Value stocks are shares in companies perceived to be undervalued in relation to their financial fundamentals, such as sales, earnings per share or dividends. Investors in value stocks look for shares whose current price is lower than their intrinsic value, i.e. the price that could be expected based on the company’s financial health and prospects. These stocks are often considered cheap in relation to their financial indicators, such as price/earnings (P/E) or price/book ratios.
Value stocks are generally distinguished from growth stocks, which are often associated with companies that are expanding rapidly, but whose price is high due to expectations of future growth. Value stocks are often established companies with a solid business model, but facing temporary circumstances that affect their share price, such as disappointing short-term results, a struggling sector or unfavorable economic cycles. What makes these stocks attractive to investors is the possibility of making a gain when the market corrects its valuation and the share price once again reflects the company’s true value.
Investors in value stocks generally take a long-term approach, anticipating that the market will eventually recognize the potential of these undervalued companies. It’s an investment style popularized by such iconic figures as Benjamin Graham and Warren Buffett. This type of investment is based on the idea that, although markets may be inefficient in the short term, they will eventually adjust stock valuations in line with fundamentals.
In times of economic uncertainty or market volatility, value stocks often attract investors’ attention, as they tend to be more stable and less volatile than growth stocks. Their lower valuation can also offer better protection against market shocks, with the prospect of potential gains as conditions improve.
