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While selecting stocks for the long term, one thing that investors need to take care of is the valuation gap. It is simply the difference between the CMP and the intrinsic value of the company.
One of the best ways to figure out such stocks is to adapt to the old-school method of valuation as per the father of value investing – Benjamin Graham, the guru of the legendary investor Warren Buffet. He is also the author of a worldwide bestseller – The Intelligent Investor.
Most of you who are into value investing might have heard about his name. However, applying his approach in today’s market is a real challenge. Why is it so? Well, nowadays, we have new-age e-commerce businesses, a whole new tech-heavy landscape, and Algo-trading that has increased the volatility, all of which makes the current market regime different than a few decades ago.
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One easy way out is to code Benjamin Graham’s theories into quantifiable metrics to find undervalued stocks in the blink of an eye. We will use InvestingPro+ “Ben Graham Formula” in the screener section to find such stocks. We will remove 2 parameters – Analysts’ target and ROIC. Furthermore, we will also lower the market cap (adjusted) filter to 200 million.
Image Source: InvestingPro+
Under the list of many stocks, Sundaram Finance Holdings Ltd (NS:) is the one investors can focus on. It is because, firstly, the stock is undervalued as per Ben Graham’s formula which is the traditional approach we are using. Secondly, through modern complex financial models, we understand, that the stock’s fair value is INR 224.3, which is a good 40% upside from the CMP of INR 160.2.
I have explained how the fair value (intrinsic value) of the stock is calculated through InvestingPro+ multiple times in the past, Just to give a brief here, Investing Pro+ uses various financial models (14 in this case) to arrive at different fair values. Then an average of all is taken to arrive at a more realistic and achievable target value.
This is a way to blend both the traditional and modern approaches to find undervalued stocks.
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X (formerly, Twitter) – aayushxkhanna
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