Due Diligence in Value Investing
© Casey Serin
When scouring the web for value investing ideas, utilizing various stock-screeners can be a good place to start. Screeners allow you to plug in a set of criteria and then filter the market for those stocks that match all the parameters you set. Screening will give you a list to start with, but it is up to the investor to follow up on each stock with due diligence to get the full picture.
As a value investor you are looking for stocks with deep value that have the potential to increase over time, not necessarily overnight. This usually requires more research, but the pay-off can be worth it. Given the longer-term horizon of value investing, some excellent screening criteria to begin your research with would be: 5 years of revenue and EPS growth historically and forecast into the future, low price to book under one, and long term debt to equity under one.
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Using Value Screening for Value Investing
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The stock market strategy of value investing involves a number of techniques that must be mastered in order to be successful.
The question has been posed, however, whether the technique of value screening is still useful for value investors. According to a study done by an investor with the pseudonym UK Value Investor, the technique of value screening still seems to work. The study was conducted with results for 2010. Past results nevertheless are no clear indication of future performance.
Some of the value screens that you can use include using the price to book ratio of stocks. It was found that on average, stocks with a lower price to book ratio tend to achieve better returns. Another useful value screen is the ROE10 which is the return on equity averaged over the last 10 years.
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Ethical Value Investing
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Value investing comes with a range of forms of investments. One of these includes Socially Responsible Investment (SRI). These investments are based on more ethical standards in a range of areas such as political, social, environmental and corporate governance. This simply means that you will be investing in companies and organisations that are ethical and therefore benefit the whole community. Many people believe that ethical investments are important but do not create enough profits. For individuals who are thinking of value investing, ethical investments can be profitable with the rights skills and techniques.
It is best to speak with an adviser who has extensive expertise in the area of ethical investments to give you tips and suggestions on how to approach value investing ethically.
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