In 2009, you could have bought just about ANY stock and you would have seen it move higher. Value stocks were a dime a dozen and even growth stocks were cheap.
Now, thanks to the huge bull market, valuations are stretched, especially in growth stocks.
This year, stocks that were trading at a premium to the market, those that were overvalued , were punished. The high growth stocks were suddenly no longer invincible.
So what are investors buying now that growth isn't so hot?
They're jumping into value.
Boring value stocks are back in vogue.
But if the stock market is so expensive, how do I find value?
Value exists in every market, even in an aging bull market where nothing seems cheap. You just have to dig deeper to find it.
Start With a Low P/E
Value investors seek companies selling for under their intrinsic value.
The best place to start looking for value stocks, then, is in the price-to-earnings ("P/E") ratio. The S&P 500 has an average forward P/E of 16.5, so a good place to begin is to look for companies with P/E ratios below that level.
Some investors, though, like to go even lower because then it's considered a deep value.
Why not try stocks trading with a forward P/E under 10?
There's no hard core cut-off. The beauty of value investing is that you can draw your own value threshold.
More . . .
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Zacks' proven strategy turns up overlooked and neglected gems that later soar in price. It has outperformed the S&P 500 with an overall gain of +36% in 2013 and accelerated in the first quarter of this year as the market punished overvalued stocks.
Today, it has uncovered a service provider to the electronics industry in Silicon Valley. Zacks will reveal this fresh pick and you can be among the first to get in at the very beginning of its climb. It will be posted on Tuesday, June 17.
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Add on a Low Price-to-Book Ratio
Value investing can't be done on the P/E ratio alone. Earnings, by themselves, aren't always an optimal indicator of whether a company is undervalued.
The price-to-book ratio ("P/B") is also often associated with value investing. It stands for the price per share divided by the book value of equity, which are found on a company's balance sheet.
Most financial websites automatically calculate a company's P/B ratio so you won't have to figure it out.
Just like the P/E ratio, the lower the P/B ratio, the better. Value investors, however, typically look for a P/B under 3.0.
Can You Still Buy Growth?
Even the value investor yearns for growth in their portfolio. The growth stocks are simply too intriguing.
But just because you're a value investor, that doesn't mean you have to sacrifice growth.
Companies that are a value, but also generating strong growth, while rare, actually do exist. The railroads, for example, have been growing their earnings in the double digits over the last several years.
You could have been buying both value AND growth.
Now is the Time to Buy Value
During a big stock market rally, it can be more difficult to find quality value stocks.
But the reward for value investors is finding that one company with great fundamentals that the market is ignoring and then cashing in the big gains when the market finally "gets it."
I manage a Zacks portfolio that will help you do just that by searching for these often overlooked and neglected hidden gems that are currently trading at least 25% to 50% below where they should be. Our mission is to signal "Buy" at just the right time - as the market begins to catch on and the stock price begins to rise.
This proven strategy outperformed the S&P 500 with an overall gain of +36% in 2013. Our success accelerated in the first quarter of this year as the market punished overvalued stocks.
Currently Value Investor. includes 25 stocks that are "on sale" right now and likely to head a lot higher in the months to come. Even more important, I am getting ready to pull the trigger on a tech stock you might not otherwise find. You will have the opportunity to get aboard at the ground floor for the full ride upward when it's posted this Tuesday, June 17.
This is a value service, so I am glad to report that starting today you can be among the first to see Tuesday's pick and the other 25 value stocks already in the portfolio. Plus, receive our best value stocks, plus recommendations from all of Zacks' portfolio services, for a full month at a total cost of just $1.
Learn more about Zacks' Value Investor portfolio >>
Good Investing,
Tracey
Tracey Ryniec is Zacks' Value Stock Strategist and serves as Editor in Charge of Insider Trader and Value Investor.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
