Adequate cash flow

Whether it is a value stock or a growth stock, firstly, the financial situation should be sufficiently safe and healthy, and the debt ratio should not be too high, especially for technology stocks that burn a lot of money, which require sufficient cash flow.

The proportion of cash in assets should be at least 10% to meet unexpected needs. Many growth stocks require high R&D investment. If R&D fails and cannot be mass-produced, and the company does not have sustained cash flow follow-up, it is very dangerous. Even giving up R&D will seriously affect the company's future development.

    Higher gross profit margin than peers in the same industry

A higher gross profit margin than in the same industry reflects the company's bargaining power, which is backed by the company's strong product or operational capabilities. If a company's gross profit margin continues to decline, it indicates that its competitiveness is questionable and may rely on continuously lowering prices to maintain competition, which is not a good phenomenon.

For example, Maotai, which we are familiar with, maintains an annual gross profit margin of over 90%, which shows how strong Maotai's competitiveness and bargaining power are.

    Do you value R&D investment

Research and development investment includes investment in talent as well as investment in research and development expenses.

Here, we can take a look at the structure of the company's highly educated talents. The number and proportion of master's, doctoral, and doctoral supervisors largely reflect the company's emphasis on research and high-quality development. Needless to say, the higher the investment in research and development, the more the company values it,

For example, Huawei, which we are familiar with, claims to have a master's degree or above and invests heavily in research and development every year. Even in recent popular events, Huawei invests heavily in preparing a "spare tire" system every year to prevent uncertain factors in the future of Android.

It is also important to pay attention to the company's R&D conversion results. If the company's profitability does not improve or even decreases despite continuously increasing R&D investment, it is highly questionable.

There is a saying in the market that goes, 'Undervaluation is king.' However, in the current investment environment, is the 'undervaluation strategy' still effective?

So has the undervaluation strategy really failed?

Although the undervaluation factor has indeed performed poorly in the past two years, looking at the global market, whether it is the US stock or A-shares, the undervaluation investment strategy has outstanding long-term returns and is a very effective strategy.

Groups with a P/E ratio of 0 to 10 times, 10 to 20 times, 20 to 30 times, 30 to 40 times, 40 to 50 times, 50 to 75 times, and over 1000 times are grouped together. Groups with a negative P/E ratio (loss) are grouped separately. Then calculate the annual return of the stocks in the portfolio for year t+1, rolling the sample once a year over the period of 2000 to 2019.

Statistical analysis shows that in the long run, undervalued strategies have significant excess returns. The median return of a combination with a P/E ratio below 10 times (excluding stocks with negative P/E ratios) is as high as 18%, far ahead of the median returns of other combinations with P/E ratios. Moreover, it can be observed that there is a strong negative relationship between the median return of the combination and the high/low P/E ratio, that is, the lower the P/E ratio of the combination, the higher the return.

In addition, in bear market conditions, undervalued stocks are relatively resistant to decline. For example, in the unilateral decline market in 2018, undervalued stocks experienced relatively low declines.