When investors choose between growth and value shares, the former is pretty easy to identify.
They're companies that are rapidly growing, and the stock price reflects the future potential of this expansion. Buying such ASX shares is a vote of confidence that the business will be larger in a few years than it is now.
But what about value shares?
The definition of value shares are more ethereal and subjective. They're stocks that the investor believes are undervalued, so the share price would rise once the market wakes up to how well the business is doing.
As such, there can sometimes even be an overlap between growth and value. They're not mutually exclusive groups.
Tyndall Asset Management portfolio manager Jason Kim is a professional at picking out value shares.
In a recent video, he revealed the ASX shares he would be targeting in 2023:
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Looking for 'intrinsic value'
According to Kim, his team looks for what they call "intrinsic value" when picking stocks to buy.
"It's all about determining sustainable earnings that each company generates on a mid-cycle basis and applying the right multiple to that stock," he said.
"Value is about identifying stocks that we believe trade at a big discount to its net worth."
Using measures like price-to-earnings ratio is too simplistic — Kim's team calls that a "naive academic" approach.
"Some stocks deserve to trade at low price-to-earnings."
By taking a more sophisticated approach using mid-cycle earnings, the Tyndall team can calculate what the deserved valuation for each business is.
"We have a large team of analysts that go out and kick the tires to talk to management, talk to competitors, suppliers and customers."
Don't be fooled by low or high PE ratios
The difference from the naive academic approach is that this "par" valuation can be vastly different between stocks, depending on context.
For example, Kim named supermarkets as businesses that have excellent defensive earnings.
Therefore investors can pay a bit more for them, and they may still be great value.
"They do deserve to trade at a higher multiple for that safety they offer," he said.
"The extent that they trade at a discount to that, they may well be still above the [average] share market multiple. To us, that's an intrinsic value opportunity."
On the other end of the spectrum, there are stocks that have wildly inconsistent or cyclical earnings.
"They do deserve to trade at a discount to the market," said Kim.
"They may seem cheap on the surface but, to us, they could be fair value or actually expensive."
This filter has served the Tyndall team well over the last three decades, he added.
"The conditions we see right now, we believe, means that our approach will outperform for quite some time."
