Investing word of the day: Undervalued

source: http://themarketwatchers.com

I have been talking about APF Trading's Expert Stock Screener and I pointed out the importance of undervalued stock. What does undervalued mean anyways?

I am reading RLC's Amended 17-Q(click here to view report) and I quote the following:

source: http://www.robinsonsland.com

III. Financial Resources and Liquidity

Receivables went down by 40% due to collection of receivable from JGSHI. Subdivision Land and Condominium and Residential Units increased by 9% to P6.8 billion due to higher level of project completion. Accounts payable and accrued expenses increased by 4% mainly due to accrued interest payable on the P=15.0 billion loans. As of December 31, 2010, total assets of the Company stood at P54.3 billion while total equity amounted to P28.8 billion. RLC’s financial position remains solid, with a financial debt to equity ratio of 0.52:1 as of December 31, 2010 and 0.54:1 as of September 30, 2010 while cash stood at P7.6 billion and P5.5 billion as of December 31, 2010 and September 30, 2010, respectively. Earnings per share for the first three months amounted to P0.37 per share. Net book value excluding minority interest in consolidated subsidiary stood at P10.45 per share as of December 31, 2010 compared to P10.08 per share as of September 30, 2010.

I highlighted the last sentence to point out what undervalued means. If you see EPS or Earnings Per Share stands at P0.37 which brings Net Book Value to P10.45. Comparing Net Book Value to Market price which is at P12.40. The P2.00 difference is not that big but based on analysts consensus this stock should be valued P15.00

Now you see why RLC is seen by analysts as undervalued. It lies mostly on what we call perceived value. 

What is Perceived Value? 

Perceived value is the real value an investor sees on the stock. This means factoring future profitability on a stock. When we factor in future earnings of a company the book value per share of the stock increases. But according to law a company should not accumulate all its earnings unless it has specifically allotted such for project expansions, repayment of a debt, and others that would greatly benefit the company. 

The distribution of earnings which is called dividends is a way of sharing what the company earns to its investors. It is a return of investment. That is why you and me invest in a company because of the return of investment.


When a company has the capability to deliver steady returns investors and traders are interested on it and thus buy such stock. When a stock has price action meaning its price is moving up or down and demand for such rises as evidence by the volume of transactions it will soon go up based on the law of supply and demand.


When buying stock we buy when the stock's price is low or other put it us bottom price so that we can profit when it starts to go up.

source: http://theideaspot.blogspot.com

That is what we call undervalued. A stock whose perceived value is above its current price. I know you have a lot of question and one of them would be how on earth will I know that a stock is undervalued?

Well I really don't have a exact answer for that, many use the P/E ratio to determine if a stock is undervalued, that is if P/E ratio is 10 and below it is undervalued but you can use my model comparing EPS, BV, and Market Price to determine if it is undervalued or overvalued. You can also use the tool  from APF Trading, Expert Stock Screener, which collates the various research of leading analyst.


It could be a lot of work but it pays. Once you get the whole idea and the psychology of investing you will soon do stock picking so simple that you don't have to spend a lot of time researching because your past experience has sharpen your mind. 


So for now ask and learn, then try in small portions, and when you are brave enough try it big time. But remember the rule: Invest at your own risk. Don't blame me, the debt crisis in Europe, the Arab conflict, the rising price of oil, the low rating of Pnoy, the rumor your neighbor heard from the tricycle driver in the intersection of your barangay and the barangay of the adjacent town and other excuses. 

It's your call. Get undervalued stocks, accumulate and cost average if you have to, and sell when stock prices reaches your target price. 

Some terminologies worth noting: Par Value, Book Value, Market Value

I know nobody likes the technical stuff specially in investing but one has to familiarize oneself to understand the business lingo, remember one must increase their financial I.Q. because information gives one an edge when it comes to investing. So First lets define these terms(some I will barrow from somewhere else to be clear).

Par Value: The nominal monetary amount assigned to a security by the issuer.

Simply put it is the peso amount that is setup by the company for their shares of stock. For example Company X is incorporated and that the shares of stock are assigned a par value of Php 1.00 per stock. Some companies has a no-par value stock. Having a par value helps the company have an exact measure of their capitalization because such things must be recorded. In some instances when the stock is first issued by the company a stockholder may invest more than the setup par value which results into a over-payment. In practice this is not recorded as gain but rather it is an additional capital recorded as additional paid in capital.

