Value investors want to buy stocks for less than they are worth. This concept certainly makes sense — after all, if you could buy a product/stock/anything for that matter at Rs. 80 which actually would have cost you Rs.100, wouldn’t you do so as often as possible? Of course, this is easier said than done. The following article gives you an overview of what value stocks are, examples of some excellent beginner-friendly value stocks, and some key concepts and metrics that value investors should know.
What Is a Value Stock?
A value stock is a stock that trades at a lower price relative to its earnings, sales, and long-term growth potential and making it appealing to value investors.
Here is one important approach for all investors to understand. Most stocks are typically classified as either value stocks or growth stocks. Generally speaking, stocks that trade for valuations below that of the average stock in the market are considered value stocks, while stocks with above-average growth rates are treated as growth stocks. Some stocks have both attributes or characteristics or fit in with average valuations or growth rates, so whether to call them value stocks depends on how many characteristics of such stocks they have.
Value stocks generally have some common characteristics. They typically are mature businesses, have constant (but not spectacular) growth rates, and have relatively stable revenues and earnings. Most value stocks pay dividends, although this isn’t a hard-and-fast rule.
Value investing was first established by Benjamin Graham and David Dodd, both professors at Columbia Business School and teachers of many acclaimed investors.
A value investor refers to someone with a primary investing goal of identifying good companies trading for a discount to their intrinsic value.
Long term investors can broadly be classified into one of three groups. Value investors try to find stocks trading for lower than their intrinsic value by applying fundamental analysis. Growth investors try to find stocks with the best long term growth potential relative to their current valuations. And investors who take a combined approach do a little of each.
How to find value stocks?
The point of value investing is to find stocks trading at a discount to their intrinsic value, with the idea that they will be likely to outperform the overall stock market over time. Unfortunately, finding stocks that trade for less than they are truly worth is easier said than done. Ultimately, if it were easy to buy Rs.100 valued stock for Rs.80 over and over, everyone would be rich.
Having said that, here are three of the best metrics to keep in your toolbox as you search for hidden bargains:
P/E(Price-to-Earnings) ratio: This is the well-known stock-valuation metric, and for a good reason. The P/E ratio or price-to-earnings can be a very useful tool for comparing the valuations of companies in the same industry. To calculate it, one simply must divide the current stock price by the earnings per share (EPS).
PEG (Price/Earnings-to-Growth) Ratio: This is similar to the P/E ratio but adjusts to level the playing field between companies that might be growing at slightly different rates. The formula for the PEG ratio is derived by dividing the stock’s P/E ratio by the growth rate of its earnings for a specified period.
Price-to-book (P/B) ratio: Think of the book value as what would theoretically be left if a company close out operations and sold all its assets. Calculating a company’s share price as a multiple of its book value can help identify undervalued opportunities, and many value investors specifically look for opportunities to buy stocks trading for less than their book value.
The formula for the PEG ratio is derived by dividing the current closing price of a share by the book value of a share in the latest quarter.
While they might not be absolutely as thrilling as their growth stock counterparts, it is important to realize that value stocks can have just as much long-term potential as growth stocks, if not more. After all, Rs.10,000 investment in Eicher Motors in 1999 would be worth more than Rs.2 Crores today. Finding stocks that trade for less than they are truly worth is a time-tested investment style that can pay off extremely well.
TOP 10 Value Stocks
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