Robert Downey, Jr. was an up-and-coming actor in Hollywood. He began his acting journey with huge success. At age of nine, Robert was nominated an Academy Award for the 1992 film, Chaplin.
However, a dark past saw the promising star's career turned for the worse. Between 1996-2001 he was arrested on drug-related charges. His setbacks led to probation, jail time and court ordered drug rehabilitation.
Just when people thought that Robert was another name from the past, he returned to the A-list on a clean slate.
Since his comeback, he starred in many films that include the popular Iron Man series. Today, Robert is one of the highly paid actors in Hollywood.
So how is the return of the Iron Man superstar related to a value stock?
You see. According to Investopedia, value stock is one that trades at a lower price relative to its fundamentals (e.g. dividends, earnings and sales) and thus considered undervalued by a trader.
Such stocks have the potential to offer profits in long-term basis. Also, you can usually relate these low priced shares of strong but temporarily unpopular large companies.
Take McDonald’s as an example. This well-established stock was highlighted at around $40 per share during a economic crisis, and analysts felt that the stock was properly valued at $97 a share due to its projected 5% growth of corporate revenue and 9% growth of company earnings. When the economy recovered a year later, the stock reached this target price.
PROS & CONS
In order to make the most of this long-term investment approach, you need to understand the advantage and disadvantage first. Of course there’s plenty of advantage and disadvantage but the following list are the important ones to be shared.
Let’s get on with it.
Benefit #1: It’s not for the rich only.
Anyone can be successful regardless of your status or background. As long as you are ready to put in the hard work, time and patience, you have a big chance of doing well. This strategy is not for anyone who is looking to strike rich overnight. You need to sit through the short-term market fluctuations in order to benefit from long-term returns.
Benefit #2: Makes the money work for you.
When you rolled the profits made and dividends earned from the value stocks, your money will appreciate exponentially over sufficient time. That means the profits works for you while you’re free to do other stuffs.
Benefit #3: Less riskier.
Although you need to ride through the daily market price fluctuations, you are not required to monitor the stocks everyday as this investment approach is for longer time frame. This buy and hold strategy ensures that you avoid mistakes made due to poor emotional decisions, usually caused by the daily noise from the market driven news.
Drawback #1: You need to tame your emotions
As humans, we tend to make decisions emotionally, and this often spillover to our investments. To control the wild emotions, you must eliminate the emotions of fear and greed from your decision-making process, and base your actions on factual data, not gut feelings. This skill can be trained through educating yourself with mentors.
Drawback #2: Lots of hard work & patience
Besides assessing the financial statements of the company, the long wait to witness the fruits of your labour may sound arduous to many. Waiting for the stock price to rise is boring. Profiting from it can take months or even years. Many may see this as challenging as majority doesn’t have the patience.
TREASURE HUNT BEGINS
To look for value stocks, start with those that went down in prices due to poor earnings results and forecast or fell short of market expectations. These are the ones that are likely to make strong comebacks in future months.
Here’s how to use the free and user friendly stock screening web tool called FINVIZ.com to nail undervalued stocks with high chance of price recovery.
Phew. That’s handful.
To find out which stocks qualified under the criteria above, click here.
So this is what happens when I ran my screener in FINVIZ. The following list showed up in the results.
The following company is the result of the screen selection above.
Motorcar Parts of America (Ticker symbol: MPAA)
This company manufactures, remanufactures, and distributes aftermarket automotive parts. It offers rotating electrical products, such as alternators and starters; wheel hub assemblies and bearings; and brake master cylinders for import and domestic cars, light trucks, heavy duty, agricultural, and industrial applications. The company sells its products to automotive retail outlets; OES customers, professional installers, and automotive warehouse distributors; and automobile manufacturers for aftermarket programs and warranty replacement programs in North America. Motorcar Parts of America, Inc. was founded in 1968 and is headquartered in Torrance, California.
As you can see from the chart, the price of MPAA has dropped significantly. However, this stock with strong fundamentals is likely to climb up when the market return normal.
Value stocks are, by definition, out-of-favor with most investors and stock analysts. That’s why they’re so far below year-ago highs.
However, when the market recovers, it has the best chance to return with strong price recovery.
If you like the idea of putting your money into something of value that will continue to contribute to the economy, if you like the sound of not having to stare at complex charts or using complicated software every single minute, if you understand the POWER of compounding and you’d like to make 15% to 25% returns on your investments every single year, then owning value stock could be for your investing style.
ONE MORE THING
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