Look who's making a comeback: Quality vs value investing
Subscribe to enjoy similar stories. MUMBAI : Investment strategies can be aligned with specific factors such as value, quality, momentum, low volatility, alpha, or a combination of these. Value and quality are often viewed as opposing strategies, as they target different characteristics of a company.
Value investing seeks stocks that are trading below their intrinsic value, offering the potential for price recovery. On the other hand, quality investing focuses on companies with strong financial fundamentals. Consequently, while value investing is centred around identifying price inefficiencies, Quality investing emphasizes the long-term stability and strength of a business, often leading to different company selections in each approach.
The value investing approach centres on finding stocks that the market has undervalued. Value investors look for companies whose stock prices are below their intrinsic or fair value, often due to temporary challenges, broader market trends, or factors that fail to capture the company's long-term potential. Common valuation metrics such as low price-to-earnings (P/E), price-to-book (P/B), price-to-sales (P/S), and high dividend yield ratios help assess the degree of undervaluation.
This strategy demands patience, as it can take time for the market to fully recognize and reflect these companies' true value. On the other hand, businesses associated with the quality theme typically demonstrate strong fundamentals such as high return on equity (RoE), return on capital employed (RoCE), manageable financial leverage (debt/equity ratio), healthy free cash flow (FCF), the ability to generate superior returns on incremental capital, and good corporate governance. These companies also often possess
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