Hi brandon07,Originally posted by brandon07
What are the 3 main filters used when looking for potential undervalued companies?
there are many different situations of "Undervalued". Let me show you some examples:
1. Price to Book ratio of less than 1.
this is especially relevant for specific industries, such as banks and finanical institutions and property developers. This ratio is NOT relevant and cannot be used to assess companies where much of the "capital" is intellectual or intangible. eg. technology companies such as Creative Technology, OSIM etc, where the asset might be a small component of their business.
I bought UOL and Sing Investment & Finance based on this ratio.
2. Turnaround companies Ignored by most investors
these companies might be loss making in the past but if you track the trend and realise they are about the "turn the corner" and be proftable again.
Real life examples: I bought Mediaring 2 years ago and China Aviation Oil a few months ago on this factor.
In choosing companies to invest, I would add in the debt-to-asset ratio as a filter. I don't want to invest in companies who might have too much debt. Look for debt-to-asset ratio of less than 1. For Mediaring and China Aviation Oil, I bought it after previous debts were settled through debt-restructuring deals.