One of the most popular forms of investing is value hunting where money managers find undervalued stocks that possess hidden potential. Everyone can learn to identify such opportunities through investment courses which will cover all aspects of famous investing techniques that have been used by the famous investors like Ben Graham and Warren Buffet.
Depressed stocks are undervalued stocks that trade at a lower price compared to their fundamentals like sales or earnings. Dividends, P/E ratios, and out-of-favor sectors are great starting points to locate depressed stocks and are all described in this article below.
Price to Earnings Ratio
The P/E or price to earnings ratio is one of the most common tools used to identify whether a stock is underpriced or overpriced. A low P/E ratio indicates undervalued investment opportunities that could be caused by the external forces (artificially bringing the stock price down). The value of a stock can be determined by comparing it with the industry average or historical averages of the stock market index.
If any stock pays out high dividends, it is a good sign that a company has been undervalued. High dividends mean that the company has generated enough profit to justify a higher stock price but the stock price is being depressed due to some other reasons. Companies with a history of paying steady dividends is a good indicator and can signal great strength for value investing in Singapore.
The business cycle falls and rises with the economy and various stock sectors are subjected to the whimsy of such movements. For instance, cyclical stocks are extremely sensitive to the sector rotation and will lose value when they are out of favor. Companies like “Ford” are considered cyclical because their profits are directly tied to the performance of the economy as well as the disposable income of potential customers. The out of favor stocks offer investors an opportunity to buy low if they have enough time to wait for the stocks to rotate back into popularity.
Falling victim to value traps is one of the biggest challenges when searching for depressed stocks. High dividends and low P/E ratios could be caused by legitimate business reasons that have nothing to do with the stock being undervalued. Although value investors stay alert to the signs of value investment opportunities, they are also advised to conduct due diligence before investing their hard earned money.