Why value investing is not the ‘be all and end all’

Assessing a company’s intrinsic value is important, but it’s just one financial measure.

In this article, Lincoln Indicators discusses:

  • What is value investing
  • When is the right time to apply a value strategy
  • How company’s financial quality is always the best measure of potential long term value.


Value investing

Value investing is a methodology that attempts to make money over the long term by identifying stocks that are cheap and exit once they are expensive. A value investor will argue that if there is no value in the price, then why invest in it? Therefore the current share price and how it is positioned to its intrinsic value is a key determinant of when to buy and sell a stock.

Share Price Value is Stock Doctor’s Golden Rule 4. Identifying fundamentally superior companies trading at a discount to their true value generally maximises an investor’s capital growth potential. Stock Doctor calculates a Lincoln Valuation for all our Star Stocks to help value investors identify the bargains amongst a pool of the most fundamentally sound investment on the opportunities on the exchange.

Commonly used techniques analysts apply to determine value include, but are not limited to Discounted Cash Flow (DCF) analysis, Price Earnings (PE) Ratios, Price Earnings Growth ratio (PEG), Cash flow per share, Price to Net Tangible Asset (NTA) value, EV/EBITDA and many more.

No matter which method you apply, the end objective is the same. Find a stock that is trading below is true worth and snap them up at a bargain.

When is the right time to apply value?

Value investors believe in the idea of ‘being greedy when others are fearful and fearful when others are greedy’ because they understand that the best time to be a value investor is during times of extreme volatility for the market, often to the downside. This is because when sentiment plays havoc with share prices, real deep value often appears. For this reason the value investor is often patient and will not make rash decisions simply because price is going up.

Just like in 2009 as the GFC played out around our ears. Irrational fear and panic gripped investors, however the Value investor took the irrational selling in their stride, stood up against the heard and made outstanding returns when eventually we felt comfortable the investing world was not about to end.

In order to master the art of Value investing a strong will and control of their investment psychology is required. From Stock Doctor’s perspective, should broad market corrections cause stocks to correct, by identifying Star Growth Stocks and Borderline Star Growth stocks who are trading at a deep discount to their valuation is a good way to maximise potential value.

But it is not the be all and end all

There will be times however, when a company’s share price trades at a premium to its intrinsic value, particularly Star Stocks, due to its strong corporate history, stability of earnings and/or its future growth prospects with the market attributing a value to management’s ability to keep the earnings momentum going. Be prepared to pay a premium for entry into a quality stock. If you are confident that earnings momentum can continue then you may choose to purchase or to keep a full or a reduced holding in the stock even though it is overvalued.

Now, there’s no denying that the best investors in the world do rely on stock value calculations as part of their overall investment decisions. Yet, a company’s assessed intrinsic value needs to be incorporated within a full assessment of the company’s Financial Health, Management Assessment, its Outlook/Forecast, and other elements such as Share Price Sentiment, Liquidity and Size, the company’s Principal Activities, and taking into account Price Sensitive Announcements.

It’s only after a full quality assessment has been undertaken that true value can be determined.

Quality must come first

It is important to note that value investing can be a very risky strategy, especially without the right stock research. Though a stock may be cheap it can stay there, or worse still, it can get cheaper. Particularly if the fundamentals are poor. Investors who make their decisions on a value at-all-cost recommendation alone will invariably have missed better market opportunities.

All that said and done, there is a role for valuations within a well-structured plan for those investors who are seeking long-term capital appreciation by identifying value plays. Paying a fair price for a quality business is what value investing should be about. And in instances where price is trading at a premium to valuation it may not necessarily be a sell based on the reason why you bought the stock in the first place.

Within Stock Doctor you can assess the value of any stock you are interested in through:

  • Lincoln’s intrinsic valuations for all covered companies.
  • Consensus price targets available for over 600 companies.
  • Identify Star Stocks to find the best quality value plays
  • Our advanced stock filter system so you can find all stocks on the ASX that are trading at a discount.
  • Other valuation methods such as P/E, PEG, EV/EBITDA, cash flow per share, NTA, and price to sales are available within the Stock Doctor platform.

Our team is always here to help answer your value questions. If you would like to discuss value investing in more detail or would like more information on Stock Doctor or our Managed Investment Solutions, please contact us on 1300 676 333.

Tim Lincoln
Managing Director