Core value investing involves buying the shares of companies with low stock valuations compared with similar companies or the market as a whole. These companies also often report below-market price-to-earnings ratios, operating results and liquidation values lower than typical S&P 500 companies. However, investors believe their core values are strong and stable, suggesting future stock price increases that can generate profits for you.
Companies that are ignored or discarded by stock market investors may have high intrinsic value. Identifying those organizations with strength and whose shares are selling at deep discounts in relation to their real value are the foundation of core value investing. Determining intrinsic value involves careful analysis of a company's balance sheet, not their income statement. Often, you will see lower-than-average price-to-book and price-to-earnings ratios. Core value investing philosophy has made investment icon and Berkshire Hathaway Chairman Warren Buffett one of the wealthiest people in the world.
Core value investing techniques are variations on the overly-simplistic investment advice, "buy low, sell high." While you still face risks, using core value investing methods often minimizes your risk of loss if you analyze target companies carefully. You might learn that organizations with good returns on equity, which indicate positive net income, and decent debt/equity ratios, which indicate a company's debt level as compared with its shareholder's equity, may still offer deep discounts on its stock price.
Core value investing does not involve simply looking for low-price stocks. Some companies consistently lose money -- possibly have never recorded a net profit -- or carry more debt than their competition, putting them at a cash flow disadvantage, which does not bode well for their future success. This is why analyzing an organization's balance sheet, a display of true strength, is vital to successful core value investing.
While high current or historic net income levels are not critical, profit margins are. Core value investing does not mean you disregard a company's income statement. It does mean you base your buy or sell decisions more on the strength of an organization's balance sheet than its income statement. At a minimum, you should investigate a corporation's profit margins, regardless of their revenue (sales) figures. Look for companies with strong profit margins as compared with their competition.
Products or Services
Core value investing also involves the analysis of a company's products or services. If they do not offer something different, their longer-term intrinsic value may be questionable. While offering unique products or services may be an unattainable goal, an organization should offer items or services that have substantial or measurable differences from the competition to attract customers and sales.