04-04-2012, 02:03 AM
Thought I'd just share an article I've read on Yahoo News today. Not sure if it's the right section to post this so moderators please shift this to the appropriate section if I'm wrong.
Quote:There are many investment strategies employed by experts in the stock market. They are based on different values, different time horizons and different risk profiles. There are three stock investment strategies that I use from time to time. They are strategies based on value, growth and income.
1. Value investing
Value investors usually concentrate on calculating the book values of assets such as cash, cash equivalents and fixed assets. The rationale is that the market is irrational and may misprice these stocks. During an economy downturn, cyclical stocks such as property, and oil & gas stocks can often be picked up at huge discounts to the valuations. The investors believe the stock price will ultimately move to more precisely reflect the value of these assets.
Other valuation techniques use relative valuation techniques such as Price-to-Earnings (P/E) and Price-to-Book-Value (P/BV) ratios. One would compare P/E and P/BV ratios against past trends of the stock itself and also within the industry to determine if the stock is undervalued. However, some stocks may take a long time to converge to its fair valuation. One would have to assess the potential capital gain against the opportunity loss from the holding period.
2. Growth investing
Growth investors focus on stocks which have high growth potential. Growth investors typically examine historical growth rates of revenue, EBITDA and earnings to predict the future trends. They also will identify catalysts with the potential to multiply earnings such as new products and new drugs. However, some of these stocks can be extremely speculative or even manipulated, depending merely on news and catalysts.
A lot of growth investors use Price Earnings Growth (PEG) ratios — which is calculated by (Price / Earnings) / (Annual EPS Growth rate) — to determine valuation for growth stocks. That is because the P/E ratio may be too high to justify an investment. Also, there are instances where the company may be making losses currently; hence the only way to value it is using forward P/E.
3. Income investing
Income investing in my opinion is the most important strategy. Income is generated from dividends and hence dividend yield and dividend growth are the key criteria. Dividend yield is also a way to determine value. When the dividend yield is high, the stock may be considered undervalued and the stock may be considered overvalued when the dividend yield is low. The track record of the historical dividend payments is also essential — make sure that the companies pay reliably and progressively raise dividends. The payout ratio and dividend cover ratio are also used to study the sustainability of the future dividends.
Which of these strategies do you use in your own investing? Share them with us in the comments below!
Calvin Yeo is the founder of the Making Passive Income blog.
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