Value stocks are central to my portfolio. Clearly, I’m no Warren Buffett, but buying undervalued stocks gives my portfolio an excellent chance of outperforming the index.
We’re now in July, and that means earnings season is approaching. Companies tend to report their quarterly earnings a couple of weeks after the end of a quarter — end of December, March, June, and September.
So is now a good time to invest in value stocks — after all, the market is somewhat depressed — or should I be keeping my powder dry?
Being a value investor
Value investing involves finding stocks that trade at a discount versus their intrinsic or book value, and holding them until they’ve realised their potential.
This strategy has continually outperformed all major indexes since the Second World War — just look at Buffett’s success.
So how can I be a successful value investor? Well, here’s a few fundamentals.
- Focus on undervalued assets
- Conduct thorough fundamental analysis
- Search for companies with strong fundamentals
- Take a long position
- Emphasise margin of safety
- Employ a disciplined approach to buying and selling
- Stay patient and avoid emotional decision-making
Earnings season
There’s often increased volatility during earnings season. This is when companies inform the market about their performance over the past three months while providing additional guidance for the coming months.
This influx of fresh information can significantly sway investors’ perceptions of a stock’s financial health and future prospects. In turn, this leads to increased buying or selling activity. And if a company’s earnings report surprises investors, either positively or negatively, it can lead to significant price movements in the stock.
Ready to pounce
As a value investor, I’m looking to emphasise the long-term prospects of the company rather than getting caught up in short-term earnings volatility.
After all, some of my top long-term investments, such as Barclays, could well report a poor quarter in the context of rising defaults and a slowing economy. In theory, I shouldn’t let this impact my long-term position on the stock.
Moreover, as Buffett says “bad news is an investor’s best friend” as it allows us to buy more of the stocks we believe in at lower prices.
It could pay me to hold off buying any more stocks until the earnings season is underway. Sometimes the market can overreact to news — just look at what happened in March — and this can present interesting buying opportunities.
Research and preparation are key. It will pay me to conduct thorough research before earnings season begins, allowing me to identify companies of interest, analysing their expected performance, and their long-term prospects.
I’m doing my research on several value stocks including Anglo-Eastern Plantation, which is already cheap at 4.5 times earnings, and mining giant Rio Tinto. But now is the time to make that shortlist to ensure I’m ready to act if the opportunity arises.
