Glossary
Value stock
A stock that trades cheaply relative to its earnings, book value or cash flow, often in a mature or out-of-favor business.
A value stock is a share priced low compared with measures of the company's fundamentals, such as its earnings, book value, cash flow or dividends. Value companies are often mature, slower-growing or temporarily unpopular: banks, energy producers, industrial firms, or a company recovering from a bad stretch. Value investing is the bet that the market has been too pessimistic and that the price will move closer to what the business is worth.
How value is identified
Index providers and analysts sort stocks by valuation ratios. Common screens:
- a low P/E ratio or forward P/E
- a low price-to-book ratio
- a high dividend yield or free-cash-flow yield
What to watch for
Cheap can be cheap for a reason. A value trap is a stock that looks inexpensive because its earnings are about to shrink, so the ratio was flattering a business in decline. Checking the trend in earnings, debt levels and cash flow helps separate the two.
Academic research going back decades found that value stocks as a group outperformed growth stocks over long periods, the "value premium." That edge has been far from steady: value lagged growth through most of the 2010s and into 2020, before rebounding in 2021 and 2022. Value and growth are labels for a spectrum, and many companies sit in between.