Value Investing with Fundamental Analysis

Value investing is basically an investment strategy that looks for underpriced and undervalued companies.  It is an analytical process that is a mix of market cap and business valuations.  It can be subjective, but there is a general thinking process that is usually the same for all investment decisions in this method.  In addition, it is ironic because value investing often has more growth than growth funds in general.

The value investment strategy begins with finding solid companies with a good business model.  In an ideal investing world, that is assumed.  But the reality is that it is not an assumed practice among stock investors and traders.  Most investors and traders start with the stock price and then work backwards.  This method starts with fundamentals and works forward.

So first, find a good company.  This should be stock market basics anyways.  Find one with strong financial statements.  Do the financial analysis and make sure they have a solid balance sheet and their revenue and profit margins are growing.  If you know how to do it, do a ratio analysis on some of the key figures and make sure they are in good standing and there are no red flags.

Second, learn about their business model.  What is their core business?  Who are their customers?  Is there a growing demand in your opinion?  Who are their competitors and do they have a competitive advantage that the competition will have a difficult time replicating?  If all of these questions have an affirmative answer, you may have a good company on your hands and a good investment.

At this point you want to do a business valuation of the company.  This is also the first step in finding out if this is an undervalued stock.  Do a business valuation and figure out how much you think this business with worth.  If they were to sell it, how much should it go for?

Then look at the stock price.  But not just the stock price, you want to see what the market cap is.  The market cap will tell you how the market is valuing the company.  If the market value is less than what you valued it for, than you have a winner.

Then your exit strategy is to sell it once it meets or exceeds your business valuations.  Of course, at that point you should redo your valuation.  In addition, make sure you don’t sell until you think it has reached a price ceiling, or resistance point.

If you were a large investor like Warren Buffett, I would tell you to divest slowly so you don’t create a crash.  But you are most likely a retail investor and it won’t matter if you sell all your shares at once.