If you had the possibility to save money, you most likely would. After all, those 20% off coupons at your favorite store leave money on the table if you do not use them. And if you could go to the bank with $80 and request a $100 bill in return, wouldn’t you take advantage of it?
A value stock is a way that investors can secure equity in a public company that is essentially “on sale.” The goal is for you to profit when other investors clue into what they were originally missing out on.
Why Are Value Stocks Desirable?
Value stocks are desirable because they are ways for investors to receive equity in a company at a perceived favorable price. Value investors take advantage of factors that might decrease the stock’s price to make a profit.
An example of this is if a company were to get bad press and their stock price drops. The new price may be lower than it typically would be due to the recent press, making it essentially “on sale.” However, once the company rebounds, you will see the stock increase in value.
What Are Common Characteristics of a Value Stock?
When looking for value stocks, there are some common characteristics that can help you identify a “bargain.” The market has undervalued these stocks for a certain reason, and as an investor you will want to get in on the action before the price corrects itself. Below is a list of things that you should look for when searching for value stocks.
Low Price-to-Book Ratio
Understanding the price-to-book (P/B) ratio is important to see exceptional returns. It is calculated as follows:
P/B ratio = market share per price/book value of equity per share
The easiest way to define book value is it is the value of what would be left over if a company goes bankrupt, according to the company’s balance sheet. To calculate this figure, you would need to subtract the total liabilities of the company from the total assets.
The concept behind price-to-book ratio is that the stock will be trading at less than the book value, making it a good buy.
High Dividend Yield
Value stocks provide investors with higher dividend income than growth stocks. This is because when you invest in value stock, you are investing in a company that is considered mature and tends to pay out higher dividends.
Lower Stock Market Volatility
Value stocks have less susceptibility to market volatility. Because most of these stocks are found among established, larger companies, they possess a high potential for reward, with a lower chance of market volatility.
Low Price-to-Earnings Ratio
Price-to-earnings (P/E) ratio is an important metric when reviewing and analyzing stocks. It is a formula that shows whether the stock price is undervalued (value stock) or overvalued.
You calculate P/E by dividing the market value per share by the company’s earnings per share.
Examples of Value Stocks
If the idea of investing in value stocks is of interest to you, knowing how to determine if you are investing properly should be of great importance. Below, you will find real-world examples of value stocks. We will look at two examples of value stocks to help you as you begin your journey.
The first example is Bank of America. It is a well-known, established financial institution. Over the last five years, it has a track record of delivering high returns. It is currently a value stock you should consider buying.
Our second example might be a lesser-known name, but is a large grocery chain throughout many states in the U.S. Albertsons provides local communities with food, essential goods, and pharmacies. It has a track record of stability, but currently has a relatively low valuation.
Please note: when this article was written, these were current examples of value stocks. As time changes all things, these suggestions could likely no longer be considered value stocks.
Other Ways to Utilize Value Stocks
Investors who are interested in value stocks should consider reducing their risks by buying exchange-traded funds (ETFs) that add value by exposing you to hundreds of stocks across multiple companies.
A great example of this is Vanguard Value ETF (VTV). This ETF focuses on stocks that have favorable metrics such as P/B and P/E that are mentioned above. It is diversified across numerous industries including health care, financials, consumer goods, and industrials.
Another ETF that focuses on value stocks is iShares S&P 500 Value ETF (IVE). It invests in value-centric stocks within the S&P 500. It also focuses strongly across multiple industries including a large portion of health care and financials.
How To Find Value Stocks
There are thousands of investment options that you can choose from. It might seem overwhelming on where to start, so simplify the process. Start by identifying around 30 companies that you would like to analyze further. After you have identified the companies you might think are value stocks, look into their P/B and P/E to see if you are in fact correct.
Also, you can reach out to your financial advisor to find out what they recommend. This is so you are not wasting your time doing research they might have already completed.
How To Invest in Value Stocks
If you are ready to begin investing in value stocks, firstly, do a quick check to make sure you understand the ins and outs of investing. If you are not a savvy investor, this is the point that you should reach out to your financial advisor for advice. They can help you determine what company’s value stocks you should consider.
If you are a savvy investor, you know where to begin. Do you research and buy your value stocks that add to your portfolio.
Benefits and Drawbacks of Value Stocks
It is a well-known fact that Warren Buffet, a talented investor and wealthy businessman, made a large fortune off of value investing. But utilizing this strategy has benefits and drawbacks that you should be aware of before you try to follow in his footsteps.
With value investing, you can see high profits. Not only that, but it also helps you get the most out of compounding. And you do not have to be a high-wealth individual to utilize this investing strategy.
While many find the benefits of value stocks to be appealing, you should be aware that they do come with risks. The stock might not gain the momentum it should, or the company might collapse.
The market, economy, and other factors can impact the outcome of the investment, which is why you should consider having a diversified portfolio to protect yourself from major losses. Additionally, this strategy takes a lot of patience and hard work.
Difference from Value and Growth Stocks
One important thing to remember is that value stocks differ from growth stocks, which is a stock that investors purchase hoping it becomes the “next big thing”.
Value stocks will be established companies, typically on the larger side. This includes common names like Bank of America, Procter & Gamble, or Microsoft. Alternatively, growth stocks will be companies that you are hoping will be the next big thing – like Tesla.
Start Trading Undervalued Stocks
Value stocks are a great way to increase your wealth, but it requires a lot of skill and risk. While it would be ideal if they would always outperform the market, it is not always the case.
Investing is tricky and keeping up with current trends in the market can be complicated. If you are ready to start trading undervalued stocks, do not hesitate to reach out to your financial advisor for guidance.