By Kathy Kristof

For most investors, a market crash is a minor disaster. For value investors, who seek out shares in undervalued companies, it's hog heaven.

"The best time to practice value investing is when there is general panic," says Whitney Tilson, managing partner of Tilson Mutual Funds and organizer of the Value Investing Congress.

But there are values to be found even at a time such as now, when stock market indexes are relatively high. The trick is in knowing how to find them.

Here are a few tips for identifying value stocks:

Value Stock Investing: Know your market

If you want to pick individual stocks, you'd be wise to stick to products and industries that you know well enough to evaluate.

Consider what sort of expertise you have and choose investments accordingly. This is likely to lead you to concentrate on a specific industry or even a niche within an industry. You might be an avid shopper, for example, so you could rattle off 20 ways that Wal-Mart is different from Kmart. A doctor might have very specific reasons to think that one drug company is better than the next. Stick to your strengths.

Value Stock Investing: Check relative prices

Once you've narrowed your investment search to a specific industry, you can find out the normal industry multiple, which is market shorthand to describe the relationship between a stock's current selling price and its earnings.

For example, a stock that sells for $20 and earns $2 a share annually has a multiple of 10. Another term used for this is P/E, which stands for price-to-earnings ratio.

Every industry has a normal multiple, and companies within each industry do too. Utility stocks, for instance, usually have a multiple of about 12, which is indicative of shares that tend to be relatively stable and slow growing. Tech stocks, on the other hand, sometimes have a multiple of 20 or more because they are fast growing but riskier.

A good reference for normal multiples is the Value Line Investment Survey -- your local library probably has a copy.

If you determine that a stock is selling for considerably less than its normal multiple, it could possibly be a bargain.

Value Stock Investing: Do your research

If a company is selling for a price that's outside its normal multiple, you must find out why before you invest.

If the multiple is less than normal, the stock might be undervalued and therefore a potentially good buy. But a less-than-normal multiple might reflect lowered growth prospects, which would make the stock much less attractive.

Read everything you can about the company, including recent financial statements and analysts' reports.

Value Stock Investing: Look for barriers

Ideally, you want to buy shares in a company that is a leader in its field and is unlikely to face significant new competition because financial, technological or practical barriers would keep new competitors from jumping in.

Value Stock Investing: Bide your time

If you find a company you like but you think it's too expensive, wait for a sale, just like you would at the mall. Short-term events can cause the stock prices of good companies to fall even when the value of the business hasn't changed. That's when value investors swoop in.

What are Value Stocks

Value stocks are a type of investment that refers to shares of companies that are considered undervalued or are trading below their intrinsic value. These stocks are typically associated with well-established companies that may be temporarily out of favor with investors for various reasons. Value investors believe that the market has undervalued these stocks, presenting an opportunity for long-term growth and potential capital appreciation.

The determination of whether a stock is considered a value stock is often based on fundamental analysis. Investors look at factors such as the company's price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and other financial metrics to assess its intrinsic value relative to its market price. If the stock's price is deemed to be lower than its intrinsic value, it may be considered a value stock.

Value stocks are typically associated with companies that have stable earnings, a strong balance sheet, and a history of generating consistent cash flow. These companies may be operating in mature industries or facing temporary challenges that have caused their stock prices to decline. Value investors believe that these stocks have the potential for a price correction in the future, as the market recognizes their true value.

Investing in value stocks is often considered a long-term strategy, as it may take time for the market to realize the underlying value of the company. Value investors aim to buy these stocks at a discount and hold them until their prices increase. The goal is to benefit from the potential appreciation in the stock's value over time and potentially earn dividends along the way.

It's important to note that investing in value stocks carries risks, as the market's perception of a stock's value can be subjective and change over time. The stock price of a value stock may continue to decline or remain stagnant for an extended period, and there is no guarantee that it will increase in value. As with any investment, thorough research, diversification, and a long-term perspective are crucial for successful value investing.

 

Available at Amazon.com:

The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era

The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions

 

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