The Lemon Fool

There seems to be a bit of noise on the benefits of value investing but can someone help me as I can't work out what exactly a value stock is.

In short, what constitutes a value stock? What are the markers?

Any help appreciated

There are many ways.
Pyad advocated a simple system, and that's where his name came from.

P - a low PE ratio
Y - a high Yield
A - a high value of Assets compared to the share price *
D - low debt, ideally none

No doubt he will appear sooner or later to explain it in more detail, but that's the crux of it.

* Ideally a tangible book value lower than the share price.

The reason there is currently a tiny bit more noise for value investing is because the D part of the PYAD system is now the reason the majority of companies are currently failing, as previous years earnings and dividends have been 'supported' by the easy access to cheap debt.

Value investing is buying something for considerably less than its intrinsic value, as defined by some type of fundamental analysis. Popularised by Benjamin Graham.

You're basically looking for underpriced shares. An example would be a share trading on a PE ratio of 12 when everything else in the same sector trades at a PE of 18 or more. That's a share worth investigating and if there's nothing much to indicate why it is trading at such a discount it's probably a value share.

https://en.m.wikipedia.org/wiki/Value_investing

https://www.investopedia.com/terms/v/valueinvesting.asp

Value investing assumes that markets are not always efficient

I feel like dipping my ancient toes back to my roots (to mix metaphors) in the Value Game so I've just bought Harbour Energy (HBR), a FTSE250 oil co. It has most of the desirable value features I seek but not all.

At 320p the P/E is just over 3, the yield is a touch under 6% and the company predicts it will soon be debt free. So three good V points.

Two downsides are that it had negative net assets as at half year to 30 June 22, and a sumary of brokers' views range from Neutral to Buy. Ideally V should have a P/B above the share price and consensus bargepole broker opinion.

Anyway, I'm in with a very small punt, just a few gees. Annual results are due 09 March.

Almost all my capital these days is in my HYP so not like the old times. I won't be betting the farm any time soon.

Ooh. controversial subject!

In the end it doesn't really matter what the textbook definition is, because investing is just as much an art as a science. Buffett would tell you that it's a stock that is trading, below its intrinsic value - that is the trading below the value of all its future cashflows discounted to the present.

https://www.youtube.com/watch?v=Bxqre8vPYBo

A few key points to understand:

- Exercise (perhaps extreme) conservatism when estimating future cashflows
- The difference between the intrinsic value and the price you pay is your margin of safety
- Intrinsic value is not a set number - it changes depending on what discount rate you want to apply, your risk appetite, and the risk premium on offer

https://www.bogleheads.org/wiki/Stock_basics
‘ Stocks may also be classified by "style," either value, blend, or growth. Growth stocks are companies that are growing their profits at a very fast rate and are expected to continue to grow at an increasing rate. Value stocks are stocks that tend to trade at deep discount relative to their intrinsic value (as defined by profits, book value etc.). Common investor perceptions tend to perceive growth stocks as "high flying companies" and value stocks as "distressed companies."

Both growth and value stocks have taken turns leading and lagging one another during different markets and economic conditions. [note 1’

Value investing is clearly easier if the flow of information about individual companies is poor, more chance of finding an overlooked bargain. That’s clearly far more difficult in the modern era than when Ben Graham was investing.

The next opportunity for a bargain is when the consensus is wrong, that’s clearly possible for those who have superior judgement to make successful investments , the difficulty is ensuring your right about the consensus being wrong, rather than overlooking risks and concerns that are justified.

When these contrarian investments pay off for you, it raises the question of whether you were right or merely lucky…

I would take the view that buying an index of ‘value’ companies is less likely to be successful, the market opinion is well informed, largely professional investors and is more than likely right, the successful value investment is far more like to be picked by a good stock picker. ( that precludes most investors including me !)

HBR has fallen since my previous post and I've taken the opportunity to buy more at the lower price of about 289p because my original value case still stands, as far as I can establish. Average cost of my "back to the roots" value play is now around 300p (inc costs) but the total investment is still minuscule compared with the size of my HYP.

pyad wrote:HBR has fallen since my previous post and I've taken the opportunity to buy more at the lower price of about 289p because my original value case still stands, as far as I can establish. Average cost of my "back to the roots" value play is now around 300p (inc costs) but the total investment is still minuscule compared with the size of my HYP.

If you are PYAD, bloody hell, I thought you might be dead. Glad to see you alive and well. Harbour/HBR is an interesting one, I was invested at the 5/6% level and then chunt introduced a 75% tax rate for profits from UK operations. Harbour have been investing for years in the North Sea, and were perhaps rightly hoping for a return on their investment. I reduced after the new chancellor's incompetence shone through.

There is another one which I think is also almost entirely UK based, ENQuest which is suffering similarly SP wise and net income wise.

Sorcery wrote:There is another one which I think is also almost entirely UK based, ENQuest which is suffering similarly SP wise and net income wise.

Having had the dubious pleasure of dealings with Messrs. ENQuest in a previous existence I wouldn’t touch them with a barge pole.

floyd3592 wrote:

Sorcery wrote:There is another one which I think is also almost entirely UK based, ENQuest which is suffering similarly SP wise and net income wise.

Having had the dubious pleasure of dealings with Messrs. ENQuest in a previous existence I wouldn’t touch them with a barge pole.

Well can you tell me a little of the reasons why? I still hold some ENQ so you may well have a good reason to sell.

I previously started a value based (PYAD) thread on the Company analysis board which may be of interest. A trading update from Bellway to report today.

viewtopic.php?f=93&t=35287

csh