7 ways to spot undervalued stocks as advised by Roy Ward

Driven by the importance of value investing, J. Royden Ward, who has served as chief analyst of the Cabot Benjamin Graham Value Investor since 2003, developed a computerized model of stock selection based on formulas created by investment legend Warren Buffett— and his mentor, Benjamin Graham.

In his book, How to Find Undervalued Stocks: Investing the Benjamin Graham Way, Ward outlines the key points below: 

1) Quality rating: Stocks with average or above-average quality rating should be pursued.  To this extent, Ward advises using Standard & Poor’s rating system to identify stocks with an S&P Earnings and Dividend Rating of no less than “B” (on the S&P scale of D to A+). 

2) Debt to current asset ratio: Investors should select companies with a total debt to current asset ratio of 1.10 or less.  There are a number of institutions that can provide data on total debt to current asset ratios.

3) Current ratio: In light of the current ratio, which indicates how much cash and current assets a company has, investors are advised to buy stocks from companies with a current ratio of 1.50 or higher.

4) Positive earnings per share growth: To avoid unnecessary risk, value investors look for companies with positive earnings per share growth.  This metric should be reviewed over the past five years. Companies with deficits in any of the last five years, should be dropped.

5) Price to earnings per share (P/E) ratio: Stocks with low P/E ratios would be selected, preferably 9.0 or less.  This criterion eliminates high growth companies, which, according to Ward, should be assessed using growth investing techniques.

6) Price to book value (P/BV): As the current price of a stock in relation to its book value gives a strong indication of the underlying value of a company, value investors should invest in stocks which are selling below their book value.  The P/BV ratio is calculated by dividing the current price by the book value per share.

7) Dividends: Value investors should seek companies with regular dividends.  Undervalued stocks take time ahead of rising as other investors realize that they are worth more than what their price suggests.