Value Investing (4)
February 28th, 2008 Ogbuotobo Chuks || chuks@stockmarketnigeria.com
By Ogbuotobo Chuks
Check out the brand
Market positioning of the corporate entity or quality of brand is another point to consider when scouting for value stocks. A growth stock can slip and lose its growth momentum but those having high quality brands are often poised for a comeback. The idea here is to ensure that if a growth stock falters, it is not a sign of a major brand failure or loss of market share. A stock that falls due to brand failure has little or no chance of coming back.
Growth stocks may shake and shiver but if they have solid brands, they are confident of their future. The value investor therefore looks for companies with superior brands but which have fallen in the equity market due to temporary setbacks. The strategy is to enter it before the market begins to see or expect the improving growth prospects again.
Test for capacity building
Another value investing criterion is to figure out whether a company is going through a normal business cycle or has undertaken a major investment programme that is yet to begin to contribute to profit. Because the stock market is usually short-term oriented in terms of return it tends to mark down a stock that is building long-term profit capacity.
Sometimes there may be companies that are prone to boom and burst cycles within or outside the domestic environment but whose businesses are not clearly understood by the market. The point is to identify companies whose distress is temporary and enter the stock before the market begins to see the end to their distress.
How strong is cash flow?
The last value investing strategy is to evaluate the cash flow potential of a company presently marked down in the stock market. Growth stocks usually consume all their cash to finance growth. But you are scouting for an unusual strength – companies that have robust net cash flows. That means companies that are resourceful enough to finance their growth internally and still have cash resources sufficient to cover 5 – 10 per cent of assets. Such a company is strong indeed.
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