Finding value is all about buying something at a discount to what it’s actually worth. The same is true of value stocks.
Sometimes factors can cause a stock to get beaten down to the point of being undervalued. Value investing is about finding stocks that are worth more than their current share price.
Investment legends like Sir John Templeton, Benjamin Graham and Warren Buffett realized decades before behavioral finance became a respected academic discipline that systematic psychological errors tend to create market inefficiencies. Templeton, Graham and Buffett reasoned that herding behavior (including momentum traders and short-term speculators that chase price trends) and overreaction bias (the tendency of people to overreact to bad news) are strong forces in the market that can push stocks far below their fair value.
Based on these observations, many of the world’s greatest investors look for stocks that are beaten down by the market due to bad news or negative rumors. Benjamin Graham, the father of value investing, constantly searched for companies that once fetched sky-high valuations but that crashed when the companies were unable to deliver on investors’ expectations.
Warren Buffett famously said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Value investing is about recognizing opportunities, spotting deep discounts and finding the next big turnaround stock. One way some investors measure a company’s value is its price-to-earnings ratio, or P/E. But P/E is a very simplistic measure of a stock’s value. Experts dig deeper, examining a company’s sales, cash flow, dividend, book value, debt levels, historical valuation patterns and more to determine if a stock is undervalued.
To help you find the next turnaround story, chief analyst Bruce Kaser writes the Cabot Undervalued Stocks Advisor and Cabot Turnaround Letter. Both advisories have a proven track record of handily beating the market with some of the most unloved, left-for-dead stocks on the market … right before their comeback stories begin.
To subscribe to either of Bruce’s value investing advisories, click here.