Share Price Analysis
There are many ways to categorize investors and their strategy, so in order to determine what appears most appropriate for your personal market goals and personality it helps to start out this section with a brief description of the five most commonly used. Knowing what you are seeking in your investment portfolio allows the investor to make better sense of evaluation processes he deems appropriate.
Value Investing. An investor should set a goal to know the difference between price and value of a stock. A value investor looks for stocks whose price is much lower than the actual intrinsic value of the company. All investors want to buy a stock that is worth more than what they paid, but this term applies to those who typically focus only on the liquidation value of the company and relate it to the number of shares outstanding. Because intrinsic value isn’t precisely limited to the idea of liquidation value, the value investing label can be confusing.
Growth Investing. This investment style stems from the idea of buying stock only in companies exhibiting excellent sales and earnings potential. Growth investors review the finances of a company to determine the potential of remaining in business as a “going concern” for a long period of time tend. Growth investors plan to hold on to their investment for a long period of time.
Income Investing. Common stocks are widely purchased by people who expect the shares to increase in value, there are still many people who buy stocks primarily because of the dividend income stream they generate. This investment style foregoes capital appreciation for consistent, high-yielding, dividend-paying companies in slow-growth industries.
GARP. This is an acronym for growth at a reasonable price. GARP investors combine the value and growth approaches and adds a numerical slant. Practitioners look for companies with solid growth prospects and current share prices that do not reflect the intrinsic value of the business, getting a “double play” as earnings increase and the price to earnings (P/E) ratios at which those earnings are valued increase as well.
One of the most common GARP approaches is to buy stocks when the P/E ratio is lower than the rate at which earnings per share can grow in the future. As the company’s earnings per share grow, the P/E of the company will fall if the share price remains constant. Since fast-growing companies normally can sustain high P/Es, the GARP investor is buying a company that will be cheap in the future if the growth occurs as expected.
This approach centers just on the numbers instead of looking at the business.
Quality Investing. Most investors today use a hybrid of value, growth, and GARP approaches. These investors are looking for high-quality businesses selling for “reasonable” prices. Although they do not have any shorthand rules for what kind of numerical relationships there should be between the share price and business fundamentals, they do share a similar philosophy of looking at the company’s valuation and at the inherent quality of the company as measured both quantitatively by concepts like Return on Equity (ROE) and qualitatively by the competence of management. Many quality investors describe themselves as value investors, although they concentrate much more on the value of the company as an ongoing concern rather than on liquidation value like a value investor would do.