGM and speak to the managment team.
5. Outlook
In US, the company will announce its outlook for the remaining of the year after reporting its quarterly earnings. This is importance to investors as by doing so, the company is committed to shareholders of the company's performance and serve as a guidance for the company's profit level. Such outlook could be quoted in term of revenue earn or profit earn or earning per share earn. In Singapore, companies do not have this habit from their respective CEO to announce future outlook and this could really hinder investors in filtering off what is a good company with good management team among the rest.
As a rule of thumb, if the stock of a company one wanted to invest in could have a tick for all the 5 criteria, this could potentially reduce a lot of investment risk and able to separate what is a good and what is a bad stock.
