13 January 2013

How to Find an Under Value Company?

While I am still learning how to find an under value stock in the stock market, I understand from Real Estate Investment is that, we can find under value real estate from Auction Market. While there are more undervalue properties in this auction market? The reasons could be due to following:

  1. The sellers cannot afford to continue to pay for the mortgage loan installment. Hence they have no choice but to allow banks to auction their real estates:
    1. Hike up of the Interest Rate. It happened during year 1997-1998
    2. Economic Crisis. It happened in US during year 2007-2008 and in Europe on year 2011-2012. 
    3. The sellers are too optimistic on real estate market and they over leverage to buy and created a bubble in real estate market until the bubble bursts.
But before that, we as a buyers / investors must know the market value of the assets before we can determine whether this asset is undervalue or over value. In stock market, we as a fundamental analysis followers should find out the intrinsic value of the counters. But how do we go for that? In real estate market, we can go through banks to get the bank valuation of the properties. In stock market, we can utilize on the various valuation methods such as Discounted Cash Flow Model, PE Ratio Comparison, Dividend Yield Comparison etc to find out the undervalue stocks. In long term investment, it is still ok if we can buy a counter with reasonable price and hold it for long period as it could surpass its peers in term of revenue and income in long run. 

Discounted Cash Flow:  A company that can generate net operating cash flow after deducted necessary cash flow is a good company. But when we cannot find a good company from this model, we can go for PE + ROE + Dividend Yield model. 

PE + Dividend Yield + ROE Model: I would think a Low PE + High Dividend Yield + High ROE Model is a good valuation model we should look for. When experience grows, you may add in more fundamental indicator for you to search for good counters in long run. Most importantly, you must find a good counter and buy it in cheap price and hold it for long term before it reaches its intrinsic value or you could find another good counter that is in deep discount rate. 

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