The article below outlines a way for investors to identify Value Stocks. It was written by renowned investment commentatot Elio D'Amato and published in the AFR on 27th Jun'23.
It identifies a lot of factors for investors to consider.
D'Amato lists IGL as the fourth best prospect on the ASX for a strong uptick in performance and perhaps a SP upward thrust.
The concept of “trending value” is one where investors attempt to buy bargain stocks the moment the price starts to turn the corner. Elio D'AmatoContributor
Jun 27, 2023 – 3.00pm
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Buying stocks low and selling them high is a primal pursuit for investors. The reality for many trying to find deep value stocks is that it requires work, a keen interest in financial accounting and immense internal fortitude to maintain unwavering conviction, irrespective of how volatile price is.
Without getting into too much detail on how to identify deep value, the underlying premise is to buy into stocks trading at discounts to their intrinsic underlying value. These will be stocks often ignored by the market because they are either too small or have had/are having operational issues.
Long-term investors could find value in bank stocks. Simon Letch
Value investors try to identify the price/value disconnect. As price often moves between over-enthusiasm and over-pessimism, the value investor knows the true value is somewhere in between. So, a stock viewed over-pessimistically, through the passage of time and business improvement, will eventually revert to a fair (intrinsic) value.
There are obvious risks when trying to identify value. The first, and most obvious, is that the stock may be cheap for a reason. Is it burning cash and on the cusp of going broke or is it at the top of its cycle (like coal stocks at the end of 2022)? Perhaps it is too small or tightly held for any institution to take a position.
Often in value investing, if something is too good to be true, it probably is. This is why value investors need to do significant research to avoid dreaded “value traps.”
Despite the effort required, value investing is keenly explored by many investors because if executed correctly, the gains can be large. The best evidence of this is often found at the end of any given year where often the best performing stocks started the year on low valuations due to weak sentiment or indifferent performances in the years prior.
Earnings upgrade at half year due to strong start.
3
Bluescope Steel
99
9,700
0.5
Improved H2 outlook.
4
Fleetwood
97
188
0.4
Modular housing a possible solution to housing crisis.
5
IGL
98
342
0.4
Last year bought out competitor that went broke.
6
K&S Corporation
97
341
0.4
Tight registry and profit upgrade.
7
Magontec
97
35
0.2
Profitability improvement and director buying.
8
Perenti
100
854
0.3
Restructure and operation refocus in 2019.
9
Sims
95
3,000
0.3
Reduction in capex and strategic review.
10
TPC Consolidated
99
51
0.4
On market buyback and stock tightly held.
11
Viva Energy
94
4,600
0.2
Growth in refinery margins due to limited global capacity.
12
Viva Leisure
93
116
0.9
Director buying and buyback.
13
Westar Industrial
99
26
0.1
Record work in progress and revenue/profit growth
* Ranked by change from 52-week high, as at Jun 26, 2023
Source: Stockopedia
For those investors who don’t have the time, inclination or patience to put in the research, there is an alternative. The concept of “trending value” is one where investors attempt to buy bargain stocks the moment the price starts to turn the corner. They do this by combining the “factors” of “value” with “momentum” so they can find stocks that are cheap and trending.
Normally, these two factors are poles apart, however when combined they can be used to find cheap stocks, that the market has started to cotton on to. This contrasts with value-only investors who must expend a lot of energy and emotion to find something before everyone else.
A nice analogy for adopting a trending value strategy is like surfers trying to catch a wave. They could choose to go to a beach where there are no other surfers, but equally no chance of catching a wave. Or frequenting a more popular beach where waves are plentiful, as are the number of surfers. While they may have to compete with others, going out far enough and being patient means they can be one of the first to catch the magic wave when it appears.
If value investing means cheap stocks revert to fair value in time and if momentum investing believes positive trends lead to more positive trends, then it makes sense that finding cheap stocks that are moving in the right direction can mitigate many of the risks in deep value investing.
Trending value investors also need to see a catalyst for the re-rate in the business. This will add further conviction in the stock and reduce some risk in picking a value play. Catalysts to look for include earnings improvements, stocks at the bottom of their current business cycle, directors buying on the cheap or a change in business strategy.
The accompanying table is a sample selection of stocks that we feel reflect the principles of trending value in that they possess a strong value/momentum (VM) ranking. As always, further analysis needs to be conducted to see if they suit the needs, liquidity and risk objectives of a specific investor.
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