We employ fundamental analysis in virtually all of our research efforts. While technical analysis (evaluating trading patterns) might be useful to some investors, we have found value-based investing to be a much more reliable tool in the long run.
What do we mean by value-based investing? At any given moment, a company’s share price reflects the level at which a given buyer and a given seller are willing to execute a trade with each other. That price may not accurately reflect what the company, as a whole, is truly worth. It’s only a reflection of what those specific shares were worth to those two parties at that moment. In a perfect world, where corporate and economic information is disseminated instantly, understood by all who receive it, and acted upon immediately, the share prices of all stocks would reflect their underlying value. But we don’t live in a perfect world, and that’s what value-based investors, like Global, attempt to capitalize on.
Very simply stated, underlying value is a mathematical calculation that considers a company’s existing net assets (assets less liabilities), along with its future cash flow potential. This calculation incorporates numerous operating and economic assumptions. Because those assumptions may differ considerably from one analyst to another, estimates on the value of a company’s share price may vary considerably as well. Value-based investors attempt to buy stocks when they are trading in the marketplace for less than their estimated underlying value, and sell them when they are trading for more.*
Why do these disparities in the market occur? First, as mentioned above, assumptions used to calculate underlying value may vary from one analyst to another. Second, many investors don’t utilize fundamental analysis in making investment decisions. Finally, investors have a tendency to overreact to economic or corporate news, causing a share price to move more radically than it rationally should.
It is the goal of every value-based investor to profit from these disparities. At Global, we constantly look for investment opportunities that are currently out of favor with the general investment community. We track political and economic cycles, as well as asset classes that are being ignored. We dig deep in an attempt to identify value in the market. That’s why you won’t find us talking extensively about the stocks you hear about on the nightly business news. That is also why our research can be so valuable.
* There is no assurance that an ‘under-valued’ stock’s price will increase to the level of its estimated underlying value.
