Are You Screening for Undervalued Stocks the Wrong Way?
The biggest mistake that I see most value investors making is assuming that cheap stocks will always outperform the market. Often companies that look cheap on a price-to-earnings or price-to-book basis are fundamentally broken.
Many investors fall prey to value traps because they don't correctly asses the industry dynamics, management competency and competitive moat of potential investments. Especially if you're looking for companies in the small to midcap space, you need to be extremely careful about avoiding poorly run businesses, which the promoters are using as their personal cash machine.
A recent report in the Business Standard stated that there are probably more than 700 "vanishing companies" that are listed on Indian exchanges. "Vanishing companies" are those that have raised money through initial pubic offerings and then disappeared. The report goes on to say that "more than half the companies listed on either the BSE or NSE could be 'vanishing'".
Do you have a "vanishing company" in your portfolio? Don't blindly follow mechanical screens for cheap or undervalued stocks. If you buy into a value-trap you could do irreparable harm to your stock portfolio and wealth.
The bottom line is that some value stocks deserve to be cheap and will always remain cheap. The key to value investing success is identifying companies with competitive moats and paying a reasonable price for their shares.
The 5 Key Criteria that All Winning Value Stocks Have in Common
Countless subscribers to the Value Investing India Report, have e-mailed us to ask what is our "secret" to finding great investments.
The truth is that value investing is both an art and science. More than anything else it takes a lot of hard work studying and valuing thousands of companies to come up with a handful of winning investments.
However, there is a "secret" that we've identified after years of research and analysis.
The "secret" is to find stocks that have the following 5 characteristics:
- Produce copious amounts of free cash flow (FCF)
- Consistently reward shareholders through dividends or share buybacks
- Have "fortress" balance sheets
- Earn consistent profit margins
- Have a high return on equity (ROE)
If you don't have a consistent method for finding stocks with the characteristics listed above, your chances of success with value investing are basically zero. I know it sounds harsh, but that's the reality for most investors.
If you don't have a well defined investment process, there is a solution. What if you had access to an investment process that's been modified, honed and perfected for finding value stocks in the Indian market? Imagine how much easier you would sleep knowing that you were investing in stocks selected by a proven value investor, who only recommended stocks that met the 5 criteria listed above.
Introducing the Value Investing India Report
The Value Investing India Report is a stock recommendation service that helps value investors by identifying stocks that have the potential to be long-term compounders. You don’t have to know how to analyze a balance sheet or do a discounted cash flow analysis, to benefit from our service, because we do the detailed fundamental analysis for you.
Our service is focused on self-directed investors who are tired of the poor returns they’ve obtained via traditional PMS firms, brokerage houses and poorly performing financial newsletters. Finding good investment ideas is hard. If you’ve been scanning websites and blogs to find good investment ideas, you’ll know that most of the free recommendations you get are worth exactly what you pay for them, nothing.
Our goal for the Value Investing India Report portfolio is to be the best performing investment newsletter in the industry based on the returns you (the subscriber) receive. We simply don’t want you to outperform the market; we want you to decimate it.
Since inception the Value Investing India Report (VIIR) portfolio massively outperformed the Nifty. Our performance is proof, you can achieve market beating returns.
The Value Investing India Report Free Membership
By signing up for our free membership we’ll give you a great deal of insight on how we pick winning value stocks. We also periodically disclose some of our recommended stocks that only Premium Access subscribers receive on a monthly basis.
You’ll also learn the following:
Where to look for investment ideas
- How to use quantitative screens to consistently find great investment ideas.
- Why other investors can be a source of great investment ideas, if you know where to look.
How to think like a value investor.
- Why a long-term focus is the key to outperformance even in the short-run.
- Why a focused portfolio is the most effective way to achieve market beating returns.
- How to prevent permanent loss of capital.
- Why low turnover portfolios tend to outperform the market.
- The essential valuation variables that really count.
- The essential operating variables that really count.
- Why stocks trade at a discount.
- How staying the course can make you a better investor.
- Why ROE is not always the best measure of capital efficiency.