Find value companies on the ASX by using a stock screener. Search for stocks by sector, sort by Price to Earnings (P/E) ratio then Price to Book (P/B) ratio. Pick the top 5 companies to investigate further. Pick the company that has a mission and product you think has potential now and into the future.
As Aswath Damodaran explains in his Investment Valuation textbook, value investing is not an exact science. However, there are tools and measures we can use to narrow down our search and rules of thumb we can use to help guide our decisions.
When I first started investing in the ASX stock market I made a simple mistake by investing in a sector I knew nothing about. My expertise and interests lay in the technology and software sector, yet because mining was so hot in Australia at the time (around 2006), I chose to invest in that sector. The trouble was I so ignorant of the sector I made a bad choice.
"Risk comes from not knowing what you are doing" - Warren Buffett
Pick a sector where you have unique knowledge. I should have picked the information and technology sector because it would give me an advantage when trying to understand the business.
If you search Google for ASX companies in the Technology sector you will get a list of 190 companies (source listcorp). This is where a stock screener comes in handy.
I used the EquiShark ASX stock screener but you can use the tool that suits you. I would also recommend using the Yahoo stock screener.
| ASX Code | Company Name | P/E Ratio | P/B Ratio | Earnings Per Share |
|---|---|---|---|---|
| AMO | Ambertech Limited | 7.11 | 2.08 | 0.05 |
| CLI | CropLogic Limited | 0.12 | 1.43 | 0.27 |
| VOR | Vortiv Limited | 0.37 | 1.6 | 0.07 |
| CGO | CPI Global Limited | 9.32 | 4.12 | 0.06 |
| DCC | DigitalX Limited | 8.5 | 1.22 | 0.01 |
NOTE: you may get too many results, or not enough, depending on your filters. Play with the filter inputs in order to get a reasonable number of results.
What kind of questions should you be asking about a company?
Ambertech is a reseller of audiovisual equipment and accessories. Their website looks much like any other site selling goods to the business and consumer market.
Taking one of their products (MaxTrap corner mount base trap) and doing a Google search returns a big list of similar companies selling the same product. Because they are a reseller they are competing directly with tens of other websites selling the same type of products.
It looks like Ambertech are competing on price and service.
As far as I can tell Ambertech has no competitive advantage. As Seth Godin talks about in his race to the bottom post, when you are competing on price it is a race to the bottom.
Ambertech has no competitive advantage
If a consumer can find the product they want from somewhere else cheaper, why would they buy from Ambertech? Ambertech can provide great service (returns, warranty, tech support) and justify a higher price point, but a competitor can also provide that feature.
Although it is far from an exact science I like to see one or more of the following in a CEO:
There are also some things I do not want to see, which include:
A quick Google search reveals who the CEO of Ambertech is. Looking into the history of the CEO doesn't reveal anything negative as listed in what I do not want to see but they don't tick any boxes on what I like to see either.
We will use Ambertech again as an example and examine whether it has been consistently making a profit. If we take a look at their financial information on Yahoo finance, we can see that since 2019 they have made a profit.
Have they made a large enough profit?
Turning a profit is nice, but it is not the total picture. We should also see if they've made a large enough profit. A measure such as return on invested capital (ROIC) is a good measure because it shows, as a percentage, how much profit they made from the injected capital. We then compare the ROIC with the weighted average cost of capital (WACC) to see how the return it made compares to the cost of that injected capital.
The return on invested capital for Ambertech in the last three years has been positive for 2019, 2020 and 2021 at 5.25%, 22.70% and 13.43% respectively (source).
A further step would be to see how this company's ROIC compares to other companies in the same sector.
NOTE: the WACC is harder to calculate and not listed here. Check out our tutorial on calculating WACC in order to work it out for yourself
After you have narrowed down the list of companies in the sector you have chosen, and researched each company, you can then make a judgement about investing.
Does the company tick all the boxes from your research? If there are any negatives or red flags it may be a wise choice to avoid investing.
If you can't find a company that ticks all the boxes it is better to invest in a low cost index fund. If you do find a company that ticks all the boxes, and you have done all your due diligence, think about investing!
I have described here one method of finding good value stocks to invest in. This is a method I use when investing, however it often doesn't turn up any stocks worth investing in for various reasons (e.g. if the market is overpriced).
From what I have read of Warren Buffett and Charlie Munger they recommend following great companies and then buying them when they are selling below their real value. This is taking the final method of picking a company you believe in and watching the market until it becomes sensible to buy. i.e. watching a good company to see when it's value metrics like P/E and P/Book make sense.
Good luck!
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