Value Stock
IntermediateA value stock is a share that trades at a low price relative to measures of its fundamental worth, such as earnings, book value or dividends, often because investors have lower expectations for the company.
Value stocks are usually shares in established companies with modest growth prospects, or companies that have fallen out of favour because of temporary problems, slowing industries or general market pessimism.
They are typically identified by low price-to-earnings, low price-to-book or high dividend yield ratios compared with the market. For example, a bank trading at 8 times earnings and below its book value, when the market average is 18 times earnings, might be considered a value stock.
Value investors believe the market sometimes overreacts to bad news or overlooks steady businesses, so buying such shares at low prices can lead to good returns if their prospects improve or if the market re-rates them.
The risk is that a share is cheap for good reason. A company in a declining industry, with weak management or serious financial problems, may stay cheap or fall further. These are sometimes called value traps.
Research over long periods suggests value stocks have at times outperformed growth stocks, but this has varied greatly, with long stretches when growth stocks have done better.
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