The search for undervalued stocks is a foundation of value investing, a method that aims to find companies trading below their intrinsic worth. This strategy, made famous by Benjamin Graham and later Warren Buffett, uses fundamental analysis to find chances where the market price does not match a company's financial condition, earnings, and growth potential. A systematic way to use this strategy is by filtering for stocks that rate well on valuation measures while also holding acceptable ratings in other important fundamental categories, confirming the low price is not a pitfall but a possible chance.
Harmony Gold Mining Company Limited (NYSE:HMY) presents an interesting example from this type of filtering. The South African gold and copper miner was found using a "Decent Value" filter, which selects stocks with a high valuation rating together with acceptable ratings in growth, financial condition, and earnings. This mix is important for value investors; a low-priced stock is only a worthwhile purchase if the core business is fundamentally healthy and has capacity for future success.
A Notable Valuation Picture
The most noticeable part of Harmony Gold’s fundamental report is its valuation rating of 9 out of 10. This shows the stock is priced favorably compared to both its own earnings and its industry group. For a value investor, this is the initial step: finding a notable difference between price and estimated value.
- Price-to-Earnings (P/E): At 15.26, HMY’s P/E ratio is much lower than the S&P 500 average of 27.17 and is better than 94% of its group in the Metals & Mining industry.
- Forward P/E: An even more interesting number is the forward P/E of 6.91, which is lower than 96% of industry companies and much below the wider market average. This implies the market has very low expectations for future earnings.
- Enterprise Value to EBITDA & Price/Free Cash Flow: The company also rates well on other valuation measures, trading at a lower level than the industry based on these cash-flow focused metrics.
This combined information forms a view of a stock the market might be neglecting, a typical situation value investors aim to use.
Financial Condition and Earnings: A Firm Base
A low valuation by itself can signal hidden troubles, often called a "value trap." This is why the filter requires acceptable ratings in condition and earnings. Harmony Gold earns a 7 for financial condition and an 8 for earnings, giving proof of a sound operational foundation.
The company’s earnings measures are especially good, placing it with the top in its field:
- Return on Invested Capital (ROIC) of 20.62% not only greatly beats the industry average but has also been getting better, showing effective use of capital.
- Return on Equity (ROE) of 22.97% and Profit Margins of 15.68% further show the company’s capacity to produce significant earnings from its assets and sales.
Financially, the company is in a steady state. Its Debt/Equity ratio is a very low 0.04, and it has a high Altman-Z score of 7.94, indicating a very small short-term chance of financial trouble. While some liquidity measures are moderate, the good solvency and earnings suggest the company is not facing immediate cash flow problems.
Growth: The Driver for New Assessment
For a value investment idea to succeed, there must be a driver for the market to reassess the stock. Growth supplies that possibility. Harmony Gold receives a growth rating of 7, backed by good past results and positive future projections.
- Past Growth: Over the last year, Earnings Per Share (EPS) increased by a notable 66.97%, and Revenue rose by over 20%.
- Future Projections: Analysts forecast continued good results, with EPS expected to grow at an average yearly rate of 25.45% and Revenue by 14.76% over the next few years.
This growth picture is necessary. It implies the company is not standing still, and its currently low valuation measures could rise if it keeps meeting these growth paths, offering the combined return of earnings growth and possible measure increase that value investors look for.
Final Points and Investor Thoughts
Harmony Gold Mining seems to match several important ideas of value investing. It trades at a clear discount to the market and its industry, it runs a profitable business with a firm balance sheet, and it is showing clear growth. The mix of a high valuation rating with acceptable ratings in condition, earnings, and growth helps reduce the chance of a value trap, implying the low price could be a chance instead of a sign of lasting problems.
Naturally, investing in a commodity-based business like gold mining involves particular risks, including connection to changing gold prices, geopolitical elements in its operating areas, and operational difficulties. These are significant factors for any investor to study more.
Interested in locating other stocks that match a similar picture? You can use your own "Decent Value" filter with the ChartMill Stock Screener to search for companies with good valuation fundamentals paired with acceptable growth, condition, and earnings. For a complete look at all the measures discussed, you can see the full Harmony Gold fundamental analysis report.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented is based on data provided and should not be the sole basis for an investment decision. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.
