A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.
Table of Content
- What is value stock?
- How to find a Value stock? or How to value a stock?
- Risk And Return of Value Stock?
- Examples of Value stocks.
A value stock is a stock with a price that appears low relative to the company's financial performance, as measured by such fundamentals as the company's assets, revenue, dividends, earnings and cash flows. Investors in value stocks are assuming that the price of the stock will eventually rise, reflecting the true health and potential of the company. Because they see the stock as relatively undervalued, they're anticipating that its appreciation will outpace the growth of the value stock's competitors or the market overall.
- Priced below peers in its industry
- Grow their earnings and revenues at a slower pace than the market
- Can be seen as risky (i.e., fundamentals may deteriorate)
Value stocks can be stocks of established companies with proven histories of financial performance differentiating them from "growth stocks," which tend to be priced at more expensive levels and often are issued by companies that are in newer industries and growing their earnings at a faster rate. Since value stocks may take some time to catch up with their potential, investing in them may be better suited to longer-term investors who have the time and the patience to wait. Value stocks also are more likely to issue dividends to their investors than growth stocks.
How do you identify Value Stocks?
No matter what your investing philosophy, value stocks can be a great way to diversify your portfolio.
If you’re just getting started with investing in the stock market, understanding how to identify value stocks is an important step to take.
Here are some of the main factors that may help you identify value stocks when you’re doing research for your portfolio.
- Focus on potential growth
- Look at the company’s dividend yield
- Look for consistent earnings
- Look at the company’s dividend yield
- Take a look at the book value
- Calculate cash flow return on investment
- Focus on potential growth
Value stocks are a common investment strategy that focuses on finding businesses that you believe will grow in the future and then purchasing stocks for them before the growth has occurred.
The idea is that you can buy stocks for lower than they will be worth in the future, and therefore make a profit by selling them once their value has naturally increased.
The key to identifying stocks that are likely to increase in value is to look for companies with good management teams, strong sales figures, and few competitors.
If you can find a company that is well-managed, consistently growing its sales figures, and not competing against hundreds of other companies for the same customers, you may have found yourself a winner!
- Look at the company’s dividend yield
The next step to identifying value stocks is looking for companies that are selling at a discount.
Dividend yield is a good metric for this. Simply take the company’s annual dividend payment per share and divide it by the current stock price to get the yield.
That’s a pretty good starting point. But remember that stocks can trade at a discount for a reason.
Maybe they’ve been struggling with declining sales or profits, or there could be risks you haven’t considered.
So although you’ll want to look at dividend yield, you should also do your homework on the underlying business to make sure the stock really is undervalued, and that it has a reasonable chance of turning things around and getting back on track.
- Look for consistent earnings
Value stocks can be difficult to find.......
There’s the old saying, “buy low and sell high,” but if a stock’s value is already low, how do you know it won’t go lower? And if it’s already high, why would you want to buy it?
The best way to find value stocks is to look for consistent earnings. Rather than looking at a stock’s current price or its recent highs and lows, look at its year-over-year earnings.
If they have consistently increased over the last few years, this is a good sign that the company will continue to grow and the stock will be worth more in the future.
But wait a minute, what exactly are earnings? Earnings are simply how much money a business makes in one year after all of its expenses are paid.
Businesses report their earnings every quarter, usually in April, July, October, and January.
When you’re looking for good value stocks, look for consistent earnings growth over the last few years from each quarter.
Risk and Return of Value Stocks
For all their potential upsides, value stocks are considered riskier than growth stocks because of the skeptical attitude the market has toward them. For a value stock to turn profitable, the market must alter its perception of the company, which is considered riskier than a growth entity developing. For this reason, a value stock is typically more likely to have a higher long-term return than a growth stock because of the underlying risk.
A value stock may need some time to emerge from its undervalued position. The risk of investing in a value stock is that this emergence may never materialize.
Example of Value Stocks
As of June 2019, large money center banks represent value stocks. Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Citigroup Inc. (C) all trade at a significant discount to the market based on earnings. For example, Citigroup has a P/E ratio of 9.67 compared to 19.12 for the average S&P 500 company.
Investors can gain exposure to a portfolio of value stocks using exchange-traded funds (ETFs). Three of the largest value ETFs based on assets under management (AUM) include the Vanguard Value Index Fund ETF (VTV), the iShares Russell 1000 Value ETF (IWD), and the iShares S&P 500 Value ETF (IVE). All three funds are specifically designed to track the price and yield performance of U.S. large-cap value stocks.