What Are the Characteristics of Value Stock?
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What Are the Characteristics of Value Stock?
Value stocks somewhat resemble an unadvertised sale. These stocks are really worth more than their current market price indicates. In short, value stocks are undervalued. Investors who purchase value stocks believe they are buying them at a steep discount and that the market will eventually recognize their true worth resulting in strong gains in the stocks’ prices.
Things To Know
- Unlike higher-valued growth stocks, the market as a whole does not expect much from value stocks.
- Look at price-to-book-value ratio.
Unlike higher-valued growth stocks, the market as a whole does not expect much from value stocks, and their generally low price/earnings ratios and bargain prices attest to the market’s low expectations. Yet not every low-priced stock is a value stock. A value stock represents a company that demonstrates a likelihood of increased future earnings. Maybe new management or new technology is about to turn around a floundering company. Or perhaps an inventory reduction program or new marketing strategy is about to pay off. Whatever the reason, the company is poised for growth. A careful review of dividends, cash flow, balance sheet, assets, annual report, and even news releases may reveal that company earnings are about to take off.
Look at price-to-book-value ratio
One key figure is the price-to-book-value ratio. The book value is the total net assets of the company divided by the number of outstanding shares; the price-to-book-value ratio is the stock price divided by the book value. For example, if a stock’s price is $20 and its book value is $30, the price-to-book-value ratio is 2/3. A stock with a price-to-book-value ratio of 2/3 or less generally would be considered a value stock. In contrast, a stock with a price-to-book-value ratio of 3 or more is likely to be a growth stock.
Look at debt
Another key factor in determining whether a stock is really a value stock is the company’s debt load. Do company assets exceed liabilities with room to spare? Again, knowing a stock’s book value can help answer this crucial question, since the book value is based on the company’s net assets, after all liabilities have been deducted.
