# What Is a Value Stock? Examples, Pros and Cons Explained

## What Is a Value Stock?

Value stocks are equities priced below their intrinsic worth compared to key financial metrics like dividends, earnings, or sales. They attract value investors who believe the market undervalues these stocks, offering long-term growth opportunities. Compared to growth stocks, which emphasize potential over fundamentals, value stocks typically present lower risk and provide regular dividends. This article explores key aspects, including the differences between value and growth stocks, how to identify value stocks, and examples in today's market.

### Key Takeaways

*   A value stock is typically priced below its intrinsic value, offering appealing fundamentals like high dividend yields and low P/E ratios.  
    
*   Value stocks come from mature companies and are characterized by stability, often attracting investors looking for less risk.  
    
*   Unlike growth stocks, which emphasize reinvestment for expansion, value stocks commonly provide steady dividends.  
    
*   Investors can identify value stocks through metrics like P/E and P/B ratios and by comparing these against industry averages.
*   The decision between investing in value or growth stocks depends on individual investor goals and risk tolerance.

![Value Stock: A company trading at a lower price than its intrinsic or book value.](https://www.investopedia.com/thmb/UUM6w43uuAwz3eri-cn2b4FZMEw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/valuestock.asp-final-1d57c793a9c945e981132d76baae0bba.jpg)

*— Investopedia / Jake Shi*

## Detailed Analysis of Value Stocks

A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.

Common characteristics of value stocks include high dividend yield, low [price-to-book ratio (P/B ratio)](https://www.investopedia.com/terms/p/price-to-bookratio.asp), and a low price-to-earnings ratio (P/E ratio). Investors can find value stocks using the "Dogs of the Dow" investing strategy by purchasing the 10 highest dividend-yielding stocks on the Dow Jones at the beginning of each year and adjusting the portfolio every year thereafter.

In contrast to value stocks, [growth stocks](https://www.investopedia.com/articles/investing/080113/income-value-and-growth-stocks.asp) are equities of companies with strong anticipated growth potential. A balanced, diversified portfolio will hold both value stock and growth stocks. Investment managers refer to these as a [blend fund](https://www.investopedia.com/terms/b/blendfund.asp).

## Strategies for Identifying and Investing in Value Stocks

A value stock will have a bargain price as investors see the company as unfavorable in the marketplace. A value stock often comes from a mature company with stable dividends that faces temporary challenges. Companies that recently issued equities may have high-value potential because many investors might not know about them. Investors can buy these value stocks directly or invest in value ETFs and [mutual funds](https://www.investopedia.com/articles/investing/020516/3-best-vanguard-funds-value-investors-2016.asp).

There are [several ways you can analyze a stock](https://www.investopedia.com/articles/fundamental-analysis/09/reverse-discount-cash-flow.asp) to determine whether it is undervalued. These methods include:

*   **Analyze the Price-to-Earnings Ratio (PE):** This valuation tool compares the stock price to the [earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) of the company. A stock may be cheap and could be a value stock if its PE ratio is lower than that of its rivals in the same industry or the historical average.
*   **Analyze the Price-to-Book Ratio (PB):** This metric contrasts the share price of a stock with its book value. A P/B ratio less than 1 indicates that the stock may be trading below its book value, which could be an indication of value.
*   **Check the Dividend Yield:** A value stock may be indicated by a high dividend yield. A stock may be inexpensive and offer an alluring return in the form of dividends if its dividend yield is higher than the industry average or historic average.
*   **Evaluate Company Growth:** This includes the company's historical and anticipated earnings growth. The stock may be viewed as undervalued and a potential value stock if its price does not correspond to the predicted earnings growths.
*   **Compare Against the Industry:** Consider the stock's position within its industry and the general market environment while performing an industry and market analysis. A value stock may be identified if it is selling at a lower valuation than its competitors or the overall market.

## Factors Leading to Stock Undervaluation

There's no single reason a stock is undervalued. In some cases, [stocks may be undervalued](https://www.investopedia.com/the-best-undervalued-stocks-11680595) as a result of investor mood and market dynamics. Stock prices may drop as a result of unfavorable news or pessimism about a certain industry, business, or market, potentially resulting in discounted possibilities. A firm may become undervalued as a result of poor financial performance, unfavorable earnings surprises, managerial problems, or legal challenges. For investors, temporary setbacks or market overreactions to bad news can present purchasing opportunities.  

On the other hand, stocks may be undervalued based on more [macroeconomic](https://www.investopedia.com/terms/m/macroeconomics.asp) concerns. The state of the economy might affect stock valuations. During recessions or uncertain times, stock prices may drop below their intrinsic value. Stocks in sectors that are presently unpopular or going through a downturn can be undervalued.

Due to a lack of investor knowledge, stocks of smaller companies or those active in specialized markets may be undervalued. A company's stock may trade at a lower valuation compared to its genuine value if it is underfollowed or ignored by analysts and investors. Investors might overlook good stocks in favor of popular ones with more media attention.  

> **Fast Fact**
>
> A single company can transition from a growth stock to a value stock. For example, once the company has achieved success, investors now measure it differently.

## Comparing Value Stocks and Growth Stocks

There's fundamental differences that distinguish value stocks from growth stocks.

### Philosophy

The goal of value investing is to identify stocks that are cheap in comparison to their intrinsic value. Investors look for stocks that are trading for less than their intrinsic value. Meanwhile, growth investing focuses on stocks of businesses that have a potential for above-average growth in terms of profits, sales, or market share. Companies with significant growth potential, cutting-edge goods or services, and the potential to generate returns above average are given priority by growth investors.  

