Below steps can guide you to identify fundamentally strong companies.
If you attempt to profit by buying stocks that have dropped in price without first ensuring that they have the underlying ability to recover. There’s a good chance you’ll experience some financial loss. Instead, the value investing formula dictates that we must first look for strong businesses to buy when their stock is undervalued and sell when it rebounds or becomes overvalued.
Let’s dive into each step to clearly understand what to do and how you can profit by investing in undervalued stocks.
- Value companies are not named for their positive Market values since every Company stock price fluctuates regularly in conjunction with individual news, events, or occurrences within the market. A fundamentally strong business is known as a value company since it has genuine natural worth as far as its consistent earnings, dividends, and cash flows. So you want to make sure you’ll only invest in such companies.
- These companies usually have a sustainable competitive advantage over their Rivals that keeps them in the game. Regardless of what their stock price may be doing from Day, and it’s this Competitive Edge. It gives businesses a protective economic moat. Economic Moat helps businesses remain financially competitive over the long term.
- Even if few negative events cause a fundamentally strong company’s stock price to dip, it will rebound in time to a market price that is more in keeping with its true value, provided the company maintains its ability to continue operations, as usual.
- Investors tend to have emotionally short memories. They won’t remember what happened with the company in the past but only care about the present and future. So as long as the company continues to demonstrate a consistently growing net income and cash flow. It’s very likely, not only to regain its former glory eventually after a price drop but also to become overvalued someday because investors start to recognize it all over again. What a great value it represents and we’re looking for fundamentally strong businesses with some additional factors.
- You should keep in mind low debt in the presence of a robust and responsive management team overall. If a company has a history of performing well and you predicted it will continue to do so over the long term. Once you’ve identified businesses that are fundamentally strong and that have a high intrinsic value, you must add them to your watchlist, so you can buy them if and when they become undervalued in the future.
When to buy?
Under normal circumstances, stocks that are financially strong and demonstrate promising prospects are maybe too expensive to buy. For this reason, a fundamentally strong business doesn’t always represent a good investment because its stock value will have little potential to increase if you buy it when it’s already trading at a price that’s more or less in line with the company’s intrinsic value.
In short, you need to learn how to find undervalued stocks so that you don’t end up buying them at the wrong time, but there’s good news a strong company can become temporarily undervalued for several reasons. These can include one-time events such as internal scandals or negative news reports that cause disillusionment but make sure that these events don’t cause the company to lose its Competitive Edge or its ability to go about its business as usual. If you wait for such occurrences as a company failing to meet its projected earnings, a downturn in the economy, a significant change in a company’s business environment, or similar types of bad news. You’ll find many great opportunities to buy a good stock at a very lower price. These events will likely cause the stock price to drop. When this happens, chances are it will become undervalued or cheaper to buy. AS a value investor, you buy low and then sell high to make a profit.
When to sell?
Now that you know the best time to buy into a financially strong company is when its stock has become undervalued. You also need to know when to sell that stock to make a profit. We know a high-quality company can be temporarily affected by negative market news that causes its stock price to plunge. We also know it’s very likely to recover over the long term. If the bad news can cause a company’s stock price to drop, in the same way, the good news can have the opposite effect and cause a price to surge during this recovery period. When a company publicly announces how well they did financially for the previous quarter, Investors feel excited, and they want to invest their money in that company. When the demand increases, the stock price goes up in either case whether a business employee recovers its true value in time because of its intrinsic value or becomes suddenly overvalued cause of some positive event, like share buyback. It will be time to sell your stock and take your profit in the spirit of buying low and selling high. So you need to pay close attention to these events because they can help the stock price go up very quickly, and you’ll also have to be quick to sell your stock and take the profit from share Buybacks and stock splits or common events that can lead to an increase in a company’s stock price.
Share buyback and stock splits
A share buyback is a program by which a company buys back its shares from the marketplace. When a company divides its existing shares into multiple shares to boost the liquidity of the shares, it’s called the stock split. So, as a value investor, we can take advantage of these golden opportunities to sell our stock at a temporarily high price and make a higher profit. The stock price tends to go up during a bull market or economic upturns. And events like mergers and acquisitions can also lead to a significant movement in stocks. A Merger is when two companies merge, and an Acquisition is when one company buys out another company. So you need to pay attention to these events, especially the earnings announcement because it happens almost every quarter so we’ll have at least Four times a year to make big profits.