With the S&P 500 trading at nearly 20 times earnings, it’s a challenging time for investors to find value in the market.
Why Value Stocks are Truly 'Worth It'
Value stocks earned their name for a good reason: they provide value for investors regardless of the state of the economy.
Value stocks are stocks that tend to trade at a price lower than their fundamentals suggest they should. Buying them is just like buying something for $0.80 that you know is really worth $1.00, and will be able to be sold for $1.00 eventually.
The best value stocks have high dividend yields, low price-to-earnings ratios or low price-to-book ratios. In short, value stocks are stocks trading for less than they are worth.
The trick is finding them. Value investing requires research and the ability to 'go against the grain', not simply picking a stock that’s popular. A good place to find value stocks is by scanning the Value Line Investment Survey for stocks selling well below their “blue book value”.
Other value stock candidates are companies with a history of success that may be going through a period of temporary turmoil, thus scaring off some investors and becoming undervalued. The market tends to overreact to news – good or bad.
Value stocks may not grow their earnings as quickly as growth stocks, or be as safe as income stocks. Estimating a company’s true worth can be difficult for value investors to do. But if they’re bought at a big enough discount value stocks give investors a good chance to make a nice profit on their investment.
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