In the sharemarket, there's no hard and fast rules for being successful because the market isn't rational.
Meaning at times the market will overvalue terrible stocks and at other times will undervalue great stocks.
Academics have a foolish belief that the market is efficient and will nearly always price shares according to all publicly available information.
Buy low, sell high
Fortunately, astute investors can exploit the market's moments of irrationality by buying shares when they are undervalued and selling when they are overvalued.
While it may sound simple enough it's not always that straightforward. Especially since valuations of shares are intensely subjective, with fair price estimates varying from one analyst to another.
Bearing that in mind, three companies I've recently valued are Australia and New Zealand Banking Group (ASX: ANZ), Telstra Corporation Ltd (ASX: TLS) and Westpac Banking Corp (ASX: WBC).
ANZ is my favourite 'Big Four' bank stock because it is the only one growing in Asia. However, its Super Regional Strategy presents its own style of risks, and these must be taken into consideration when trying to value it. Nonetheless, given that I expect ANZ to grow its loan book at a solid rate over the long term, my fair value estimate for ANZ shares is around $30. Since I try to purchase shares at a wide discount to the price (known as a margin of safety), I wouldn't consider buying ANZ shares until they dropped below $25.
Telstra is also seeking to expand throughout Asia. Telstra is targeting one-third of revenue from the region by 2020, yet it currently accounts for less than 10% of the group total. As Australia's largest and most profitable telecommunications company, Telstra generates reliable profits for shareholders. My fair value estimate for Telstra shares is between $6 and $6.50. Therefore, I would only look to add Telstra to my portfolio when it dropped below $5.00.
Finally, Westpac is significantly overvalued in my opinion. Westpac lacks the growth of ANZ but, as Motley Fool analyst Mike King showed here, Westpac is heavily exposed to Australia's hot property market. While a market crash is unlikely, I find it very difficult to envisage demand for credit increasing at the same rates it has historically (especially with household debt levels at record highs). My fair value estimate for Westpac shares is $25.81 – significantly below the current price of $32.90.
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