Value investing: Difference between quality and value factors

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Duffman2315
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Value investing: Difference between quality and value factors

Post by Duffman2315 »

Hi guys,
got a basic question for you, i've just started learning about value investing and i've read a few different books on the subject matter/strategies and one simple thing that stumps me is the different formulas/factors for value versus quality.
for example, i'm reading 'Millennial Money' by Patrick O'Shaughnessy. he talks about 'Value' being 'price to cash flow' or 'enterprise value to free cash-flow' and 'Quality' is referred to as 'return on invested capital' (higher than 30%). i feel like a business with a high return on invested company (relative to its peers) would also be great 'Value' if they're returning higher than there peers??…..
So my question is what makes one factor considered 'Value' and others considered 'Quality? Without going into it to much could someone give me a clear simple answer to the differences with possible examples? i appreciate the help! i know its a simple questions i just need this clear in my head!
thanks in advanced.
ig17
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Re: Value investing: Difference between quality and value factors

Post by ig17 »

A new Toyota Camry or a ten year old Ford Focus? Which one is better quality? Probably Camry. Would you pay $100K for a new Camry? I hope not. It would be an extremely poor value. Would you pay $500 for a ten year old Focus? Maybe. It might be a great bargain if you need a beater for winter driving.

Same with stocks. A high quality business can be a poor investment if you overpay. A low quality business can be a good investment if it's cheap enough.

Does this help?
Duffman2315
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Re: Value investing: Difference between quality and value factors

Post by Duffman2315 »

yeah cool that does help, just thinking about it now. Again this will sound simple and/or stupid but all value measures (be it enterprise value and something/price and something) always have a reference to price right?(be it price per share/market cap ect) so obviously increases/decreases to share price without an increase/decrease to say cashflow will affect it's value? then making it expensive cheap to their peers/other investments?- not sure if thats a question or a statement ha. but i'm onto he right track yeah?

but when considering 'quality' factor like 'return on capital invested' it has no reference to price, so in theory it could be high (north of 30%) but that quality could already be priced into the share price and the 'value' could be really high right? depending on what metric you use to value the business.....???

i guess could you also give me a few other methods people use to 'Value' a business and another that helps determine the 'quality'?

One last thing, again another statement - lets say a business has an 'enterprise value to free cash free cash flow' of 5. So my first reaction is thats good value/cheap, but relative to what? my thinking is the inverse (1/5)=0.20 or 20% and (in Australia) i'd get 2% in a bank account and thats makes it better value. Should i be comparing this return to other investment options or to other companies in the market? maybe to it's peers its not that cheap....

Anyways again thanks for your help, hopefully my thoughts makes sense and i'm on the right track!

Cheers
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