“A value investor looks for undervalued stocks in hopes of making a healthy profit for a lower investment,” explains Mike Eisenga.
While Michael believes this is a great strategy, he also sees some pitfalls. Too many investors mistake cheap stocks for value stocks, or they invest without doing enough research.
“There are no shortcuts to finding great companies or real estate properties to invest in, for that matter. You have to take your time to do your research diligently and even ask for the professional help of a consultant if needed. Investments are always risky matters and require a lot of prep-work,” suggests Michael.
The first thing an investor must consider is the stock’s value: has it been over or undervalued? To determine that, value investors should look at the price to earnings (P/E) ratio. A low P/E number indicates that the current stock price is cheap when the company’s profits are in the equation. That makes the stock undervalued.
“P/E ratio doesn’t always tell the whole story because past earnings are not always a guarantee of future earnings,” says Eidenga.
Another important metric – FCF (free cash flow) is cash a business has left after paying for capital expenditures and operating expenses. It shows how well a business is at generating cash. If they are, dividends will be higher, and the company may even have enough money for stock buyback programs. Additionally, good FCF numbers often predict higher earnings in the near future.
If FCF is high, but share prices are low, there’s a good chance that those share prices will go up soon. While buying low and selling high isn’t always good advice, in this case, it can be.
“Take the total debt a company has and divide it by each shareholder’s equity. The answer is the debt to equity ratio (D/E). When the final number is higher, more of the financing is coming from debt. When it’s lower, the company is using equity. The more debt a company has, the more it may struggle to have adequate earnings,” suggests Michael.
Although the D/E ratio is important, there is more to take into consideration. First, a company with a high D/E could be expanding or creating a new product line. There are also industries where a higher D/E is simply expected.
Finally, there is price/earnings to growth (PEG). The only difference between PEG and price to earnings ratio is that the former considers earnings growth an important factor. P/E doesn’t account for a company’s forecasted growth. As a result, PEG often shows a fuller picture.
“Look at the data and make a rational decision. When it comes to money, emotional and rushed decisions are never a good thing,” – summarized Mike Eisenga.
About Mike Eisenga
Michael Eisenga is a successful commercial real estate investor with a banking and finance background and is the former mayor of the City of Columbus. As a President of both American Lending Solutions, a mortgage lending company (he founded and operated from 2000 to 2018), and First American Properties, he has a track record of creating and operating successful businesses. Mr. Eisenga is also devoted to property development and construction, primarily serving smaller local communities. Especially in the senior housing sector.
Company Name: First American Properties
Contact Person: Michael S. Eisenga
Email: Send Email
Country: United States