What is Value Stock
A Value stock is a stock whose current market price is trading lower relatively to the company’s financial performance in terms of company’s assets, revenue, dividends, earnings and cash flows.
Some of the investors in the value stocks are assuming that the price of the stocks eventually rise due to market over reacts to any news which do not exactly analyse the strength of the underlying fundamentals of the company. Hence such stocks are trading below the intrinsic value of their company are known as the Value stocks.
General characteristics of Value Stocks
Here we have mentioned some of the characteristics of the Value stocks.
• Stock price is predictable
• Consistently cash flow
• Independent to superior management
• Reasonable valuation
• Reliable
• Transparent financial statements
• Safety margin using many matrices
How to identify a Value Stock?
Value investors usually earn profits from those shares which are trading at low or at a discount, investors first need to identify the intrinsic value of the value stock.
Intrinsic value is a combination of studying cash flows, financial structure, revenues and profits as well as other fundamental factors like brand, business model, market structure.
There are some measures used by the investors to calculate the value of the stock of a company are as follows-
1. Price-to-book ratio (P/B ratio)- P/B ratio is calculated by dividing the company’s stock price by its book value per share. Low P/B ratios indicates the undervalued stocks and can be useful in finding the value of a stock.
2. Price-to-earnings ratio (P/E ratio)- P/E ratio is calculated by dividing the company’s stock price by its earning per share. P/E ratio determine the relationship between the stock price in the market and its book earning. Low P/E ratio indicate that the stock is undervalued and have chances for increment of its share price.
3. Price-to-sales ratio (P/S ratio)- P/S ratio is calculated by dividing the market civilization by the company’s revenue. A low P/S ratio indicates a buy as the stock is undervalued.
4. Free cash flows- The net cash generated by the company after subtracting all the operating and capital expenditure. If the company has free cash, then it will have money for future investments.
If you want to invest in stocks then you need to open your account in any of the below stock brokers.
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