Wednesday, December 29, 2010

Value Stocks

Value stocks are stocks that are deemed to be undervalued in price, generally this is determined by studying the relative PE ratio, Price to Sales, Price to Book ratios, and dividend yield. A value stock would be characterized as a company with a low PE ratio, low price to sales ratio, low price to book value ratio, and a high dividend yield. However in some instances the reason for the lower market valuation is because the company has less attractive growth prospects or has fallen out of favor e.g. due to earnings downgrades or financial difficulties. Astute value investors will recognize that some low valuations are legitimate, but will seek out companies that are trading on unjustifiably low valuations relative to their fundamental value (which they may determine based on discounted cash flow modeling and in house research and valuation methodologies. A fund that invests solely in value stocks is called a Value Fund.

Synonyms: Value investing, Value fund, Value oriented, Deep value

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