The Basics of Value Stock Investing
Value Stock is a term used to describe a stock that is trading at a price that is less than its real or “intrinsic” value as determined by its fundamentals. Value investors employ a strategy of finding stocks that are trading at a deep discount when compared to the intrinsic value; the size of the discount is referred to as the “margin of safety”. Benjamin Graham and Warren Buffett are among the best-known value investors.
Identify a Value Stock
Stock screeners offer a great tool for investors to filter for viable stock investment candidates and for value investors offer an efficient way to plug-in the characteristics of a stock that would meet a value investor’s criteria. The attributes of a value stock can include:
Low Price/ Earnings (P/E) Ratio: Price/Earnings is a valuation measure that shows how much investors are willing to pay for each unit of earnings for a given company. While high P/E ratios demonstrate investor optimism for that company, it can also mean the stock is overvalued. Value investors often look for companies whose P/E ratios less than 20 and lower than others in the same industry. All else being equal, the low P/E company would be cheaper.
Low Price/Book (P/B) Ratio: The Price/Book ratio compares the book value of a company to its market value to help investors measure the relative value of a stock. A company’s book value is an accounting firm to measure the value of a company by the sum of its assets. Value investors often look for a P/B ratio of less than 3 and lower than its industry peers.
High Dividend Yield: The dividend yield tells investors how much the company is pays out in dividends relative to its current share price. As such, the dividend yield measures cash flow for a stock investment. For value investors, a dividend yield that is 50% higher than market and industry average is often desirable.
Debt/ Equity (D/E) Ratio: The Debt/Equity ratio shows the proportion of company equity and debt used to finance its assets. Debt/Equity provides demonstrates the relationship between levels of capital contributed by creditors and company shareholders. A Debt/Equity ratio that is 10% lower than the industry average would be seen as attractive.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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