Picking Stocks at 52 Week Low: What You Should Know September 6, 2018

It has been proven over the years that value-oriented strategies beat the market over a longer time horizon. These strategies include, but are not limited to, selecting stocks based upon low ratios of price to book, price to earnings, price to cash flow and price to sales.

Price to Book

Price to book ratio (P/B) reflects the value that the market attaches to the company’s shares relative to its book value of equity. It is typically above 1. Should the P/B fall below 1, it could mean that the company is undervalued but it could also mean that the company is facing financial distress. In actual fact, to put it more accurately, P/B gives us an idea as to whether you are paying too much for what would be left if the company went bankrupt immediately. It is more suitable to be used for companies with mostly liquid assets such as financial firms as compared to firms with a lot of intangible assets such as information technology companies which are “patent intensive”.

In my opinion, I would prefer firms with a P/B greater than 1 as it tells me that there is market value added. It is unavoidable for strong companies to sell at a premium though it might be said that there will be greater opportunity to find bargains in the small cap arena (market capitalisation of US$1billion to US$3 billion) because they are more lightly analyzed and more likely to be mispriced.

Price to Earnings

Another valuation multiple that I would prefer is price to earnings (P/E). P/E reflects the value investors are willing to pay per dollar of earnings. A high P/E suggests that investors are expecting higher earnings growth in the future as compared to companies with low P/E. However, a low P/E could mean that the stock is undervalued. The definition of what is high and low is relative to the industry. And the company’s P/E has to be compared to its industry’s average.

A simple approach that I would like to take in value investing would be to look at billion dollar cap companies that are able to generate a strong Return on Equity (ROE) for shareholders of above 10% and still be able to have a lower P/E compared to its industry’s peers. ROE reflects the amount the company is able to generate per dollar invested by its common shareholders – the greater the ROE, the more profitable the company is. Thus, a high ROE and a low P/E as compared to its peers would mean that the company is of quality and is likely undervalued at this present moment.

Technical Analysis

We would advise clients who are choosing to pick stocks at the 52 week low to use technical analysis to confirm their entry timing. An effective technical indicator that I use would be the stochastic oscillator. It is a technical momentum indicator that compares a security’s closing price to its price range over a period of time. The crossover of the fast line over the slow line at the 80 and 20 mark serves as a confirmation of an overbought and oversold condition respectively. At the price of a 52 week low, should there be a crossover of the fast line and slow line at the 20 mark, it indicates an oversold condition and you can consider entering.

Conclusion

In conclusion, given the volatility of the current market, we would encourage using a dollar cost averaging strategy when investing. This means that instead of investing a lump sum, you can avoid timing the market by investing the same dollar amount in the same counter over a period of time. For instance, investing an amount of S$1000 every month into a specific counter at the then current price, so you can buy into a greater number of shares when price declines and a lower number of shares when price increases. It eliminates emotion in trading amidst market unpredictability.


Disclaimer

These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.

The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.

Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.

About the author

Phoebe Yeo Jia Ying
Equities Specialist
Phillip Securities Pte Ltd

Phoebe currently manages a portfolio of over 10,000 trading accounts and is part of the POEMS Dealing Team. She holds a Bachelor of business degree from Singapore Management University with a major in Finance and Strategic Management. She is proficient in stock trading using a mixture of both Technical and Fundamental Analysis.

No Related Market Journal.