The debate between value and growth stocks is never-ending. Some investors are looking for growth stocks, while others want value stocks in their portfolios. Our focus today is on the value stocks, and perhaps we will pick growth stocks in some other article.
We will help you pick value stocks using Peter Cundill’s principles. He is one of the best stock market advisor in India. Before we get into his principles, let us understand value stocks. So, there is no confusion, and you know what you are getting into.
What are value stocks?
Value stocks are shares of companies that are considered undervalued relative to their intrinsic worth or fundamental value. Investors who follow a value investing strategy seek stocks that are trading at a price below their intrinsic value, often determined through fundamental analysis. The goal is to identify opportunities where the market has unduly discounted the stock, providing the potential for future capital appreciation as the market corrects its valuation. Here are the key characteristics of value stocks:
- Low Price-to-Earnings (P/E) Ratio
- Strong Fundamentals
- Dividend Payments
- Attractive Book Value
- Margin of Safety
Peter Cundill’s Principles to Pick Value Stocks
Peter Cundill is a successful Canadian value investor. He has developed a set of principles for picking value stocks. We will look at his principles, which reflect his investment philosophy and approach to finding undervalued opportunities in the stock market. Benjamin Graham, the father of value investing, influenced Cundill’s investment style.
Below are his six principles for picking value stocks:
Financial Strength: Cundill emphasized the importance of financial strength in a company. He looked for companies with solid balance sheets, low debt levels, and strong cash flows. A financially strong company is better equipped to weather economic downturns and financial challenges. Cundill favored companies with low debt, as excessive debt can pose a risk to a company’s financial health. He believed that a strong balance sheet provided a margin of safety. For example, if a company has a debt-to-equity ratio of 0.5, it means that for every rupee of equity, the company has 50 paise in debt.
Earnings and Dividend Yield: Cundill focused on companies with consistent earnings and dividend histories. He sought businesses that generated reliable profits over time. The dividend yield was an important metric for Cundill, as it reflected a tangible return for investors. Let us look at the financials of a hypothetical company to understand the rationale. Company A has details below:
- P/E Ratio: 10
- Earnings Growth: Consistent growth over the past five years.
- Dividend Yield: 4%
- Dividend Growth: Annual dividend increases for the past decade.
Company A has a relatively low P/E ratio, consistent earnings growth, and a healthy dividend yield with a history of increases. These factors might make it attractive to a value investor.
Book Value and Asset Values: Cundill paid attention to a company’s book value and the value of its underlying assets. He looked for situations where the market price was significantly below the intrinsic value of the company’s assets. It is in line with the value investing principle of buying stocks at a discount to their intrinsic value.
Here is an example from the Indian market. After the COVID crash in March 2020, recovery started in the second half of the year. Most stocks recovered from the shock and were trading over their book value. However, a large-cap company was still trading below its book value—L&T. The book value was around Rs 1400 per share and was trading at Rs 900 for nearly a month. As a value investor, you need to look at such an opportunity. Sooner rather than later, the stock price will go above its book value.
Market Sentiment and Investor Psychology: Cundill was aware of the influence of market sentiment and investor psychology on stock prices. He looked for opportunities where market sentiment was overly pessimistic, leading to undervaluation. His contrarian approach involved going against the prevailing market sentiment when it presented investment opportunities. Do you need an example for better understanding? Think of a sector presently that no one is talking about in India. Let us help you – information technology. Therefore, you may find some investment opportunities in this sector.
Margin of Safety: Benjamin Graham popularized the concept of a margin of safety, which was a key principle for Cundill. He sought to buy stocks at a significant discount to their intrinsic value, providing a margin of safety in case of unforeseen events or market downturns. The margin of safety refers to the difference between the intrinsic value of a stock and its market price. This principle is about minimizing the risk of permanent capital loss.
Management Quality and Alignment with Shareholders: Cundill placed importance on the quality of a company’s management. He preferred companies with capable and shareholder-friendly management teams. Additionally, he looked for situations where the interests of the company’s management were aligned with those of the shareholders. Management could demonstrate this alignment through ownership of shares. One should look for companies with considerable promoters’ stakes.
Before you go,
You would have guessed by now that finding a value stock is not that straightforward. There are too many parameters to consider. We live in a time when the best share market advisor in India can be AI-driven. Since these are AI-driven, they can be accessible to every investor. Have you checked Jarvis- Investment powered by AI? If not, go and check it out, and whether you want to trade stocks or invest in them, the solution is just a few taps away.