### Valuation

Traditional valuation indicators like PE ratios, PB ratios, or dividend yield are frequently used to identify value stocks. These measurements assist in identifying whether a stock is trading at a lower valuation than its fundamental indicators or its competitors in the same sector. Alternatively, growth stocks are frequently assessed using unconventional valuation techniques. This includes the [price-to-sales (P/S)](https://www.investopedia.com/terms/p/price-to-salesratio.asp) ratio or the [forward PE ratio](https://www.investopedia.com/terms/f/forwardpe.asp). Instead of reflecting current earnings or book value, these measurements show predictions for future growth.  

### Company Profile

Value stocks are frequently linked to solid, well-established businesses that operate in dependable sectors. Although their development rates may be slower, they are seen as financially reliable and may be undervalued by the market. [Growth stocks](https://www.investopedia.com/stocks-that-grew-more-than-bitcoin-8716756) are often found in sectors that have a strong potential for growth, such as emerging markets, healthcare, or technology. These businesses may have greater volatility because they are frequently in their early phases and reinvesting profits in growth.  

### Dividends

Value stocks frequently place a strong emphasis on dividend payments, and investors may look for shares in companies that offer high dividend yields. These equities are more common in mature industries, consumer staples, and utility sectors. This is because the company may not need as much capital for growth as the company has already scaled. Alternatively, rather than paying dividends, growth stocks frequently place a higher priority on reinvesting profits in the expansion of the business. These businesses frequently have to use their resources for marketing, R&D, or business expansion.  

### Risk

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility. The potential for [capital appreciation](https://www.investopedia.com/terms/c/capital-growth.asp) may be moderate, but they often offer steady income through dividends. In addition, the company is already established so may have already overcome many risks start-up or infant companies face. Meanwhile, growth stocks carry higher risk due to their higher volatility and market expectations. While they offer the potential for significant capital appreciation, they may also experience greater price fluctuations and have a higher chance of underperforming during market downturns.

Value Stocks

*   Seeks to find undervalued stocks
    
*   Often uses traditional valuation metrics
    
*   Are usually more established companies
    
*   Often issue dividends as there is less need for cashflow
    
*   May be less risky as the company is already established
    

Growth Stocks

*   Seeks to find companies set to grow
    
*   Often uses untraditional valuation metrics
    
*   Are usually younger companies
    
*   Often do not issue dividends as there is resource constraints
    
*   May be more risky as the company is yet to prove its business model or operations
    

## Case Study: A Real-World Example of a Value Stock

Honda Motor (HMC) produces and sells outboard engines, power generators, lawn mowers, and automobiles all over the world. Because the company has a less comprehensive vehicle lineup compared to rivals, it may fly under the radar with some investors. For instance, Honda does not offer a huge SUV or a full-sized truck. As a result, Honda is vulnerable to losing market share if consumer preferences move further in favor of those larger vehicles.  

However, the manufacturer has other traits that could be beneficial long-term. One is that Honda has a reputation for quality, particularly with regard to fuel-efficient vehicles. The leadership group is skilled at organizing. The company's is currently embarking on a cost-cutting plan to decrease expenses. Honda also plans for all its North American vehicles to be electric by 2040.

On the stock side, as of May 2023, Honda's stock had a P/E ratio of 8.57. This is notably less than rival companies such as Toyota, who boasts a P/E ratio as of May 5, 2023 of 10.14. Also, Honda boasts a stronger dividend yield. As of May 2023, Honda's dividend yield was 2.87%.  

## Are Value Stocks a Good Investment?

Value stocks may be a good investment for investors looking for lower risk equities. Value stocks tend to relate to companies that have already been established but are undervalued by the market. For investors not willing to invest in start-ups or unknown entities, value stocks may make a good alternative.

## How Do You Profit From a Value Stock?

You can profit from a value stock by buying the equity and holding it. As opposed to attempting to swing trade or look for quick appreciation of capital, value stocks may take longer to appreciate in value as the market comes to fully realize its value. In addition, you can make money from value stocks as they generally issue dividends, allowing for cash proceeds during this holding period.

## Are Value Stocks High Risk?

Value stocks are generally considered less risky than growth stocks. However, consider that both value stocks and growth stocks are equities which are generally more risky than other types of investments.

## Are Value Stocks Better Than Growth Stocks?

Depending on a number of variables, such as an individual's investment goals, risk tolerance, and market conditions, value stocks or growth stocks may be preferable. Value and growth stocks each have advantages, and each investment strategy might perform differently depending on the market conditions.   

## The Bottom Line

Value stocks are those that trade for less than their perceived intrinsic value, often identified by metrics like low price-to-earnings and low price-to-book ratios. These stocks typically belong to well-established companies with strong financial fundamentals and stable operations, often offering dividends to investors. While considered less risky than growth stocks, value stocks present opportunities for long-term gains as the market corrects pricing inefficiencies. A balanced investment approach often includes both value and growth stocks, allowing for diversification and potential appreciation over time.  

> **Article Sources**
>
> 1.  Honda. "[Honda Targets 100% EV Sales in North America by 2040](https://hondanews.com/en-US/honda-corporate/releases/release-32797eaea7316f1bed4bfcd27919f703-honda-targets-100-ev-sales-in-north-america-by-2040-makes-new-commitments-to-advances-in-environmental-and-safety-technology)."
>     
> 2.  Barron's. "[HMC](https://www.barrons.com/market-data/stocks/hmc)."
>     
> 3.  YCharts. "[Toyota Motor Corp](https://ycharts.com/companies/TM/pe_ratio)."