The 2020 pandemic hit many companies hard, while other companies took it as a chance to grow, seemingly unaffected by the state of the world around them. NVIDIA (NASDAQ:NVDA) came out as one of those thriving businesses and achieved gains of 122% in 2020. The company’s graphics processing units (GPUs) were present and needed for trends that accelerated exponentially due to the pandemic, boost...
Value stocks is a term commonly used to refer to companies that publicly trade their stocks for relatively cheaper costs than those of their actual earnings.
That means they tend to trade for values lower than the average, as seen in the Sç&P 500. For reference, when a company trades for higher values, it usually means that said company represents an instance of growth stocks (companies with profits higher than those expected from its respective area of business, which tend to be popular among investors).
Sadly, this highly reflects upon the expectations people commonly have regarding value stocks in general. They’re seen as non-thrilling and not as worth it as their favoured counterpart. However, value stocks shouldn’t even have to be underestimated at all. Why?
- Value stocks are typically very mature businesses.
- While their growth rates might not be even close to those of growth stocks in terms of size, they’re still remarkably steady.
- For you, they represent an opportunity for stable profit.
- Value Stock investors tend to be paid dividends.
Why people choose to invest in value stocks
If you’re still having some doubts about value stocks in general, you might be interested in hearing why investors tend to go through with this option.
As is the case for growth stocks, investors are usually looking for stocks with the best long-term growth potential.
On the other hand, value investors use fundamental analysis to instead look for stocks being sold at prices lower than what the company should be valued for.
However, it is not that uncommon to find investors that make use of both approaches.
Here’s an astounding instance of success to give you an idea of value stocks’ true potential. The CEO of Berkshire Hathaway, Warren Buffet, initially took control of the company in 1964. At that time, Berkshire was publicly traded with value stocks. By 2019, Berkshire’s profit was around 2,744,062%.
Finding value stocks to invest in
Your focus should be on finding a company that is trading at prices lower than those of its intrinsic value. However, in doing so, you should be aware and trusting of the company’s potential of outperforming in the foreseeable future.
How can one be able to find hidden gems such as this? Easy. Here are some tools you might employ in your search:
- Price-to-earnings ratio (or P/E ratio): A valuable tool for comparing companies’ values within the same industry. Just pick one company, and divide its stock price by its last 12 months of earnings.
- Price-to-earnings-to-growth ratio (or PEG ratio): Similar to the P/E, but adjusting itself to consider the growth rate between companies. Only this time, you divide a company’s P/E ratio by its annualized earnings growth rate.
- Price-to-book ratio (or P/B ratio): An approximation of how much value a company would have left if it were to cease operations and suddenly sell all of its assets. Useful for people looking for undervalued opportunities.
To assist you even more, here are some outstanding value stocks already selected to try out as of right now:
- Berkshire Hathaway
- Procter & Gamble
- Johnson & Johnson
Regardless of what people might think of value stocks in general, it is essential to consider that value stocks can have as much long-term potential as any other investment opportunity. As long as you know what to look for, find a company capable of delivering just that, you can end off with substantial wealth. You just got to be in it for the long-run.