- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
How to find value stocks in a bull market
Sometimes value opportunities do not jump out at you. Dig deep enough and you’ll find stocks to buy.
If you’re an investor that believes the market is overvalued, and you’re cashing out your investments until value reappears, consider this: unless you are buying an index fund, it actually doesn’t really matter whether we’re in a bull market or a bear market.
The stock market is made up of a vast universe of shares and within that universe there will always be some top stocks that are overvalued and some that are undervalued.
Sometimes value opportunities do not jump out at you. If you dig deep enough, and have a powerful tool like Skaffold to do the majority of the hard work for you, there are plenty of value opportunities to be found.
Before seeking value, you must first understand what constitutes a top stock. Top stocks display similar characteristics. At Skaffold, we believe top stocks display five essential qualities:
1. Impressive company management: they have a track record of delivering rising value for shareholders;
2. Strong return on equity (ROE): top stocks generate in excess of 20 per cent returns on their equity;
3. Low debt: companies with strong balance sheets (ie minimal debt) are generally considered lower risk;
4. Strong earnings per share (EPS) growth: earnings per share growth indicates the company is growing;
5. Positive forecast intrinsic value growth: businesses able to increase their value ultimately experience rising share prices.
Determine the best price to pay for top stocks
Once you’ve identified the very best stocks, you need to consider an appropriate price to purchase their shares.
Warren Buffett is often quoted as saying “I would rather buy a good business at a fair price, than a fair business at a good price.” Buffett’s advice is to focus on the fundamentals of the business first. Seek out businesses that are profitable (they generate return on equity in excess of at least 15 per cent), and have strong prospects for future growth
Skaffold estimates intrinsic valuations for every business listed on the Australia Securities Exchange (ASX), plus another 2,000 of the world’s largest listed businesses on exchanges spanning North America, Asia and Europe.
Safety Margin is the difference between a company’s intrinsic value and its share price. A positive safety margin indicates the share price is less than the value of the business and you can pick up shares for less than what the business is worth. A negative safety margin indicates the share price is higher than what the business is worth.
Buffett’s mentor, Benjamin Graham famously said that in the short run the stock market behaves like a voting machine, but over the long run it acts like a weighing machine. Market hype is not sustainable over the long term; share prices tend to converge with the intrinsic value of a business.
Find growth stocks
Finding growth stocks with Skaffold is easy. Skaffold estimates up to three years of intrinsic values for every listed business, then calculates the per annum growth rate, known as Forecast Change in IV.
Forecast Change in Intrinsic Value examines year-to-year changes in a company’s forecast intrinsic valuations. Companies forecast to grow display positive Forecast Change in IV growth rates.
Remove companies with excessive debt
The Net Debt / Equity ratio compares a company’s total debt to total shareholders’ equity. Companies with a significant amount of debt on their balance sheets are considered high risk.
Skaffold recommends removing companies with a Net Debt / Equity ratio greater than 70%.
Compare safety margin with future growth rates
Whilst a company may be trading a premium to its intrinsic value this year, if impressive growth is forecast, it may turn out to be a top stock so paying a little more today could secure your position in a future growth stock.
Remove high risk or unethical sectors
At this stage some investors may choose to remove companies operating in particular sectors due to ethical reasons.
Once you’re created your shortlist of top stocks, its time to evaluate each in further detail.
Top stocks checklist
Using our essential qualities of top stocks checklist as a guide, here’s how you can evaluate a company in Skaffold.
1. Good management
The A1 – C5 Skaffold Score is a proxy for good management. The only way a company can attain and maintain a good Skaffold Score is if it is well run.
Whilst evaluating management can be quite subjective, the Skaffold Score provides a more objective framework. You can’t argue with results!
Here’s an example of a company that has achieved Skaffold’s highest A1 or A2 Score for 8 of the past ten years. Management of this company are doing a great job, and have the track record to prove it!
2. Strong return on equity (ROE)
Return on equity is ultimately the return that management are generating on the funds that you, the shareholders, have provided them with. Look for businesses that are able to consistently generate a high level of return on their equity (in excess of 15 per cent) - the blue line.
3. Low debt
Debt can be used in a business to leverage up return on equity. In a low interest rate environment, it may well be advantageous to utilise some debt to fund a company’s operations.
On the flip side, debt (red columns) introduces a greater level of risk to the business. If profitability falls, the interest payments still have to be met. Interest rates could rise, increasing the burden on the business and the volatility of bottom line earnings. Also, in a liquidity crunch, companies may struggle to refinance their debt when it comes due which can put them in very difficult situations.
4. Earnings per share growth
Skaffold sources forecast earnings per share figures for more than 500 ASX-listed companies and thousands of global stocks. These estimates, including the number of analysts contributing forecasts and the range of their estimates, are presented on a company’s Earnings and Dividends Evaluate screen.
Remember, forecasts are never certain. Analyst’s estimates are determined based on the facts available at the time. If a major change happens, such as the government changing the ground rules, then earnings per share estimates and intrinsic valuations will also change.
Also remember that the further out you are forecasting the greater the level of uncertainty as to those returns being realised. Also note if a small number of analysts are covering the stock and if the range of the bullish and bearish estimates is tight, or quite varied.
5. Positive forecast intrinsic value growth
Ideally you want to invest in top stocks that are able to grow their intrinsic value. In the long run, if the value of a business is rising then the wealth of its owners will also be rising.
Whilst prices can dislocate from value for extended periods, in the long run they will usually revert.
Compare your top stocks side-by-side
Skaffold’s Compare feature allows you to evaluate 6 stocks side-by-side. Comparing businesses against each other allows you to narrow down your list to just a handful of the best stocks to buy.
With Skaffold you can compare stocks by balance sheet quality, business performance, return on equity, dividend yield, price to earnings ratio, earnings per share growth, cash flow ratio, net debt / equity, cash interest cover, property plant and equipment / total assets, combined ratio, return on assets, net interest margin, cost to income ratio or bad debts.
Find top value stocks with Skaffold
The market can, and does, move very quickly. Opportunities do not always linger for that long. That’s where Skaffold can give you a strategic advantage. Even when opportunities are few and far between, there will usually be something of interest, but if you haven’t got a stock research tool that sifts out all the noise, finding new opportunities may be very difficult.
Some of you may be thinking, “That’s fine for you market tragics, but I would rather spend my time sailing a boat or playing golf”.
As with any achievement in life, there will always be some time commitment involved. With Skaffold you can drastically cut down your research time. And with the addition of new features, such as custom alerts, new opportunities are delivered to your inbox as they appear.
Skaffold makes it easy to find opportunities, especially when the market as a whole may be looking overvalued.
With Skaffold, identifying opportunities and monitoring the stocks in your portfolio is simple, and even fun!