Critique this post with two cited references and two advices:

Value can be a subjective concept, particularly between people in different locations, and even at various points in time.  In contrast, it is relatively simple to place a financial amount, or price, on a product or service.  For example, ticket prices for the Raiders game against the Chargers at Allegiant Stadium have a price of $200 - 800, depending on the section of the stadium where the seat is located.  For a life-long Raiders fan, the value of a ticket to this game is probably higher than the dollar amount she paid for the ticket.  In the case of company valuation, "companies have two primary sources of value, the value of operations and the value of non-operating assets" (Brigham & Ehrhardt, 2017, p. 298).  To some degree, a company's stock price is based on the market's perception of the value of the firm, at a particular point in time.  In some cases, a company's stock price may be lower than the value an investor has determined the stock price should be, and "value investing is a strategy where investors aim to buy stocks, bonds, real estate, or other assets for less than they are worth" (Berger & Curry, 2022, para. 1).  In very simple terms, calculating a firm's intrinsic value, along with determining the company's Price to Book ratio and/or Price to Earnings ratio are useful tools that a value investor may use to identify undervalued stock.

As a strategy, value investing has become more challenging as companies are increasingly investing in intangibles, as opposed to physical assets, such as factories or equipment.  It is becoming more common for companies to hold assets that "consist of data sets, software, brands, and even ideas" (Chandler, 2022, para. 9).  These types of intangibles are difficult to value, and firms rely upon management estimates and judgments when quantifying the value of intangibles.  Ultimately, intangible assets may not result in an increase in stock price and company value over the long-term.  To illustrate, the value of a brand is partially formed by public perception, and an investor may anticipate that the value of a certain brand will increase, along with the price of the company's stock.  This expectation may actually never be realized, and if there is a public scandal surrounding the company and brand, there is a strong likelihood that the value of the brand will be negatively impacted well into the future.  Another potential downside of value investing is failing to thoroughly perform financial analysis tasks and financial calculations, such as the firm's free cash flow and/or levels of debt.  The reason that the company's stock price is low may simply be due to the fact that the company could be on the verge of financial distress.  It is important for investors to differentiate between a stock that is truly undervalued, and a stock that is trading at a low price for legitimate reasons. 

       

Reference:

Berger, R., & Curry, B.  (2022, April 4).  What is value investing?  How does it work?  Retrieved from https://www.forbes.com/advisor/investing/how-value-investing-works/

Brigham, E. F., & Ehrhardt, M. C.  (2017).  Financial management: Theory and practice (15^th ed.).  Cengage Learning.

Chandler, S.  (2022, July 20).  Value investing targets low-performing but quality stocks, aiming to profit when their prices rise again.  Retrieved from https://www.businessinsider.com/personal-finance/value-investing-definition

Edited by Andrea White on Aug 30 at 12:23am