Archive for the ‘Financial Analysis’ tag
How to find undervalued companies?
Look for comapnies selling at a discount. Bear markets offer opportunities to buy strong franchises at inexpensive valuations. Hence, to identify a company, following points must be kept in mind.
- Strong financial position – low debt to equity relative to the sector, strong liquidity
- A strong brand name, franchise or industry position
- Low valuation multiples (relative to the sector and/or history keeping in mind long-term profitability potential)
- Ideally depressed margins or earnings though very few companies match this criteria given the peak earnings/margins situation we are in.
Additional Reading
A buying formula
The theory of reflexivity was first mooted by philosopher Karl Popper and then adapted by his famous chela George Soros. Reflexivity suggests that trends (social, cultural, religious or economic) are often amplified by feedback loops that make them stronger and more prolonged.
In particular, financial trends start from rational causes but are often prolonged to a point where prices swing far into the irrational. In the context of a market, a feedback loop can be understood simply as the price-amplification that occurs whenever profits are reinvested. A trader profits, reinvests those profits and makes more profits. Others bring in new funding in hope of emulation.
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