When to Look for Value Stocks

(3 of 6)

When to Look for Value Stocks

While you can find value stocks at any time, there are certain conditions under which stocks may be undervalued. Identifying these situations can help you succeed in efficiently locating value stocks and in spotting them when you see them. Identifying a value stock often requires considerable time and research, and distinguishing these conditions can help you shorten that process.

Temporary stresses

For example, the stock of companies under temporary stress often may be undervalued. The key word here is "temporary." Maybe the company has just corrected a quality problem in a primary product line. Or, perhaps it has just hired an experienced turnaround guru. However, if what you thought was a temporary stall turns into a full-blown tailspin, the stock that you identified as a great value may dive toward oblivion, taking your principal along with it.

Bear markets

When the average price of all stocks falls during a bear market, the prices of many stocks may be undervalued. This is a time when some investors will actively seek to purchase stocks at bargain prices.

Bull markets

You also can find value stocks during a bull market. Investors may overlook the true value of a company for a variety of reasons. The market may be overreacting to negative news—for example, the announcement of a recent drop in earnings, a temporary decline in sales, or even the filing or judgment of a small lawsuit against the company. If the company’s problem is temporary and readily fixable, its stock may be undervalued.

When the industry slumps but the market does not

Sometimes, there may be industry-wide slumps even when the market as a whole is roaring ahead. Otherwise-strong companies in industries experiencing a temporary slump are good candidates for value stock.