Value Stocks

Stocks that appear to trade at a lower price relative to their fundamentals like earnings and dividends.

What Are Value Stocks?

Value stocks are shares of companies that appear to be trading for less than their intrinsic or book value, making them "underpriced" relative to their fundamentals. Value investors believe the market has temporarily undervalued these companies and that the price will eventually rise to reflect their true worth.

The father of value investing is Benjamin Graham, author of "The Intelligent Investor" and mentor to Warren Buffett. Graham's approach focused on finding stocks trading below their net asset value — buying "dollar bills for fifty cents."

How to Identify Value Stocks

• Low P/E ratio: Trading below the sector or market average P/E ratio.
• Low price-to-book (P/B): Stock price below the company's book value per share (assets minus liabilities).
• High dividend yield: Value stocks often pay generous dividends because they're mature companies generating steady cash flows.
• Low price-to-sales (P/S): Revenue-based valuation metric that's useful for comparing companies within the same industry.

The Value Trap

Not every cheap stock is a value stock. Some stocks are cheap for good reason — they're in declining industries, have unsustainable debt, or face structural challenges. These are called "value traps" because they appear undervalued but never recover. The key is distinguishing between temporarily depressed and permanently impaired businesses.

Value Stocks and Earnings

Value stocks face lower earnings expectations, making beats more common but less dramatic. A value stock that beats by $0.05 might rally 2-3%. A growth stock beating by the same amount might rally 10%. On EarningsShot, understand that prediction accuracy on value stocks may be higher, but the subsequent price moves tend to be more muted.