Three Types Of Value That Can Be Found In The Market: Part Two
After investing in the stock market for more than a decade and having interviewed many great investors in Asia, I realised that most of the value that we can find in the stock market can be grouped into three main segments. They are:
1. Asset Value
2. Current Earnings Value
3. Growth Value
Previously, we looked at Asset Value. Now, let’s take a look at how we can find companies with “Current Earnings Value”.
It’s All About The Earnings
Companies that have current earnings value are generally mature companies with stable earnings. These companies are attractive to income investors. They can generate consistent profits year after year. They might be companies in boring industries like utilities, consumer staples or can even be real estate investment trusts.
The value of these companies are coming from their earning power and their dividends. Therefore, investors should not expect very high growth coming from them. Some common method of valuing these companies include using dividend yield, price-to-earnings ratio (P/E) and discounted cash flow method.
The Disadvantages
However, there are some disadvantages associated with this method. For example, investors would need to make some assumptions to predict what might be the normalised earnings for such companies. It would be more complicated if we are dealing with cyclical companies or companies that are facing a turnaround situation.
Foolish Summary
Most value that can be found in the market can be segmented into three main groups – asset value, current earnings value and growth value. Current earnings value can be found in companies with share prices trading below their earnings potential. However, there are some risks involved in this method as investors would need to make certain assumptions about the companies when valuing them.
