Reasons for value stocks to get attention during a Share Market Grind

Summary

• History has it that undervalued shares have offered good profits when the stock market has recovered from lows.
• It is okay to be prepared for another decline in the market and have some cash in hand. Investing in dirt-cheap valuable stocks is not a bad option.
• Company’s overall financials, competitors, offerings and track record suggest whether a stock is undervalued or not.

Turning towards value stocks during a volatile share market can garner high returns in the long term, provided they are the right ones. Low-valued stocks, historically, have offered strong gains when the stock market has recovered from its lows.

GOOD READ: Utilities stocks are powering up returns during downturn

Value stocks are those stocks which tend to trade at a lower price relative to their fundamentals like dividends, earning and sales, thereby making them attractive to investors eyeing for long-run returns.

Usually, experienced investors indulge in value investing, buying fundamentally robust stocks, trading at lower price. Therefore, determining the ‘real’ value of a stock is vital so as to be able to make that decision whether the stock is cheap right now or it is still overpriced.

Going for modestly priced stocks and holding on to them is quite a simple and old investment strategy. The stock market has its history of highs and lows and this volatility provided an investor with an opportunity to buy stocks when they are undervalued and sell them when they attain their due value.

Now, buying dirt-cheap stocks is not going to give impressive returns in the near future, but over the long run, this investment might give high profits.

DON’T MISS: Westjet and Air Canada: 2 popular airline stocks on TSX

How to identify a value stock?

To know if the share price is trading low or at a discount, an investor, first needs to know the intrinsic value of that particular stock. Now, if features like overall financial structure, cash flows, revenues and profits are clubbed with factors like brand name, business model, market share and overall market value, it will provide with a wholesome intrinsic value. Some ways to find out the value of a stock are as followed:

P/B Ratio – Price-to-book ratio can be calculated by dividing the company’s stock price by its book value per share. Book value can be calculated by subtracting liabilities from the total assets. Low P/B ratio suggests that the stock is undervalued.

P/E Ratio – Price-to-earnings ratio can be measured by dividing the company’s stock price by its earnings per share. This helps to learn the actual relationship between the stock price in the market and its real earning as per books. Low P/E ratio indicate that a particular stock I undervalued and can be bought if there is a chance of future gain.

P/S Ratio – Price-to-sales ratio can be derived by dividing the company’s market capitalization by total sales. A low P/S ratio indicates that the stock is a good buy.

Free cash flows – The net cash generated by the company minus the operating and capital cost is the free cash flow. If the company possesses free cash flow, it is bound to have money for future pay-offs.

Apart from these methods, company’s overall financials, dividend payment history, competitors, offerings and track record can also suggest whether a stock is undervalued or not.

DID YOU READ: 3 Favourite ASX IT stocks as market hits 3-month low

Reasons for value stocks to get attention during a Share Market Grind

1. Good prospects of profitability - History has it that undervalued shares have offered good profits when the stock market has recovered from lows.
2. Long-term hold – While, assets like gold and bitcoin may outperform value stocks in the short run, in the longer term, value stocks may provide with better profits.
3. Preparation for the remainder year – more than nine months of 2020 have passed, and the stock market has shown strong signs of volatility. Investors, who have lost their money in the gone months, might want to invest in some inexpensive but valuable stocks so as to reserve some of their profits.
4. Liquidity – with economies reopening, the world economy might experience an improvement. Therefore, investing in value stocks may provide cash in hand once the stock market flourishes.

ALSO READ: 5 Undervalued stocks as per TSX