As mentioned in Growth Stocks: Industry Disruptors That Generally Do Not Pay Dividends, value stocks are seen on the opposite spectrum to growth stocks. During the Great Depression and its aftermath, many investors were focused on buying companies that were going out of business, those whose assets were worth more than the stock traded for.
Value stocks are usually the stocks of low growth companies that trade at lower price-to-earnings (P/E). You can also find undervalued stocks in small cap companies, foreign companies, or companies in the same sector often trade at similar P/E ratios.
They're stocks that you think are worth more than their current market price and many times found among larger, more established companies.
In Value Investing: Where to Look for Hidden Value, I shared some places to look for value stocks. Look for stocks with P/E ratios below 14:
- Spinoffs from larger companies are a wonderful opportunity for investors who are not constrained by questions of corporate size.
- The end of the year has historically been a good time to buy value stocks that portfolio managers have tossed out in order to avoid listing them in their year-end report.
- Companies that have been doing the same, though growing slowly and profiting modestly.
- Stocks of smaller companies.
Value stocks may do well early in an economic recovery but are typically more likely to lag in a sustained bull market.
You can find more information on value investing in Investing 101: How Investing Works.
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