A Japanese proverb states that “money grows on the tree of persistence”. The author of this proverb may well have been an investor that realised that, despite slumps and doldrums, over the long run, the stock market will advance and outperform almost any other traditional investment.

Stocks can be bought in any market, bull or bear, and a savvy investor will buy to hold once nothing fundamentally changes with that business. In the current market environment with downward trending interest rates (July’s 90-day Treasury bill auction yielded 8.32 per cent and the 180-day Treasury bill auction yielded 8.73 per cent down 0.2 per cent and 0.53 per cent respectively from the previous month’s auction), there has been renewed interest in equity investments but not raging interest. And though the summer months have been passive, which historically stands true, investors should get off the sidelines as buying opportunities continue to be present. The two keys to successful stock investing, regardless of market conditions, are excellent research and a solid investment strategy that one sticks to.

Stocks & Securities Ltd (SSL), strongly recommends that investors focus on value investing. This process involves selecting stocks with solid fundamentals that appear to be undervalued by the market and, therefore, have the potential to increase in share price when the market corrects its error in valuation. One of the greatest investors of all time, Warren Buffett, has demonstrated that value investing is a successful strategy. From 1977 to 2009, the share price of his holding company, Berkshire Hathaway Inc (BRK.A), has produced an average annual return of 27.7 per cent compared to the benchmark S&P 500 Index’s average gain of 8.8 per cent over the same period. In fact, BRK.A has climbed from US$138.00 a share in 1977 to US$99,200.00 as at December 31, 2009.

The first step in the value investing process is selecting companies that have established lines of business, competed successfully within its industry, and produced reliable profits for its investors year over year. A strong history of profits is the clearest way to demonstrate that a company’s way of doing business will likely withstand challenges that arise. Value investors target companies that have had consistent histories of profit for the past three to 10 years.

A good example of such a company is Scotia Group Jamaica Ltd (SGJ), which has posted increased earnings for the last nine years. Its three-year average earnings growth rate is 16 per cent. SGJ’s profit performance underscores the next critical component of value investing, which is seeking out managers that are capable of delivering excellent results. Ordinary investors may not have the opportunity to meet management face-to-face, but value investors can look for other ways to gain insight into a management’s priorities and abilities, such as by reading the company’s quarterly and annual reports and of course their track record in delivering results. In addition, SGJ’s diversified revenue streams, which include its banking, investment and insurance arms have performed well for the Group over the years. As a blue chip stock on the local market, SGJ has traditionally been one of the most actively traded. Since the start of the year, the stock has advanced 8.28 per cent to $21.19 (close price on August 17, 2010), compared with the JSE Main Index’s 2.46 per cent gain over the same period.

Once you have identified a stable, profitable business with a competent management team, then you’re ready to move to the next critical pillar of value investing — determining whether the stock price is attractive. Value investments are usually considered those with low Price to Earnings (P/Es), and Price to Book Value (P/BV) ratios).

GraceKennedy Ltd (GK) is currently trading at $58.00 (close price on August 17, 2010) or at 0.76 times its book value. Compared with its peers in the Conglomerates industry on the JSE, GK has the lowest P/BV and a P/E of 6.44 times compared with the industry average of 10.99 times. But recall that pricing is only one factor in the value investing process; one must also look at the fundamentals. GK boasts a strong management team which has been able to transform the business into one of the Caribbean’s leading conglomerates. It now has 60 subsidiaries and associated companies under its belt and operates in five core segments — banking and investments, retail and trading, food trading, money services and insurance. While its profit performance over the past five years may not be as impressive as some of its counterparts, the company’s focus has been on structural growth and the expansion of its asset base and book value. As a result, this stock is expected to rebound and outperform the Jamaica Stock Exchange (JSE) Main Index.

This is one value investing methodology that can be used to select stocks. Once you have determined that the stock is solid and meets your value investing criteria, examine your portfolio carefully and determine if the stock under consideration fits. If the stock goes well with your portfolio and your diversification needs, don’t hesitate to buy it.

The guidelines above will enable you to make sound decisions when investing in equities whether in a bear or bull market. However, there is no time like the present for investors to get back in the game as the summer quickly comes to an end. SSL sees value in the local equity market, with many fundamentally sound companies like GK and SGJ trading at attractive prices. Always stick to your trading techniques and purchasing strategies and remember that investing is a marathon, not a sprint.

Deon McLennon is an Investment Analyst at Stocks & Securities Ltd. You can contact him at dmclennon@sslinvest.com.