Why Bertelsmann could appeal to value investors

Economic uncertainty has unsettled prices right across the market in 2020. For value investors, these conditions offer the chance to buy stocks on the cheap. But how does this strategy work, and how would a stock like Bertelsmann Se & Co Kgaa (FRA:BTG4) stack up against it?

Value investing 101

Value investing has been used very profitably by some of the world's most influential investors. From early pioneers like Benjamin Graham to modern day heroes like Warren Buffett. But while buying stocks that appear to be cheaper than they should be makes sense to a lot of investors, knowing what to look for can be confusing...

A key part of any value strategy is the idea of buying stocks below their intrinsic value (or what they are truly worth). To make sure that happens, a sufficient ‘margin of safety’ can be an important way of reducing the investment risk.

A ‘margin of safety’ is the difference between a stock's intrinsic value and what the market is currently pricing it at. The higher the discount to the intrinsic value, the greater the margin of safety for an investor. Here are some of the measures that matter most...

Finding stocks at a discount…

One of the best measures, which can be used to assess how a company is priced compared to what it sells is the Price to Sales ratio. To compute this ratio we take the current price of a company and divide it by its sales per share. This helps to give us a clearer picture of a company’s value, even when earnings are temporarily negative or suppressed (as they often can be in such volatile times).

Investors typically look for a Price to Sales ratio of less than 1, to offer optimal value. 

• The Price to Sales ratio of Bertelsmann Se & Co Kgaa currently stands at 0.002.

...and are cheap compared to what they own

The Price to Book ratio tells us how a company is priced compared to the company’s Book Value Per Share. The Book Value of a company is essentially what belongs to shareholders after all the liabilities are deducted from the company’s assets. Once we divide the current stock price by the Book Value Per Share, we get the Price to Book ratio.

Value investors regard the Price to Book ratio very highly, as it is a good indicator to the ‘margin of safety’ one might receive when purchasing a particular stock. A Price to Book below 1 is sought after, as it means that the current value of assets of the company is greater than the value of its total liabilities.

• Bertelsmann Se & Co Kgaa has a Price to Book ratio of 0.003.

What does this mean for potential investors?

Finding stocks at cheap prices is one of the best known strategies in the stock market. But be warned: value doesn't guarantee future returns and we've identified some areas of concern with Bertelsmann SE & Co KGaA that you can find out about here.

Alternatively, if you'd like to find more shares that are showing signs of having strong quality and value, just come and take a look at this Value screen.