The idea of investing in ‘ value stocks ’ is nothing new.
“Buy low, sell high” is a common mantra in the stock market — and with good reason. If you can buy a stock at a value now and then sell it high in the future, it’s a beautiful thing indeed.
The general concept of seeking out a great value has been around, oh, pretty much since the stock market started.
But as a trading technique, it was refined and popularized by a certain legendary investor, who made a fortune by carefully researching stocks and finding deals where nobody else was looking.
Curious about how value stocks work and how to find them? In this post, you’ll get a comprehensive overview, starting with what value stocks are and progressing to tips for how to invest in value stocks.
Table of Contents
- 1 What Is a Value Stock?
- 2 The Top 5 Value Stocks Right Now
- 3 Conclusion
- 4 One Platform. One System. Every Tool
What Is a Value Stock?
A value stock is a security that’s trading at a price that’s low in relation to its fundamentals.
By ‘fundamentals,’ we’re talking about things like dividends, earnings, or sales. Some characteristics of a value stock would include a high dividend yield, a low price-to-book ratio, low price-to-earnings ratio, or a combination of these factors.
A value stock trader is someone who carefully and thoroughly researches to find the best values in the market.
So as a value stock trader, you dedicate yourself and your time to research companies. You’re working under the assumption that the market isn’t always perfect and that prices aren’t always right. With that in mind, you hope to find stocks that are trading for less than they should or could be.
Value vs. Growth
Let’s take a second to explain the difference between value and growth … There is a difference, and it does matter.
One key difference is that value stocks look to the past, while growth stocks look to the future.
A value investor looks at things like fundamentals and historical data when searching for stocks. When seeking out value stocks, you dig deep into financial statements and try to determine if the value of a company’s stock is above the current trading price.
If you find that the company has solid fundamentals and is undervalued, it could be a contender for a trade.
That’s not necessarily the case with growth stocks. Growth stocks are more forward-looking. As a growth investor, you expect that higher-than-average expected growth rates will make for returns that are also higher than average.
But the risk here is that this potential hasn’t yet been realized, and the company has plenty of work cut out to make this growth a reality.
Also worth noting: With value stocks, earnings typically ride the same waves as the economy. So when the economy is heating up, these stocks tend to rise in price. And when the economy is slowing down, value stocks will generally follow suit and decline in price.
The History of Value Stocks
The idea of finding a great bargain is about as old as time. But while the idea of value investing isn’t new, many credit uber-investor Warren Buffett with making it a full-fledged trading phenomenon.
He’d thoroughly research companies looking for values, then invest. He was very good at it — as evidenced by his storied career.
Unfortunately, times change. In recent history, value stocks have been having a tough time. Since the financial crisis in 2007 and 2008, the markets have been moving differently. The biggest movers have been growth stocks, particularly innovative companies like Amazon.
The problem for value investors? This type of stock probably wouldn’t even show up on their watchlist … In spite of the fact that they have a lot of growth potential, they’re typically not undervalued.
What to Look for in Value Stocks
Say that you want to buy a new washing machine. You probably wouldn’t just go to a single store and throw down some cash after looking at one machine. You’d spend some time reading reviews online, comparing prices, and looking for sales.
While, of course, the stock market works a little differently, ultimately the same basic ideas apply … First, you need to find what you want to buy. Next, you need to validate the trade through research.
A value stock will be one that has a price lower than other stocks in the same sector —and without any really good reason.
Overall, the value stock is typically not met with a huge amount of optimism on the part of most traders. This could be due to any number of catalysts like negative publicity, low earnings reports, legal problems, or sympathy plays based on happenings in other companies.
As a value investor, it’s your job to find these companies and use information like earnings reports to determine whether the company is really in deep trouble or if it’s genuinely a good value right now.
Often, promising value stocks are associated with established companies that have stable dividends. In essence, you’re looking for basically strong, good companies that are experiencing setbacks that you think are temporary.
