Value investors does not buy any stock. Instead, we can say that value investors avoids most of the stocks of the market.
Value investors know well which stocks to invest in, and which should be better left alone.
If we observe the behaviour of value investors in last 100 years, a clear pattern can be drawn on their investment pattern.
Knowing which stocks to buy and which to avoid is key in value investing.
As I always say, to be successful in stock investment, important is to include winning stocks in ones investment portfolio.
In addition to inclusion of winning stocks, it is also essential to know how to avoid non-value stocks.
But how to know which stocks are non-value stocks?
Yes, this is the objective of this post.
It will give its readers a rough idea of identifying non-value stocks.
These non value stocks are those stocks where value investors never invests.
#1. Value investors avoid stocks which one cannot HOLD FOREVER
As a rule of thumb, value investors focus is to buy those stocks which they can hold on to ‘forever’.
This is one common understanding between all value investors.
Value investors will not only buy stock which are undervalued, but should also exhibit sufficient incentive that investor can hold on to them forever.
One such incentive is ‘regular dividend payments’.
Even if the stock is extremely undervalued, but if its not paying consistent dividends, its not so good for value investors.
Value investors love dividend paying stocks.
But on other hand they do not like some good stocks just because it doesn’t pay dividends consistently.
What value investors love is continuously appreciating dividend per share year after year.
#2. They avoid stocks which does not show APPRECIATING EPS
Value investors just do not stop after analysing EPS of one year.
They would rather like to see how EPS has performed in last 10 years.
A company which has does not guarantee consistent EPS growth in 3-5-10 years time frame are best avoided by value investors.
Fluctuating EPS is one thing which value investors don’t like at all.
#3. Value investors avoid stocks which is NEW IN MARKET
A company which has listed itself recently in stock market are rated low by value investors.
Even though these stocks pay dividends and exhibit EPS growth, but value investors would rather wait then investing in them too quickly.
Value investors let stocks first prove its worth. They let stocks mature in market first.
A stock which is yielding good dividends, and has reasonable EPS growth rate, but may still be avoided by value investors. Why?
#5. They avoid stocks which do not show COMPETITIVE MOAT
Value investors are very sensitive to a factor called competitive moat.
This is one factor that decides if the company will continue to better its dividends and EPS in times to come.
A company which faces stiff competition is most likely will compromise on its profit margins to up their sales.
This will ultimately reflect in the shareholders value (low dividend payout and low EPS growth0.
For value investors, companies which enjoys monopoly market will have enormous influence in their buying decision.
#6. They avoid stocks whose PRODUCT LINE IS UNKNOWN
Value investors are more defensive investors. They are not like flamboyant growth-investors.
Suppose, a company was launched today whose primary business is to sell aerated, flavoured water (like Coca Cola in year 1892) to its consumers.
Value investors would rather stay away from stocks of this company.
Value investors cannot imagine how an aerated, flavoured water can interest a consumers?
This is what value investors will suspect in first place.
But this is also true that value investors never shelve any stock forever.
They track the stocks, and let it build its own value.
When the same aerated drink manufacturer grows to become Coca Cola & Pepsi, then value investors will buy its stocks.
But first the stock must prove that they deserve to be included in value investors portfolio.
One such recent example is related to IBM stocks which Warren Buffett first bought only in year 2011.
#6. They avoid stocks whose products DO NOT APPEAL TO PUBLIC
Value investors are very sensitive to a fact that to whom the products are sold.
Value investors would like to buy stocks of companies whose products appeals to the mass, like:
- Cocal Cola,
- Craft Foods,
- Gillette etc.
Products which appeal to public will automatically sell in the market.
Companies which make such products does not have to reply too much on marketing to maintain its market share.
#7. They avoid stocks of companies which CARRY HIGH DEBT
Value investors are also very sensitive to a fact that how much debt a company is carrying.
If one looks into the balance sheet of companies which value investors prefer:
Very-low debt/equity ratio will be extremely evident.
If not zero, debt levels of value stocks are generally very low compared to industry standards.
Value investors love stocks of low-debt carrying companies.
#8. Value investors avoid stocks of companies with low PROFIT MARGINS
Companies carrying low debts, and fanatic consumer may still be avoided by value investors? Yes.
The reason can be low profit margins.
There are companies like:
- retail operators,
- telecom operators,
- airline operators etc
Though they have huge consumer base, but their profit margins are too low.
These are such stocks where value investors would like to avoid.
Value investors are conservative, defensive investors. But they are not lazy or stupid.
When they invest and buy/sell stocks, they do it with extreme caution and near perfect timing.
Value investors have an eyes of a hawk that will track its prey from miles above the sky.
They dive for the kill at the right moment.
Their calculations that supports their investment decisions are very sound and fundamentals.
Looking at the above discussed parameter you must have realised that value investors does not get influences by fancy numbers.
They are more drawn by companies which exhibit inherently strong business fundamentals.
Hi Mani, your articles are too good and easy to understand. Please keep up the good work.
Dear Mr. Mani,
I am investor in stocks since 1979 but never traded. I used to buy from savings and sold when I needed cash as was busy in my business. Now I have adopted shares trading as a hobby not business as I am 64 and relaxed. Was trying to find articles to help me further my study and found your pages. I have not studied in detailed as I am storing them to red later. I felt like thanking you. Take good care and be blessed
Thank you sir for your blessings. I hope you will enjoy reading the article.
Good research and analysis, I want to invest for capital appreciation for 6 months.
Thanks for posting your comment.
According to your superb analysis, which companies qualifies Warren Buffet style of investing in early 2019, as Indian market is in correction mood since September-October and is likely to remain range bound till general election in 2019. Kindly prepare a report on which shares are best to buy in all three caps, large, mid and small.