Finding value investments in stocks is never easy, but in an overheated market like the one we have today, it can be nearly impossible.
Fortunately, there are a number of strategies you can employ when searching for value in an overheated market. Many of these tactics are tried, true and proven. Utilizing them will enable you to make money even when everybody else is paying too much for stocks.
Some Effective Value Investing Strategies for an Overheated Market Include:
- Shop for those stocks that are out of favor with the market. In today’s environment, that includes brick and mortar retail, some financial stocks and automakers to name just a few. Value Line has a weekly list of top performing and worst performing sectors. Look for the best companies in the worst performing sectors. Another resource is Ycharts.com. Y-charts data indicates that there are some grossly undervalued stocks in today’s market including:
- Supermarket giant Kroger (NYSE: KR) reported $117.05 billion in revenue on April 30, 2017, yet you could pick up its shares for $22.23 on July 5, 2017.
- Ford Motor (NYSE: F) reported $153.23 billion in revenue and $39.99 billion in cash and short-term investments on March 31, 2017, yet its shares were trading for $11.32 on July 5, 2017.
- Bank of America (NYSE: BAC) shares were trading at $24.93 billion on July 5, 2017. Yet, the monster bank reported $18.74 billion in net income, $2.248 trillion in assets and $179.99 billion in cash and short-term investments on March 31, 2017.
- Look for cheap companies with a lot of cash. A good way to find cash-rich companies is to look at financial numbers such as cash and short-term investments, income, cash from financing and cash from operations. These can show you if a company is running a lot of cash throw the till and has a lot of float.
- Look for float. Float is large amounts of additional cash that some companies like insurers and tech companies accumulate. This appears in the financial report in the form of cash and short-term investments, cash from operations, cash from financing and free cash flow. Paying attention to those numbers can show you which companies are making a lot of money.
- Pay attention to the news. Look for good companies that are making bad news. News reports to watch for are falling sales, PR issues that cause overreactions to the news and overselling in the stocks. A good example here that most people are familiar with was the data breach that affected Target a few years ago. Stories about government action and management shakeups often cause unwarranted drops in stock prices. News events cause great companies to be priced lower than they should. As Warren Buffett said, Mr. Market is usually rational but at times becomes overly depressed or overly exuberant. When a news event affects a company, we need to determine if it’s a real issue to be concerned with or if it’s just an overreaction to news. If it’s an overreaction, that could be a buying opportunity.
- Look for good stocks that major investors are dropping. A company is not necessarily bad because a major player like Warren Buffett drops it. Walmart (NYSE: WMT) is still a very good company with growing revenues; even though Buffett sold most of his stake in it. Major investors often sell stocks because of strategies or prejudices that often have nothing to do with their actual value.
- The basic value investing criteria still apply. No matter how overheated the market gets, the fundamentals of value investing are still sound. A great way to learn or brush up on fundamental value investing criteria is to take a good value-investing course such as Wall Street Value.
It is possible to find great value investments in any market if you are willing to search for them. You should never let an overheated market scare you out of value investing.