Value Stock

Value Stock is a stock that has the potential of selling at a higher price, but due to the company's adverse condition in the market, the stock is trading at a lower price than its actual worth based on its earnings, dividend, or sales. However, the true value of the stock is believed to ne achieved sometime in the future.

Due to pessimistic view of the stock or due to poor quarterly or yearly results, the stock might be temporarily trading at a value under its fair value. However, spotting a stock from the value stock list and parking funds for a medium to long-term, could be beneficial as the stock is expected to grow to its true value sometime in the future.

A value stock is a company’s share that trades at a value lower than what reflects from its fundamentals like sales, earnings, and dividends. These stocks are the opposite of a growth stock which is expected to grow at a rate significantly higher than the growth rate of the market.

It is essential to understand that the stock's intrinsic value (fair value) is not necessarily directly related to its current market price. The valuation of a stock depends upon its demand and supply in the market, and if there is a high demand in the market, the price of a share will increase, and if the company doesn't have any good future aspects, then the price of the stock will decrease.

So, a value stock is currently selling below its fair value. Fair value can be calculated using various measures like price to earnings ratio, price to book value ratio. There were situations when their projected earnings were lower, or we can say guidance given by the company was lower. The market has a pessimist view of the company's long-term endeavor. Hence, the share price falls, and soon when the company is out of all rumors and shows a good profit, then the price of the share increases.

A diversified portfolio is the best portfolio for investment. Investors can gain exposure to the portfolio of blended funds, where the value stock and growth stock are put together for maximum returns.

Let us understand how to determine such shares to be able to the value stock calculator through the discussion below.

One of the most frequently used methods for figuring out a company's valuation should be using various financial ratios. A few common ratios are price-earnings, price-sales, and price-book ratios. Since the value stock companies are commonly found to have paid dividends in the last years, the Dividend Discount Model is the best valuation method. Investors can calculate the PE ratio and take the Avg PE ratio for the previous five years to evaluate whether shares are trading at a discount in respect of their intrinsic value or not. Also, the investor can calculate the intrinsic value using different online calculators and compare it with actual prices in the market.

Let us understand the value stock calculator and its implications in depth with the help of a couple of examples.

Example #1

Jos has been an investor in the stock market for over a decade. While scanning through his personal value stock list that he created to keep a track of companies that might potentially be trading at a value lesser than what must reflect based on its fundamentals, he found ABC Ltd.

The value of the share seemed at least $5 below its true value. Therefore, he decided to invest in the stock and use the opportunity of entering the stock ahead of time before everyone in the market jumped on the bandwagon.

Example #2

Let's analyze this with the example of VR films; there was a time in June 2019 when there were only buyers of this stock; at that time, the stock price was Rs 90.00, and in August 2019, there were only sellers of this stock, price prevailing in the market was Rs 171.25. Therefore, investors were wise enough to research this stock and make a market move.

Similarly, in the case of Binani Industries Ltd, the stock touched its 52 Week low of Rs 5.70 on 31st October 2019. On the next day, 1st November 2019, there were only buyers in the market for this stock, while before that, there was a situation where all the investors were selling this stock. The same situation took place in the case of Ansal Properties and Infrastructure Ltd.

Let us understand the importance of the value stock calculator through the discussion below.

The value stock is purchased at a bargain price as the company's situation in the market is going down, and the company is unable to perform to its best. As the market understands the stock's potential, the price of the share will increase, and investors will be able to earn substantial returns. Investors are betting that inefficiency gives them an opportunity for considerable gain. An investor who is trading in value stock knows that he is trading at a price lower than they are worth and will gain when the price of the share increases.

Both growth stocks and a value stock list contribute equally to construct a diversified portfolio. However, it is important to understand their differences in fundamentals and implications. Let us understand the differences through the comparison below.

#1 - Meaning - A growth stock is a successful company with substantial growth potential shortly. The company is expected to have earnings higher than the industry's average growth rate. These stocks are said to be growth stocks, while the Value Stock is determined to be currently undervalued compared to their intrinsic value or their fundamental worth.

#2 - Price Earnings Ratio - The market price of share / last year's EPS. If the projected PE ratio is more than the current PE ratio, then the stock is considered a value stock. However, Growth stock has a low Projected PE ratio compared to the Current PE ratio due to the denomination factor of EPS.

#3 - Investor's Expectation - The Investor invests in value shares, believing that the share price will increase when the broader market recognizes its full potential. In contrast, the growth stock investors think that there will be high earnings on shares irrespective of the market conditions.

#4 - Returns - Both types of stocks are guaranteed to receive the returns for future capital appreciation. Also, such investors receive a dividend in return. Simultaneously, growth companies don't pay many dividends because investing the surplus funds in the business is a viable option for expansion and growth instead of distributing the dividend.

#5 - Risk Level - Growth stock carries a higher risk, which is led by comparatively high volatility and driven by volatility; the stock's price is higher compared to the fundamentals of the company. On the contrary, it is comparatively a safer bet to invest in value stock, which is expensive compared to peer stock. Hence, there is comparatively lesser trading in the stock and lesser volatility.

This article is a guide to what is a Value Stock. Here we explain its examples, how to determine, importance, and compared it with growth stocks. You may learn more about financing from the following articles –

• Income Stock
• Capital Stock
• Cyclical Stocks
• Defensive Stock