The value of a company is different than the price. When investing, it is imperative that you know the difference.
Price is easy, just look the ticker symbol up and find the current price per share that is being traded on the stock market. The price of an option is also easy, just look up the price on an option chain.
Value is a different story.
Value investing is founded on the concept of buying stock in companies that have a solid history of earnings and sales growth. There should be little uncertainty about the value of a company’s operations or future performance in order to be considered a potentially sound value company.
Who is one of the greatest Value Investors today? Answer at the end of the blog
How do you find Value opportunities?
Research and gather financial data over 3-8 years for each company you are interested in. Do you understand this company and the industry it is in? Is the management team doing well? Are they buying or selling their shares of that company?
How can you find out what a company’s value is?
The following criteria are a starting place in determining a company’s worth
1. Sales Growth- are sales increasing or decreasing
2. Earnings per Share Growth – are EPS increasing or decreasing
3. Book Value Per Share – increasing or decreasing?
4. Free Cash Flow Growth – increasing or decreasing?
5. Return on Investment Capital- increasing or decreasing?
6. Long Term Debt – can it be paid off in 3 years?
Is the company’s stock on sale?
Once you have found a fundamentally sound company, look for a sale price where you will be comfortable purchasing. Is your stock undervalued? Value is determined by growth rates over a period of time. Once that is determined, look for an opportunity when the stock is on sale to purchase.
Options also have a value called Theoretical or Fair Value. Compare this with the current price of the option to see if it is overvalued or undervalued. When an option is undervalued, be a buyer. When an option is overvalued, consider being a seller.
Answer: Warren Buffet
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