Using fundamentals to identify value opportunities – an introduction

In this series, I will show investors how to find and analyse new value investment opportunities. So what are these? Let's start with a definition:

A value opportunity

is one where there is a perceived difference between the fundamental value of the underlying business and the price at which the market currently offers the investor the opportunity to purchase a share of that business.

Many investors will use additional tools in their stock selection. For example, they may conduct a balance sheet analysis to minimise the risk of bankruptcy or use charts to time their entry into a stock. However, such factors will always be secondary considerations that value investors use when they believe they have identified a significant difference between valuation and price. Conversely, a value investor will never buy into a company they believe to be overvalued, no matter how strong the management team or the stock's recent price action is.

The start of value investing

The idea that valuation should form a major part of choosing to invest in a business may seem pretty standard today, but it wasn't always the case. Benjamin Graham is often considered the father of Value Investing. When Graham and David Dodd wrote their 1934 book, Security Analysis,...