June 13, 2019 | Bhawana Neupane

“Know what you own, and know why you own it.” – Peter Lynch

There are various techniques of investing that you can adopt to gain profit on your stock investment. One of the popular techniques adopted by the investing greats like Warren Buffet and Peter Lynch is value investing.

In a simple sense, value investing is nothing but a technique to pick stocks that you believe the market has undervalued. In doing so, you estimate the value of the stock and make investment decision accordingly. This value is known as the intrinsic value of the stock. To determine the intrinsic value of the stock, you can use fundamental as well as technical analysis.

Basically, value investors pick stocks that have strong fundamentals and growth opportunities. So, you can start by preparing a list of good companies. Some of the features of a good company are consistent growth in revenue and profit, good cash flow, competent management team, operational efficiency, strong brand image, and good dividend yields.

After this, what you need to know is either the company’s stock is overvalued or undervalued. You can use financial ratios like P/E ratio, price to book value ratio, dividend yields, etc. This will help you to decide if the company is worth a buy at the given market price. Low P/E ratio, below average price to book ratio, high dividend yields, etc. supports value investing. Also, you must see the company’s future potential and growth opportunities. This is because it assures good returns in the coming days.

Value investors are long term oriented. The short term rise or fall in stock price do not affect the investment decision of value investor. They look at a big picture and make wise investment decisions.

Let me clarify value investing by an example below.

Chilime Hydropower reported a decline in its net profit by more than 17 percent in this third quarter. This was mainly due to an increase in its tax provision. Investors responded negatively to this news. As a result, the share price of Chilime fell by more than 8 percent in a day. Now if you think from the perspective of a value investor, you might be willing to buy the shares of the company at a bargain price. Chilime has shown good fundamentals over the years and the future also looks bright. Company shareholders have consistently received good dividends.

Likewise, the company has promising power projects like Madhya Bhotekoshi, Rasuwagadhi and Sanjen Jalaviduyt which are expected to complete within 2020. So, the revenue generated from these projects will definitely push the profit of the company. Also, the goodwill of the company in the hydro sector has always been a plus point.

We will discuss more on value investing in the next part.


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