As the global markets looked poised for recovery after almost two years since the onset of the Covid-19 pandemic, Russia’s invasion of Ukraine on Feb 24 wiped most gains (if any) away.
The only exception were stocks that were dealing with oil, energy or commodities, which saw price gains from the hostilities.
As at the afternoon of March 11 (Singapore time), the benchmark Straits Times Index (STI) fell 6.2% to 3,249.66 points from the 52-week high of 3,466.23 on Feb 17.
The S&P500 fell 4.6% to its close of 4,269.90 points from the month-long high of 4,475.01 points on Feb 16.
The NASDAQ Composite fell 7.4% to 13,080.22 points from 14,124.10 points on Feb 16, one of the peaks during the month.
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The Dow Jones Industrial Average fell 4.5% to 33,357.56 points from Feb 16’s 34,934.27 points, while the FTSE 100 fell 6.0% to 7,149.54 points from Feb 16’s 7,603.78 points.
With the red marks splashed across the markets, is it wise to try to catch a falling knife, so to speak?
According to The Edge Singapore’s senior financial analyst Thiveyen Kathirrasan, research is key.
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To be sure, research is one thing Kathirrasan is big on, having stressed the importance of it in our previous story.
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Yet, the answer is really that simple. Without research, buying into the markets without any real knowledge, is simply gambling.
“It’s really on you to do your research to determine whether the company is cheap to buy [at present] or not,” says Kathirrasan.
For instance, if a particular company estimates that its revenue is slated to increase 2% a year, its stock price is technically supposed to go up accordingly.
At a time where there’s no news (or noise, as Kathirrasan deems it), and when a company’s earnings are likely to be within its expected range, that’s when it is easier to determine the true value of the companies, he says.
If the company’s financial results come in line with expectations with a positive outlook, that’s when a decline in share price upon negative news represents an opportunity, he adds.
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“Unexpected news creates a window where the stock is open to be valued subjectively until the actual results come out, or analysts or the market have a strong consensus on what's gonna happen to the company. So this is the time when you wanna actually do research because there’s a higher possibility that it might not be correctly valued (which will be determined in the future),” says Kathirrasan.
“[In a nut shell], you want to buy a stock when it is undervalued, or when there is a divergence in its share price and its intrinsic value,” he continues.
The most common way to value a stock is to determine its price-to-earnings (P/E) ratio, where you take the company’s stock price and divide it over its most recent earnings per share (EPS).
Investors can also rely on the price-to-book (P/B) ratio that is used to compare a company’s current value in the market to its book value per share. This is calculated by dividing the current share price against the company’s latest book value per share. Traditionally, any figure below 1.0x means that the stock is currently undervalued.
There is also the use of forward P/E ratio, which uses estimated earnings, or the potential of a company’s future performance. The higher the forward P/E ratio, the higher the amount of growth expected.
