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Identifying undervalued assets

Recent research has found that an alarming 31 per cent of SMSF trustees consider choosing investments as one of the hardest aspects of running an SMSF. Value investing is one such strategy that SMSF investors can utilise to boost their portfolios.

Value investing involves identifying undervalued assets that have the potential to increase in value over time. These assets are generally priced well below their intrinsic value due to missed expectations, market crashes, cyclical fluctuations and so forth.

To identify undervalued assets or asset classes you need thorough analysis and good judgment. Look for asset classes that are inexpensive and backed by news. It is much better to invest in industries where you understand the business dynamics, i.e., how they make their money, underlying conditions and so on.

Furthermore, looking for businesses in industries with a sustainable competitive advantage where external factors do not affect them too much is ideal.

When evaluating stocks look at companies with a low debt load, are paying steady dividends and have a quality rating that is average or better. Other metrics to consider include:

Price-to-earnings ratio: This is a stock’s current share price divided by its annual earnings. A lower ratio indicates it is cheaper. Stocks with a ratio of 9 or less are typically undervalued.

Price-to-earnings growth: A stock’s price-to-earnings ratio divided by its projected earnings growth rate over a certain time frame. Ideally, companies with no deficits and where earnings increase over that time period are better.

Price-to-book value: This is calculated by dividing the current price by the book value per share. Investing in stocks which are selling below their book value is key.

As with any other investment strategy, it is best to seek professional advice if you are unsure whether value investing is appropriate for you.

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