The Top 5 Value Stocks Right Now
Here are some examples that could be considered value stocks right now. As always, do your own research…
AMC Entertainment (NYSE: AMC)
Right now, AMC Entertainment is a stock that people love to hate. The company is a leader in the world of entertainment … but it’s been having trouble lately.
Since 2016, the company has grown thanks to several acquisitions. It’s now the biggest movie theater chain in the world. However, these acquisitions have resulted in some big expenses for the company, causing its debt to skyrocket. When you add to that the factor of dwindling ticket sales at the beginning of 2019, the overall optimism isn’t high for this stock.
However, there are some signs that it could be undervalued right now.
For one, the lower-than-usual box office sales could be something of a fluke based on higher-than-average sales in the first part of 2018.
Additionally, AMC’s Stubs A-List program (a sort of movie ticket membership) has vastly exceeded expectations. As this program grows and the company adjusts from the debt, it could move back up the (stock) charts.
Children’s Place (NASDAQ: PLCE)
Traditionally, this New Jersey-based company, which operates The Children’s Place retail stores, has been a solid performer. In the past several years, the stock enjoyed some impressive growth, with the stock price more than tripling between 2014 and 2018.
However, in late 2018, its biggest rival, Gymboree, filed for bankruptcy and subsequently liquidated its stores in the first quarter of 2019. Investors understandably got scared, worrying that Children’s Place might be next.
But the fear isn’t necessarily warranted. With its biggest rival out of the way, there could be room for this company to get back on its upward trajectory.
It’s also proven to be more savvy in the digital age, so there isn’t necessarily a strong sign that Children’s Place will follow Gymboree’s path.
Incyte (NASDAQ: INCY)
2017 was a very tough year for Incyte, a Delaware-based pharmaceutical company. After reaching a high price of about $149 per share, share prices plummeted to the high $50s. One reason? There was gossip about an acquisition, but it never happened.
While there was some recovery in 2018, it wasn’t a total turnaround. However, recently the stock is finding support near the 200-day moving average line, pushing both lows and highs slightly higher. It may be a sign of a turnaround from the steady downtrend since 2017.
Recently, increased interest in one of its drugs drove some sales. But for now, the stock is still available at a fairly low price. If things continue to reverse for this company, it could be set to grow.
NetScout Systems (NASDAQ: NTCT)
NetScout helps companies with performance management solutions. What does that mean? They might help companies do things like implement 5G connections or streamline security procedures.
There were some pretty big pullbacks for this stock in 2017 and 2018 after lackluster earnings reports, and it experienced serious lows in October of 2018. The company claimed to have good reasons — such as delayed orders with some of its biggest customers — but investor confidence was clearly shaken.
However, more recently, things are looking up, along with earnings estimates. In March and April, the stock began reaching new highs. As of this writing, the stock is down from these highs, but that could change as more investors get curious about NTCT.
Whirlpool (NYSE: WHR)
This famous appliance manufacturer is like a poster child for the bad things that can happen to potentially good stocks during the U.S.-China trade war. The stock dropped dramatically in 2018 as supply and material prices rose significantly. Ultimately, the company’s bottom line took a hit.
But here’s the thing: The company represents a variety of well-respected brands and a solid income stream. It’s considered a market leader.
It also services a variety of different customer demographics with varying price points. And it’s also hip to digitizing appliances, which is a growing trend. With improved digitization, it will also have improved customer data, which could improve marketing efforts.
It could be as simple as a good company that’s experiencing bad times due to the trade war, in which case this could be a strong contender as a value stock.
© 2016 StocksToTrade.com
Seeking out a good value is never a bad thing. That’s just as true in the stock market as it is in a supermarket or the mall.
However, finding the most promising value stocks isn’t just a matter of filtering based on price. It requires plenty of research and diligence to actually figure out if a stock is trading lower than its potential. It also requires looking at and understanding the fundamentals to see if the stock really has potential in the future.
Like any other investing style, value stocks require dedication, discipline, diligence, research, and poring over the charts to make the most-intelligent trading decisions.
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Have you traded value stocks? What are some of the biggest lessons you’ve learned? Leave a comment and let us know!