Updated on March 14, 2023
Value stocks are stocks which are considered as under-priced or priced lower than their peers and also in comparison to their own performance metrics. They might have a long track record but are currently trading at lower valuations due to certain factors like
adverse macro environment or cyclical nature of the business.
‘Value Investing’ is an approach which tries to identify value stocks today to profit from them in future. The underlying premise is that the market will recognize the ‘true worth’ of value stocks with time and the price will ‘catch up’.
Features of Value Stocks
Some features of Value Stocks are:
1. Low Price – Value stocks belong to companies which are currently undervalued and are displaying slow growth and thus their prices are beaten down.
2. Less Volatility – Value stocks exhibit lesser price fluctuations, during market highs as well as lows.
3. Low Price to Earnings ratio – Value stocks have a low P/E ratio and are thus treated as ‘underpriced’ wrt existing market valuations.
Benefits of Value Stocks
Benefits of Value Stocks are:
1. Value stocks move slowly, do not move up or down drastically and are thus considered to be relatively less risky and stable.
2. Value stocks also have a good dividend payment record and are used by investors as a hedge during times of poor market performance.
Limitations of Value Stocks
1. Value investors are willing to wait till the stocks reach their ‘real potential’ but sometimes this wait can be very long.
2. Value stocks keep the capital locked which could otherwise be utilised elsewhere for good returns.