Investing in Philippines: Investing word of the day: Undervalued


Sunday, May 29, 2011

Investing word of the day: Undervalued

I have been talking about APF Trading's Expert Stock Screener and I pointed out the importance of undervalued stock. What does undervalued mean anyways?

I am reading RLC's Amended 17-Q(click here to view report) and I quote the following:

III. Financial Resources and Liquidity
Receivables went down by 40% due to collection of receivable from JGSHI. Subdivision Land and Condominium and Residential Units increased by 9% to P6.8 billion due to higher level of project completion. Accounts payable and accrued expenses increased by 4% mainly due to accrued interest payable on the P=15.0 billion loans. As of December 31, 2010, total assets of the Company stood at P54.3 billion while total equity amounted to P28.8 billion. RLC’s financial position remains solid, with a financial debt to equity ratio of 0.52:1 as of December 31, 2010 and 0.54:1 as of September 30, 2010 while cash stood at P7.6 billion and P5.5 billion as of December 31, 2010 and September 30, 2010, respectively. Earnings per share for the first three months amounted to P0.37 per share. Net book value excluding minority interest in consolidated subsidiary stood at P10.45 per share as of December 31, 2010 compared to P10.08 per share as of September 30, 2010.

I highlighted the last sentence to point out what undervalued means. If you see EPS or Earnings Per Share stands at P0.37 which brings Net Book Value to P10.45. Comparing Net Book Value to Market price which is at P12.40. The P2.00 difference is not that big but based on analysts consensus this stock should be valued P15.00

Now you see why RLC is seen by analysts as undervalued. It lies mostly on what we call perceived value

What is Perceived Value

Perceived value is the real value an investor sees on the stock. This means factoring future profitability on a stock. When we factor in future earnings of a company the book value per share of the stock increases. But according to law a company should not accumulate all its earnings unless it has specifically allotted such for project expansions, repayment of a debt, and others that would greatly benefit the company. 

The distribution of earnings which is called dividends is a way of sharing what the company earns to its investors. It is a return of investment. That is why you and me invest in a company because of the return of investment.

When a company has the capability to deliver steady returns investors and traders are interested on it and thus buy such stock. When a stock has price action meaning its price is moving up or down and demand for such rises as evidence by the volume of transactions it will soon go up based on the law of supply and demand.

When buying stock we buy when the stock's price is low or other put it us bottom price so that we can profit when it starts to go up.

That is what we call undervalued. A stock whose perceived value is above its current price. I know you have a lot of question and one of them would be how on earth will I know that a stock is undervalued?

Well I really don't have a exact answer for that, many use the P/E ratio to determine if a stock is undervalued, that is if P/E ratio is 10 and below it is undervalued but you can use my model comparing EPS, BV, and Market Price to determine if it is undervalued or overvalued. You can also use the tool  from APF Trading, Expert Stock Screener, which collates the various research of leading analyst.

It could be a lot of work but it pays. Once you get the whole idea and the psychology of investing you will soon do stock picking so simple that you don't have to spend a lot of time researching because your past experience has sharpen your mind. 

So for now ask and learn, then try in small portions, and when you are brave enough try it big time. But remember the rule: Invest at your own risk. Don't blame me, the debt crisis in Europe, the Arab conflict, the rising price of oil, the low rating of Pnoy, the rumor your neighbor heard from the tricycle driver in the intersection of your barangay and the barangay of the adjacent town and other excuses. 

It's your call. Get undervalued stocks, accumulate and cost average if you have to, and sell when stock prices reaches your target price. 

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