The key to finding value in the equity market largely involves knowing where to look. Some situations create more fertile ground for value plays than others. When industries or markets fall, it’s worth poking around for diamonds in the rough — think well-capitalized housing related companies during the housing crisis, for example. When a new leadership team takes over, it can be worth looking for underappreciated brands ripe for resuscitation.
Other times, it’s a combination of factors that add up to more upside than investors are currently giving a stock credit for. In those cases, a stock may not even look like a value play at first blush. Take Restaurant Brands International (QSR): Its current P/E ratio of 24x earnings is far from a deep value play but there is the potential for material earnings improvement. Plus, we see signs that suggest at least some of the company’s value is partially hidden — in part because investors are more familiar with the brands it owns than the company itself.
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