value investing

Value Investing

The strategy of selecting stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies with sound financial statements that they believe the market has undervalued. They believe the market always overreacts to good and bad news, causing stock price movements that do not correspond with their long-term fundamentals. The result is an opportunity for value investors to profit by taking a position on an inflated/deflated price and getting out when the price is later corrected by the market. Typically, these investors select stocks with lower-than-average price-to-book or price-to-earning ratios and/or high dividend yields.

Notes:

Value investors don't try to predict which way interest rates are heading or the direction of the market or of the economy, but only look at a stock's current valuation ratios and compare them to their historical range. For example, say a particular stock's P/E ratio has ranged between a low of 15 and a high of 50 over the past five years, value investors would consider buying the stock if it's current P/E is around 20 or less. Once purchased, they would hold the stock until it's P/E rose to the 40-50 range before considering selling. The only reason they'd sell the stock sooner is if the company's long-term fundamental outlook significantly worsened.

See also: Dividend, Dividend Yield, Intrinsic Value, Price-Earnings Ratio, Price-To-Book Ratio, Value Stock, Value Trap

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Value investing

In the context of asset management, mutual funds, and hedge funds, the a style of investment that focuses on securities with low price to earnings ratios or low price to book ratios. Some of these securities are deemed cheap and are viewed by manager as having a lot of profit potential.

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value investing

The selection of securities to be bought and sold on the basis of the value of a firm's assets. For example, an investor may look for a stock in which current assets exceed total liabilities on a per share basis by more than the market price of the stock. Value investing emphasizes asset value more than earnings projections. See also asset value.