What is a “Value”Stock?

Looking for Bargains in 2021?

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By Dr. David E. Marcinko MBA

The bargain-hunting value style is looking for shares that are underpriced in relation to the company’s future potential. A value investor will invest in a company in the expectation that its shares will increase in value over time. Value investing is based essentially on quantitative criteria; asset values, cash flow, and discounted future earnings. The key properties of value shares are low Price/Earnings, Price/Sales ratios, and normally higher dividend yields.

On observing a company’s earnings growth, a value manager will decide whether to buy shares based on the company’s consistency or recovery prospects. The key research questions are: 1) Does the current P/E ratio warrant an investment in a slow growth company or, 2) Is the company a higher growth candidate that has dropped in price due to a temporary problem.  If this is the case, will the company’s earnings growth recover, and if so, when? The key to value investing is to find bargain shares (priced low historically or for temporary and/or irrational reasons), avoiding shares that are merely cheap (priced low because the company is failing).

Financial Planning MDs 2015

The buying opportunity is identified when a company undergoing some immediate problems is perceived to have good chances of recovery in the medium to long term.  If there is a loss in market confidence in the company, the share price may fall, and the value investor can step in. Once the share price has achieved a suitable value, reflecting the predicted turnaround in company performance, the shareholding is sold, realizing a capital gain. A potential risk in value investing is that the company may not turn around, in which case the share price may stay static or fall.

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