A value stock is a stock with a price that appears low relative to the company's financial performance, as measured by such fundamentals as the company's assets, revenue, dividends, earnings and cash flows. Investors in value stocks are assuming that the price of the stock will eventually rise, reflecting the true health and potential of the company. Because they see the stock as relatively undervalued, they're anticipating that its appreciation will outpace the growth of the value stock's competitors or the market overall.
Some of the general characteristics of a value stock are:
- Price-to-earnings or price-to-book ratio at or lower than the broader market
- Priced below peers in its industry
- Grow their earnings and revenues at a slower pace than the market
- Can be seen as risky (i.e., fundamentals may deteriorate)
Value stocks can be stocks of established companies with proven histories of financial performance — differentiating them from "growth stocks," which tend to be priced at more expensive levels and often are issued by companies that are in newer industries and growing their earnings at a faster rate. Since value stocks may take some time to catch up with their potential, investing in them may be better suited to longer-term investors who have the time — and the patience — to wait. Value stocks also are more likely to issue dividends to their investors than growth stocks.
"When investing long term, some investors combine growth and value stocks to create a balanced portfolio."
— Niladri Mukherjee, head of CIO portfolio strategy in the Chief Investment Office at Merrill and Bank of America Private Bank
Investing in both
value and growth stocks can be beneficial to your investment portfolio. When investing long term, some investors combine growth and value stocks to create a balanced portfolio through the business cycle. Because economies tend to run in cycles — sometimes exhibiting characteristics that favor value stocks, other times exhibiting characteristics that favor growth stocks — this blended investment approach may help investors pursue more consistent returns over time.