Good Value Stocks – Some Thoughts on Buying Value Stocks

Phil “What are the good value stocks right now?”  I‘ve been asked this many times.  I have reviewed many newsletters wondering the same question. I have spent hours in front of the laptop researching only to find that something doesn’t add up. And, where I didn’t do the research extensively I have lost a lot of money.  I really hate losing money!

If you notice a basic graph of the Dow Jones Industrial Average you will see the trend is UP, yes there are dips and periods of uncertainty, but if you don’t panic. And, we all panic, You will eventually find most stocks increase in value. In this post, I’ll give you an example of such an event in my life. But before I discuss Value stocks. I just want to touch on a subject that keeps coming up. Why I don’t like giving stock buying advice and why you need to be careful and do your own due diligence.

Why one person cannot give advice to the masses

It is a question that cannot be answered simply, for many reasons. So be careful with newsletters. Use them wisely and do your own due diligence. Remember…

  • We all have different risk tolerances.
  • We all have a different amount of cash with which to invest and with which to speculate.
  • We are ruled by our emotions and that is, in fact, the worst of investing vices. You need to be logical and stick to your investing mantra. Don’t swap and change.
  • Our preferences are different… I like tech stocks, My friend likes medical stocks, another likes finance stocks, some use various company metrics and some like charts.
  • One also has to remember if you are going for a 100 bagger, it will not only come with high risk but will probably take you much, much longer than you thought. Also, it won’t happen with a typical value stock.

To help you on your road to riches I’ll share a few simple guidelines I use for value investing and feel free to leave a comment. I’m always willing to listen and learn.

In other posts, on more riskier tech stocks, I will list a few stocks that interest me. Some I am invested in and some I am not. I’ll also update you why I think some stocks are ripe for huge stock appreciation and some of the concerns I have with them.

I just want to say up front. I do not recommend any stocks and I am not a finance professional. I just offer you my thoughts that will hopefully help you decide what path to take on your own road to riches.

And, if you disagree with anything I write, leave me a post with your reasons. It is highly possible your research has picked up something I have not. Let’s have a chat.

Value Stocks – What do I look for?

So today I’m discussing value stocks. If I am looking at a company who has been around for a long time and in my mind undervalued then there is value there.  When I am looking for value,  my research tends to view what their product roadmap looks like and if it is exciting. I then dig a bit deeper to see if they are undervalued vs what I expect the company to come out with over the next few years. Some of the financial things I look at are…

  1. Do they have a dividend that is going up?
  2. Do they have positive free cash flow?
  3. Is the company trading at a premium to its net asset value otherwise known as it’s intrinsic value?

An Example – Intel Corp (INTC)

A few years ago I labeled Intel Corp (INTC) as a value stock. Wall Street did not like the company and to be honest they still don’t.  They had record results quarter after quarter and the stock did not move. Admittedly, Intel did have some issues internally. Wall Street was labeling it a PC company, but they were gradually moving away from that.

Even though they had made mistakes the management of the company was reasonably solid. They did miss the cell phone market which was a huge mistake and then failed to try to play catch up.

However, year after year they started to change from a PC company to a server and software company.  They even had over 10,000 software engineers at one point! A tenth of the company were software engineers. A big investment in the future.

Yes, they bought lots of companies only to sell at a later date, sometimes for less. But there was a change going on.  Changes do not happen overnight and slowly they have become an internet of things, software and server company. They are also moving steadily towards being an automotive company and it seems lately, to drop Apple. Apple is such a small percentage of the revenue that it will be lost in the noise. One could see no movement in the stock price for years.  Indeed nothing happened for a very long time.

They had lots of cash and a very generous yield. In short, it was indeed a reasonable value stock, if I remember correctly, trading around 12  times earnings, slightly below its competitors.

Making Money with Value Stocks Take Time

If you had bought where I indicated, yes, I know, you had to wait over a year for Wall Street to finally catch on. But since around October 2013, the stock has been advancing. It leveled off again until 2017 and then hit it 16-year highs. 16 years!

Remember all the time I was collecting a nice dividend. 3-4% mounts up, especially if you reinvest.

At the high $50s INTC is not a buy, but is a hold. Although I must admit I did sell some at just under $56. The reason for the current sell-off is that the CEO Brian Krzanich had to leave because of relationship with one of his staff years ago and it has only just come out. The board must have been fuming that he did not disclose this during the interview process. Also, we are currently seeing market fears that Trump’s tariffs will hurt the economy and in particular Intel’s business. I have a feeling these will subside, but to be practical, better to take some money off the table.

Take some Money off the Table. Let me Explain…

Why would I sell something I think may continue, because it is nice to book some profits and put some cash back into your account.  I am effectively playing with the free stock now.

Think about it.

BUY 100 stocks at $25.    Cost is $2500

SELL 50 stocks at $55. Return is $2750

Leaves me with 50 STOCKS and a spare $250 to go out and celebrate.

Remember, it means if INTC goes to zero I have still made $250!

I just takes time. Too much time one would say.

One would think if I put it in the bank it is safer.  Well, I’ll tell you a true story. One day after having 10K in the bank for 7 years, we got 1 cent interest. After 7 years!  I used to know nothing about money. I was an engineer and completely ignorant about money matters.  Many engineers are actually. But believe me, we did better than some who ended up getting less than they put into the bank, as the charges were more than the interest payments! They lost money!  So the stock market if you are sensible will always give you a higher rate of return in the long run.

My goal is to provide useful help to the ordinary chap. So they can learn from my mistakes and maybe even profit from them.

Value Stocks are a Useful Tool in Your Portfolio.

So Yes, stocks can be volatile and take 16 years to recover. But if you look at the right things, you increase your chances of success.

You can make money in the stock market. There are good value stocks out there.  Remember to make sure they have a reasonable dividend, so you get paid to wait. Make sure they have lots of cash and positive cash flow. And try to always buy when they are trading at below the company’s intrinsic value?

Don’t forget to take some money off the table when you get the chance. It feels really good.

I normally try to close within a year. And if I am investing in a value stock, I also play options to increase my return.  I’ll discuss options another time. I love options.

I hope you have found this useful.

Leave a comment and let me know your thoughts about value investing and if you know any good Value Stocks currently out there.

Phil

 

 

 

 

3 thoughts on “Good Value Stocks – Some Thoughts on Buying Value Stocks”

  1. Hi Phil,

    I currently work as an Engineer (As you did once upon a time) and have very little knowledge with regards to trading / investment. As such, I am looking to start / build a portfolio. Are ‘Value Stocks’ a good place to start, from what I gathered from above, you are essentially investing in a stable company that has a high chance of slowly increasing in value, or at least not decreasing (forgetting, internal secret love affairs of course).

    Thanks,

    Ciaran

    Reply
    • Yes, value stocks are probably the safe way to go. There are many options that I’ll go through in the weeks ahead. Also, I’ll be recommending some books which you should read to get a good understanding before you start putting money into stocks. Good luck.

      Reply

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