Value Stock Definition Example How To Find Value Stocks

Value Stock Definition

Explanation

It is essential to understand that the stock’s intrinsic value (fair value) is not necessarily directly related to its current market price. The valuation of a stock depends upon its demand and supply in the market, and if there is a high demand in the market, the price of a share will increase, and if the company doesn’t have any good future aspects, then the price of the stock will decrease.

So, a value stock is currently selling below its fair value. Fair value can be calculated using various measures like price to earnings ratioPrice To Earnings RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more, price to book value ratioPrice To Book Value RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more. There were situations when their projected earnings were lower, or we can say guidance given by the company was lower. The market has a pessimist view of the company’s long-term endeavor. Hence, the share price falls, and soon when the company is out of all rumors and shows a good profit, then the price of the share increases.

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Importance

The value stock is purchased at a bargain price as the company’s situation in the market is going down, and the company is unable to perform to its best. As the market understands the stock’s potential, the price of the share will increase, and investors will be able to earn substantial returns. Investors are betting that inefficiency gives them an opportunity for considerable gain. An investor who is trading in value stock knows that he is trading at a price lower than they are worth and will gain when the price of the share increases.

Methods to Determine Value Stock

One of the most frequently used methods for figuring out a company’s valuation should be using various financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more. A few common ratios are price-earnings, price-sales, and price-book ratios. Since the value stock companies are commonly found to have paid dividends in the last years, the Dividend Discount ModelDividend Discount ModelThe Dividend Discount Model (DDM) is a method of calculating the stock price based on the likely dividends that will be paid and discounting them at the expected yearly rate. In other words, it is used to value stocks based on the future dividends’ net present value.read more is the best valuation method. Investors can calculate the PE ratio and take the Avg PE ratio for the previous five years to evaluate whether shares are trading at a discount in respect of their intrinsic value or not. Also, the investor can calculate the intrinsic value using different online calculators and compare it with actual prices in the market.

Examples of Value Stock

Let’s analyze this with the example of VR films; there was a time in June 2019 when there were only buyers of this stock; at that time, the stock price was Rs 90.00, and in August 2019, there were only sellers of this stock, price prevailing in the market was Rs 171.25. So investors were wise enough to research this stock and make a market move.

Similarly, in the case of Binani Industries Ltd, the stock touched its 52 Week low of Rs 5.70 on 31st October 2019. On the next day, 1st November 2019, there were only buyers in the market for this stock, while before that, there was a situation where all the investors were selling this stock. The same situation took place in the case of Ansal Properties and Infrastructure Ltd.

Value Stock vs. Growth Stock

A good portfolio has a mix of both types of stocks. The benefit of diversification can be considered with both stocks.

#1 – Meaning – A growth stock is a successful company with substantial growth potential shortly. The company is expected to have earnings higher than the industry’s average growth rate. These stocks are said to be growth stocks, while the Value Stock is determined to be currently undervalued compared to their intrinsic value or their fundamental worth.

#2 – Price Earnings Ratio – The market price of share / last year’s EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more. If the projected PE ratio is more than the current PE ratio, then the stock is considered a value stock. However, Growth stock has a low Projected PE ratio compared to the Current PE ratio due to the denomination factor of EPS.

#3 – Investor’s Expectation – The Investor invests in value shares, believing that the share price will increase when the broader market recognizes its full potential. In contrast, the growth stock investors think that there will be high earnings on shares irrespective of the market conditions.

#4 – Returns – Both types of stocks are guaranteed to receive the returns for future capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more. Also, such investors receive a dividend in return. Simultaneously, growth companies don’t pay many dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more because investing the surplus funds in the business is a viable option for expansion and growth instead of distributing the dividend.

#5 – Risk Level – Growth stock carries a higher risk, which is led by comparatively high volatility and driven by volatilityVolatilityVolatility is the rate of fluctuations in the trading price of securities for a specific return. It is the shift of asset prices between a higher value and a lower value over a specific trading period. read more; the stock’s price is higher compared to the fundamentals of the company. On the contrary, it is comparatively a safer bet to invest in value stock, which is expensive compared to peer stock. Hence, there is comparatively lesser trading in the stock and lesser volatility.

Conclusion

A diversified portfolioDiversified PortfolioPortfolio diversification refers to the practice of investing in a different assets in order to maximize returns while minimizing risk. This way, the risk is kept to a minimal while the investor accumulates many assets. Investment diversification leads to a healthy portfolio.read more is the best portfolio for investment. Investors can gain exposure to the portfolio of blended funds, where the value stock and growth stock are put together for maximum returns. In addition, investors should focus on value investingValue InvestingValue investing is a long-term strategy that involves buying and holding undervalued securities, real estate, or other financial assets.read more, which involves buying a company at a price lower than the intrinsic value and selling it when the price reaches its value.