On this simplistic measure, the average fall over for the cheapest 10 stocks over the past 12 months has been -45% for the high yielders and -12.5% for the low PE stocks.īuying stocks because they offer 'good value' is simply a strategy one would only employ if they wished to reduce a capital gains tax bill! I've run a screen on the cheapest stocks in the market (on a prospective PE basis and dividend yield) and their respective 1 year performance. So in its essence, it can often mean that "the crap has floated to the top". So the value end of the market is reflecting all the negative current sentiment. Think of it as the discount or ‘sin bin’ end of the market.Īs a wise friend and mentor many years ago once told me, "Good stocks aren't cheap and cheap stocks aren't good".Įfficient market hypothesis (EMH) states that stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. Looking for value invariably focuses the spotlight on the discounted stocks in the share-market the oversold the ignored the disliked, distrusted and disappointed sectors of the market. Unfortunately this type of analysis, albeit fundamentally correct in many cases, is fraught with danger. It is easy to find any investor with a financial data source and rudimentary excel skills has the capacity to sort the universe looking for 'value criteria': a low PE (ignoring the negatives) a high dividend yield and perhaps, if they're feeling a little creative an attractive EV/EBITDA ratio or a discounted Price/NTA ratio. What I will try to convey are a number of clear, logical and achievable processes, ideas and practices that will assist in discovering and profiting from small cap opportunities in the Australian market.Ĭoming briefly back to traditional 'value'.
I don't think readers specifically want to find ‘value’, they simply want to invest in stocks that will deliver a significant positive overall return over time (capital growth and income, but mostly capital growth) with minimal to moderate risk. When I select stocks in the small cap space (ex ASX200) I do not focus on value as I find 'value’ to be one of the most confused, overused, misleading and irrelevant factors with respect to share-market opportunities. It is certainly an easy (and lazy) argument for stockbrokers to recommend a company. One reason regularly quoted to buy a certain stock is because it offers ‘good value’. (Article by Dean Fergie, Director & Portfolio Manager at Cyan Investment Management, first published Equity October 2017)