We all agree that to make money in stocks we need to buy cheap stocks. Yet there is no consensus as to what cheap stocks are. Value investors believe that cheap stocks are those with low valuation e.g. Price to Earnings, Price to Sales, Price to Book ratios, etc. However, stocks with low valuations may not appreciate in price. Many are cheap because their prospects are poor. We need to find stocks that are trading at valuations not justified by their fundamentals. In other words, we need to know the stock’s intrinsic value.
Growth investors believe that cheap stocks are those with strong earnings growth because the earnings growth will take prices higher. However, stocks with strong earnings may not appreciate in price if valuations already discount unrealistic growth expectations. We need to look for growth stocks that are trading at valuations that are reasonable based on their growth expectations.
Determining a stock’s intrinsic value means we find out a stock’s value taking into consideration its financial condition, growth prospects, past valuation history, quality of earnings, etc. The aim is to look for stocks that are currently trading at discounts vs. their intrinsic value.
Read more about how our valuation methodology incorporates all these factors to determine a stock’s intrinsic value.