What Are Value Stocks? How Do I Find Them?

Value stocks have gained popularity this month as investors look for vaccines to end the coronavirus pandemic. This article will consider key things to know:

  • What are value stocks?
  • Why are they going up?
  • How do I find value stocks?
  • Are value stocks good investments?

What Are Value Stocks?

Value stocks are equities that may appear inexpensive by various metrics. Investors may want to own them based on the idea their prices will return to “correct” values. They may not care whether their businesses are growing, or the long-term prospects of the industry.

Growth stocks, in contrast, are companies whose markets are increasing. They’re usually in newer fields where products and services haven’t yet reached all potential customers. (Like technology.) Growth stocks usually trade at higher prices, so they wouldn’t be considered undervalued.

Recent examples of value stocks include energy, industrial and financial stocks. Growth stocks include software companies, e-commerce and biotechnology.

Why Are Value Stocks Going Up?

Value stocks have gained recently because investors think the economy may recover from the coronavirus pandemic. They see the potential for fiscal stimulus to boost hiring and business spending. Hopes of at least one effective vaccine have people thinking travel restrictions and social-distancing measures could end soon.

Most value stocks fell sharply when coronavirus pushed the economy into recession. Investors shifted to companies that would benefit from social-distancing and remote work. Those included e-commerce, streaming video and software companies. They’ve mostly paused in the last month as sentiment shifted toward reopening.

How Do I Find Value Stocks?

Investors can find value stocks by scanning for companies based on certain ratios and metrics. They include:

  • Price / book value is a company’s market capitalization divided by its book value. Book value is the difference between all the company’s assets and all of its liabilities. It’s also known as shareholder equity. Companies with low price / book values may be considered bargains.
  • Price / earnings is a company’s stock price divided by per-share earnings. Also known as P/E ratio, this is the most common metric for valuing stocks. One limitation of P/E ratios is that they only work when companies have positive earnings. (Many beaten-down companies may have had losses recently.)
  • Enterprise value / EBITDA compares a company’s enterprise value by its earnings before interest, taxes, depreciation and amortization (EBITDA). Enterprise value is a company’s market cap plus debt, minus cash. This accounts for assets financed with debt. For example, a company may purchase a building with cash on hand or borrow. The two scenarios will produce different market capitalizations and book values, but the same enterprise value.
    EBITDA measures the company’s ability to generate cash. This can be used to pay lenders or dividends (depending on how much debt it has). EV / EBITDA is commonly used when assessing takeovers and leveraged buyouts.
  • Dividend yield is a company’s annual dividend / price. Higher values suggest a stock is inexpensive relative to its cash distributions. However, investors should realize that management can lower dividends without warning.

Are Value Stocks Good Investments?

Investors should always consider their time horizons, risk thresholds and expectations when making portfolio decisions. Recent gains in value stocks are based on the economy recovering and the coronavirus pandemic lifting. They also result from money managers rebuilding positions after liquidating these assets earlier in the year.

While the snapback could be sharp, its duration may be limited. Many impacted industries, like hotels, airlines and fossil fuels, may never return to their previous size. They could also be susceptible to political risk if Congress fails to pass further stimulus early next year.

Value stocks have at least two other potential drawbacks. First, their end markets are often mature or shrinking. Second, they don’t stand to benefit from disruptive technological innovation. This could make them less suitable for investors with multiyear time horizons.

This article was written by David Russell, TradeStation Securities, Inc., part of the Monex Group Inc, published on 24/11/2020.

David Russell
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.

Risk Disclaimer: The information above is of general nature only and does not take into account your objectives, financial situation or investment needs. Prior to you make an investment decision, please make sure you carefully read and fully understand our Financial Services Guide, Terms and Conditions, Privacy Policy and other relevant documents that you can obtain from this website. Monex Securities Australia Pty Ltd (AFSL No. 363972; ABN 84 142 210 179) is the Financial services provider. Financial products trading carries risks and may not be suitable for all investors. You are strongly recommended to seek independent financial advice before making any investment decisions.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!