While share prices do go up and down no matter what, there is still a need to understand about the premium you are paying. On the other hand, discounts must also be recognised accurately in order to ascertain the worthiness of an investment. In this post, we will discuss about the ways we can use to find out if a particular share we are looking at is at a good price to enter.
Is Price to Book Value (P/Bv) is less than or more than 1
Every share counter will have an odd price-to-book-value ratio (P/Bv). The reason is because market sentiments are sometimes entrenched when companies of particular sectors are boost or sabotaged by the economy. In other words, do not take the P/Bv as it is, do remember that it is not definitive for a share, which has P/Bv < 1 to be on a discount. Or in another case of a P/Bv > 3 signalling that it is definitely overpriced.
The point I am trying to make is not to ignore P/Bv, but to compare company performances in the same sector using stock screener on SGX. For example, when comparing DBS, UOB and OCBC, do note that since there is difference in their recent Q3 performance, OCBC has the lowest P/Bv ratio compared to its competitors. Additionally, do take the amount of difference in performance into account as well. If the difference in performance is much smaller than in their P/Bv then it is highly possible that a discount is available at the moment.
6 months VWAP as price guidance
There must be a reason for price movements, therefore do take note of the Volume Weighted Average Price as a gauge when deciding if the entry price is right. The rationale for following VWAP in general is because share prices might over react at times to certain news, hence there is a chance for discount in such cases.
Many investors will be both interested and confused when the share price of a reputable company plunges. Sometimes, this price changes are not supported with drastic change in performance. In such case, do study the price surge before the plunge. If there is insufficient reason for it, then it is probably a pump and dump situation. This tells u to ignore VWAP entirely as a gauge for entry price planning.
Changes in net profit (attributable to shareholders)
Some companies will show their profits attributable to shareholders. This metric will increase the Net Asset Value of its company’s shares and therefore we will need to adjust our entry prices accordingly. I believe that sometimes traders are too obsessed with technical analysis such that they neglect fundamental changes. This is also important for value investors as their valuation of a company should be updated when they decide to buy another batch of shares of a company.
The nature of the business (Law of diminishing returns or Growth)
No business can expand indefinitely. For example, if there is the same brand of cafe at every floor of a mall, then the cost of the business will be too great to generate profit. That is the law of diminishing returns. In other words, do not attribute the amount of capital expenditure, expansion plans and amount of capital invested in the business as a plus point all the time. Do practice proper judgement towards each news about the company you would like to invest in and decide on a case by case basis.
Closing Thoughts
Apart from using complex equations which also have its inaccuracies. It would be wise to introduce the above considerations into your trading and investment plans. After which, do adjust your entry prices accordingly so as to prevent any surprises in the price movements.
To end, I always have a rule for myself when I set entry prices and that is to make sure that I do not treat a failing business as a discount or an overpriced share for a long position. That would require extra work, which many do not know must be done before one can do well in the market.
