Everyone desires a good buy. Undervalued stocks are analyst dreams. Strong fundamentals in steady cash flows, strong profit margins and tangible asset bases are hard to come by. The rarity increases when the unwind value of a company drops below its current Book Value. The gem in the rough is when the unwind value of a company is below Tangible Book Value per Share.
A fundamental investor looks to acquire assets at a bargain. Have you ever been confused about what a stock price means? Let’s take a simple step through some fundamentals.
A CONCISE EDUCATION LESSON ON VALUE
What is book value?
The book value per share is a market value ratio that weighs stockholders’ equity against shares outstanding. Simply put, Book Value is the value of all shares divided by the number of shares issued.
The real insight is when a stock price drops below something called Tangible Book Value Per Share (TBVPS).
TBVPS is the value of a company’s tangible assets divided by its current outstanding shares. TBVPS determines the potential value per share of a company if a company must liquidate its assets.
A ratio called Beta shows what a company stock price compared to the market tends to do. A one to one ratio (1:1) means the stock tends to act the same. A two to one ratio (2:1) means the stock tends to do twice the activity (goes up twice as fast as the market). A beta below one (i.e. 0.50) means the stock tends to behave at half of the market’s activity (i.e. tends to go down half the rate of the market).
USING MARKET HERD PSYCHOLOGY TO BUY REAL MARKET VALUE
Market scares drive stock prices down based on mass sell offs. Sometimes these sell offs create false depreciation for fundamentally strong companies.
Despite our best efforts to be logical people are emotional. Many lack control to not impulsively act when money is at stake. Some people just can’t stand to watch a price go down. Understanding market psychology of the “Market Herd” is key to getting into a public market.
Remember, you are playing in a game with everyone. Everyone. That means the guy you passed at Wal-Mart is in your game. Talk to your everyday person. The everyday person tends to watch the news to determine what they are doing. A good amount of people do not read. According to a CBS article by Abigail Hess twenty four (24) percent (%) of Americans didn’t read a book in the past year.
What no reading means is a good amount of people are making uninformed decisions. Many are ruled by fear.
Fear causes temporary reactions to non-permanent situations. Situations always normalize.
Normalizing is where you capitalize.
Look at the Corona virus outbreak. Despite the fact the death rate is less than the annual flu everyone is freaking out in the market. According to CNN, The S&P 500 (SPX), the broadest measure of the stock market, fell 0.8%. The S&P 500 dropped 11.5% this week, its worst weekly percentage drop since October 2008. The selloff has shaved $3.2 trillion off the S&P this week.
CORONA BY THE NUMBERS
According to the CDC, there were 76,936 reported cases in mainland China and 1,875 cases in locations outside mainland China. There have been 2,462 associated deaths worldwide; no deaths have been reported in the United States (as of February 25th 2020). Of the associated deaths the concentration of those at risk are those with “suppressed immune systems”, “elderly” and “infants” with “under-developed immune systems”.
The actual chance anyone has of dying is about 1%.
MARKET HERD REACTIONS TO CORONA
This corona doesn’t have any salt or a lime. It’s a bad drink. The market has destroyed equity values over a 1% chance of anyone dying. The people making decisions are most likely not going to die. The reactions have depressed tangible asset bases because no one is immune to a stock price dump.
The opportunity is stocks sporting market prices below Tangible Book Value Per Share. These stocks are available right now.
MY FAVORITE TYPE OF PICK
A favorite pick I have is Real Estate Investment Trusts (REITs). These things pay out 90% of their rental income, have nothing but tangible value and if they unwind and close people get paid back.
What’s your call to action?
Look for a buy right now.
Buy a REIT who is being quoted below Tangible Book Value Per Share.
I got in on a REIT and made 8.92% on a single trade. Guess what? There are still undervalued REITs available now. Just do your homework and figure out which one. I’m not telling anyone which one to buy. You must do what the others won’t do…you must “Read”.
I am still finding them all over the place. You can too. Did I cheat you out of a tip? Not even close. If you made it through this article you have a strong fundamental strategy. Just apply your newfound knowledge to turn a profit. All a profit takes is effort and diligence. Follow me on Medium or subscribe to my newsletter to learn more insightful advice on how real life situations influence economies. Wealth is value not money. Money is always attracted to wealth.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM), Master Financial Planner (MFP) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com.
The information above is not investment advice or financial advice. Before making any investment decisions carefully consult with licensed professionals. The information above is non-specific and may not be suitable for everyone. The information in this article is meant for informational purposes only. The author does not endorse this material or style of investment to any reader.