Ok ok I know it's to technical. The question now is that why do you as an investor need to know what is PAR Value. Well as I said it is a measure. It will be a good reference when buying stock. Probably you will notice the importance of this term when you compare Par Value and Market Value for example take PLDT Stock(listed as TEL, go to www.pse.com.ph and type TEL in the Right top search named Symbol Lookup). When PLDT Stocks were first issued it was at Php 5.00 only but as of last Friday the Market value is at Php 2, 445.00. Now do you see what I mean.

Book Value: It is the current value of a stock as per company's books.

Ok let me put it this way, it is the net worth of the company per stock. Well what's the use of this value anyways you may ask. As I have discussed in my previous post it is important to note what a company's net worth is. Net worth implies that the company is either a company in good financial position or not. A negative net worth is called a deficit and when we say deficit it means the business owes more than owns more. The likelihood of that company going bankrupt is high thus one has to be on the look out. It also helps investors to determine if such stock is undervalued as compared to its current market price. For example stock of Company X has a market value of Php 25.00 but its book value is at Php 45.00. What does this mean? It simply means that the market sees a different value for the company and it is a indication for an investor to further analyze why such is happening given the strong standing of the stock.

Market Value: price as determined dynamically by buyers and sellers in an open market.

Simply said it is how anyone will buy the stock based on their perceived value of the stock. Let me give you an example. Back in my province some businessmen goes around the neighborhood and check the mango trees in our backyard. If they see that it has a lot of buds they predict that this tree will bear many mangoes in the near future and will ask the owner if they can "pakyaw" (not Manny Pacquiao) our tree. Price negotiations will run and soon an agreed price will be settled. The basis of such price is the current price of mango any sane person would ask or buy such product. Nobody will buy a mango for Php 20,000.00 per kilo but rather it would be in a range of Php 40-120 per kilo range depending on the demand and supply level. 

Market price is the price at which stocks are bought and sold. In the case of the Market price indicated in the PSE it is the last traded price which is called closing price. This is important because as I said it will be the basis of any sane investor. In the stock market, brokers will have their bid and ask values. As the course of trading happens this value changes depending who is willing to sell or buy at a certain price.

Some terminologies worth noting: Par Value, Book Value, Market Value

I know nobody likes the technical stuff specially in investing but one has to familiarize oneself to understand the business lingo, remember one must increase their financial I.Q. because information gives one an edge when it comes to investing. So First lets define these terms(some I will barrow from somewhere else to be clear).

Par Value: The nominal monetary amount assigned to a security by the issuer.

Simply put it is the peso amount that is setup by the company for their shares of stock. For example Company X is incorporated and that the shares of stock are assigned a par value of Php 1.00 per stock. Some companies has a no-par value stock. Having a par value helps the company have an exact measure of their capitalization because such things must be recorded. In some instances when the stock is first issued by the company a stockholder may invest more than the setup par value which results into a over-payment. In practice this is not recorded as gain but rather it is an additional capital recorded as additional paid in capital.

Ok ok I know it's to technical. The question now is that why do you as an investor need to know what is PAR Value. Well as I said it is a measure. It will be a good reference when buying stock. Probably you will notice the importance of this term when you compare Par Value and Market Value for example take PLDT Stock(listed as TEL, go to www.pse.com.ph and type TEL in the Right top search named Symbol Lookup). When PLDT Stocks were first issued it was at Php 5.00 only but as of last Friday the Market value is at Php 2, 445.00. Now do you see what I mean.

Book Value: It is the current value of a stock as per company's books.

Ok let me put it this way, it is the net worth of the company per stock. Well what's the use of this value anyways you may ask. As I have discussed in my previous post it is important to note what a company's net worth is. Net worth implies that the company is either a company in good financial position or not. A negative net worth is called a deficit and when we say deficit it means the business owes more than owns more. The likelihood of that company going bankrupt is high thus one has to be on the look out. It also helps investors to determine if such stock is undervalued as compared to its current market price. For example stock of Company X has a market value of Php 25.00 but its book value is at Php 45.00. What does this mean? It simply means that the market sees a different value for the company and it is a indication for an investor to further analyze why such is happening given the strong standing of the stock.

