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"Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The overreaction offers an opportunity to profit by buying stocks at discounted prices" by Adam Hayes

 

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Value criteria 1: Low debt = Low bankruptcy risk

Debt to equity ratio: D/E <1, 1.5 for railroad and 2 for utilities

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Value criteria 2: High liquidity

Current ratio and quick ratio are over 1, better look for company with 1.5~2.5

 

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Value criteria 3: Long-term prospects

 

Persistent products

a good valuation is asking yourself, “do I see myself using the products in the next 10 years OR will the world need the products from the company in the next decade?”

 

Barriers to entry the market (regulation, high cost etc.)

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Sustainable advantages

Technology/product that is hard to be copied, high switching cost, the low-cost structure like Walmart etc.

 

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Value criteria 4: Stability 

Low volatility earnings (ROE >15%, be cautious when it is over 25%)

 

Consistent dividend payout record

screen out companies that don’t have an over 10 years unbroken dividend record. A dividend record provides investors a notion about whether a company is sustainable in long term. 

Also, while waiting for the stock to grow, receiving dividends is comforting.  

 

Consistent growth in BV

although we don’t want high growth stocks, we would still like companies that have stable growth. 

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Value criteria 5: Proper managerial incentives

The management of the company care about shareholders. Are they working on the behalf of sharehoders? 

No lawsuits related to the management team and board of directors

 

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Value criteria 6: Comprehension

 

Understandable business model: Can you understand how the business earns profit? What are the factors that impact the future profitability? 

 

Analyst coverage: how many coverages for the company? Are there enough coverage for the company? Larger companies require a greater financial coverage. 

 

Value criteria 7: Buy at attractive prices 

 

P/E < 15

P/BV < 1.5

Margin of safety: 50% margin of safety (buying for 2/3 of its fair price) – Warren Buffett

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* A stock does not necessarily need to fulfill every single criterion. 

 

Keep in mind: if it doesn’t not match, investigate and see why 

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Source from “The Intelligent Investors” by Ben Graham

and Value Investment course in Western University by William Huggins 

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