Value Stocks: Buying the Unloved

Value stocks trade at low prices relative to their earnings, assets or cash flow. Sometimes that is a bargain; sometimes it is a warning. Here is how value investors think and how to avoid value traps.

What a value stock is

A value stock is one that looks cheap compared with the business behind it. Its price-to-earnings or price-to-book ratio is low compared with the market or its peers. Value stocks are often mature companies in slower-growing industries, like banks, telecoms, energy or autos, and they frequently pay dividends.

The value investor’s bet is that the market is too pessimistic and that the price will rise as the business proves steadier than feared.

A low P/E means you pay fewer dollars for each dollar of earnings.

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