Market Value: price as determined dynamically by buyers and sellers in an open market.

Simply said it is how anyone will buy the stock based on their perceived value of the stock. Let me give you an example. Back in my province some businessmen goes around the neighborhood and check the mango trees in our backyard. If they see that it has a lot of buds they predict that this tree will bear many mangoes in the near future and will ask the owner if they can "pakyaw" (not Manny Pacquiao) our tree. Price negotiations will run and soon an agreed price will be settled. The basis of such price is the current price of mango any sane person would ask or buy such product. Nobody will buy a mango for Php 20,000.00 per kilo but rather it would be in a range of Php 40-120 per kilo range depending on the demand and supply level. 

Market price is the price at which stocks are bought and sold. In the case of the Market price indicated in the PSE it is the last traded price which is called closing price. This is important because as I said it will be the basis of any sane investor. In the stock market, brokers will have their bid and ask values. As the course of trading happens this value changes depending who is willing to sell or buy at a certain price.

Some terminologies worth noting: Par Value, Book Value, Market Value

I know nobody likes the technical stuff specially in investing but one has to familiarize oneself to understand the business lingo, remember one must increase their financial I.Q. because information gives one an edge when it comes to investing. So First lets define these terms(some I will barrow from somewhere else to be clear).

Par Value: The nominal monetary amount assigned to a security by the issuer.

Simply put it is the peso amount that is setup by the company for their shares of stock. For example Company X is incorporated and that the shares of stock are assigned a par value of Php 1.00 per stock. Some companies has a no-par value stock. Having a par value helps the company have an exact measure of their capitalization because such things must be recorded. In some instances when the stock is first issued by the company a stockholder may invest more than the setup par value which results into a over-payment. In practice this is not recorded as gain but rather it is an additional capital recorded as additional paid in capital.

Ok ok I know it's to technical. The question now is that why do you as an investor need to know what is PAR Value. Well as I said it is a measure. It will be a good reference when buying stock. Probably you will notice the importance of this term when you compare Par Value and Market Value for example take PLDT Stock(listed as TEL, go to www.pse.com.ph and type TEL in the Right top search named Symbol Lookup). When PLDT Stocks were first issued it was at Php 5.00 only but as of last Friday the Market value is at Php 2, 445.00. Now do you see what I mean.

Book Value: It is the current value of a stock as per company's books.

Ok let me put it this way, it is the net worth of the company per stock. Well what's the use of this value anyways you may ask. As I have discussed in my previous post it is important to note what a company's net worth is. Net worth implies that the company is either a company in good financial position or not. A negative net worth is called a deficit and when we say deficit it means the business owes more than owns more. The likelihood of that company going bankrupt is high thus one has to be on the look out. It also helps investors to determine if such stock is undervalued as compared to its current market price. For example stock of Company X has a market value of Php 25.00 but its book value is at Php 45.00. What does this mean? It simply means that the market sees a different value for the company and it is a indication for an investor to further analyze why such is happening given the strong standing of the stock.

Market Value: price as determined dynamically by buyers and sellers in an open market.

Simply said it is how anyone will buy the stock based on their perceived value of the stock. Let me give you an example. Back in my province some businessmen goes around the neighborhood and check the mango trees in our backyard. If they see that it has a lot of buds they predict that this tree will bear many mangoes in the near future and will ask the owner if they can "pakyaw" (not Manny Pacquiao) our tree. Price negotiations will run and soon an agreed price will be settled. The basis of such price is the current price of mango any sane person would ask or buy such product. Nobody will buy a mango for Php 20,000.00 per kilo but rather it would be in a range of Php 40-120 per kilo range depending on the demand and supply level. 

Market price is the price at which stocks are bought and sold. In the case of the Market price indicated in the PSE it is the last traded price which is called closing price. This is important because as I said it will be the basis of any sane investor. In the stock market, brokers will have their bid and ask values. As the course of trading happens this value changes depending who is willing to sell or buy at a certain price.