What exactly does value mean to you? Individuals will boast that they “got a good deal” or “it was a steal” if they were able to purchase the same good or service for a lower price as compared to another location or vendor.
This will never happen on Wall Street, and in the odd event it did, this is referred to as an arbitrage opportunity. Unfortunately, you can’t buy Apple for $87 on the BATS Exchange.
Value also comes in another form: buying a substitute product or service that has the same or even better functions and qualities as a competing product or service, but can be purchased at a lower price.
While difficult to find, these opportunities can be uncovered. As I’ve written before, if these didn’t exist, your favorite hedge fund managers, including the original, sweet Grandpa Warren (extra sarcasm; see Kraft Heinz layoffs) wouldn’t be famous for beating market.
Buyer beware: Merely purchasing something for a lower price does not define value. Nor does it mean transacting for something that is attractive on its surface and promises so much, but at its foundation is broken and/or useless.
Whether your a sophisticated investor, lightening quick trader, or a newbie to the game, you’re aware of the dichotomy growth vs. value stocks.I don’t believe in this categorization; companies that have minimal or negative growth are not valuable.
Value needs growth. If current product demand is slowing, a lack of innovation persists, or the industry is unprofitable, those are legitimate reasons why these stocks have lower multiples and prices.
My view is that you have Obvious Growth (traditional growth) vs. Uncovered and Underappreciated Growth (i.e., real value) stocks. A true value stock sells at lower EV/EBITDA or P/E multiple, but has higher revenue and/or profit growth as compared to its competitors.
Or, despite similar industry sales, a company has a lower debt/equity ratio, better ROI or ROC, etc. Also, the company may sell a product or service that market participants do not fully understand.
I dedicate around 20% of my portfolio to these. Price targets are set ahead of time and I take gains once the target is hit. I will sell if the value proposition has changed. Because patience is required, 2-3 purchases creates a full position, but I cut my losses after being down 8%-10%.
These are not easy companies to find. There are millions of intelligent people and even smarter computers who search for these opportunities. You must do your research, learn the industry and the top players, and have a basis as to why the growth is unrecognized.
In my next Analyst Report, I will pitch you on what I believe is the most undervalued stock in the market (extra cliff hanger teaser). For now, I encourage you to share what you believe is a strong value play and the thesis that supports your conviction.
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