What are value stocks?
The stocks that trade at a lower price than their actual intrinsic value are known as value stocks. Since a value stock trades at a lower price than its intrinsic value, it becomes an attractive investment option for investors.
If you invest in value stocks, then this phenomenon is known as value investing. Investing in these stocks mostly means that you have to be patient because you won’t get rich overnight by investing in them.
How to calculate the intrinsic value of a stock?
There are multiple ways for calculating the intrinsic value of a stock. That said, among those ways, the dividend discount method (DDM) is a very easy and quick way for calculating the intrinsic value of a stock. The dividend discount method (DDM) is very useful for stable, large companies.
One of the most commonly used versions of the dividend discount model is the Gordon Growth Model (GGM). With the help of Gordon Growth version of the dividend discount method, we can come to know the intrinsic value of a stock in the following way:
Intrinsic value of stock= DPS1 / (r-g)
DPS1= Expected dividends one year from now
r= The required rate or discount rate of return on the investment
g= The annual dividend growth rate in perpetuity
Let’s say a company aims to pay a $16 dividend per share this year, which has had a stable 4% growth over the years. The required rate or discount rate of return for this investment is 9%. Here, $16 is DPS1, 4 % is g and 9% is r. The intrinsic value is:
$16 / (0.09-0.04) = $320
How to value a stock?
There are multiple methods of valuing a stock, and the P/E (price-to-earnings) ratio is the go-to metric for almost every investor.
How to calculate the P/E ratio?
To calculate the P/E ratio, you will need to divide the stock price by the earnings per share (EPS). The P/E ratio tells what the market is ready to pay for a stock based on its past and future earnings.
If the P/E is high, then this means that the price of the stock relative to earnings is high, and it is possibly overvalued. On the other hand, a low P/E means that the current price of the stock relative to earnings is low.
What do we have in the list of best value stocks 2020?
The following are the top value stocks to buy in 2020:
1. Brighthouse Financial Inc.
This financial services company provides life insurance and annuities to more than 2 million customers in the U.S. Brighthouse Financial has total assets of $235 billion, assets under management of $207 billion, and liabilities of $214 billion. The segments of this company are annuities, Run-Off, and Life.
2. Ardagh Group SA
Ardagh Group SA is also one of the best value stocks to buy now. This Luxembourg-based materials company manufactures packaging products and containers by using 100% recyclable material. Ardagh Group is a producer of metal and glass products, and it employs more than 16,000 people globally.
3. CF Industries Holdings
CF Industries Holdings manufactures and distributes fertilizers that provide nutrients to crops. This global fertilizer and chemical company has a stable carbon footprint in the agriculture space and has been expanding its global reach.
4. NRG Energy Inc.
This power utility company is involved in producing, selling, and distributing energy and energy services to roundabout 3.7 million customers across the U.S. NRG Energy generates about 23,000 megawatts of electricity. In the 2nd half of August, the company made the statement that shareholders of Centrica showed approval to its proposed acquisition of Direct Energy from Centrica PLC.
5. NortonLifeLock Inc.
This software technology company offers cybersecurity to almost 50 million consumers. NortonLifeLock provides solutions that aim to help its customers secure their devices, identities, and other digital security needs. Over the next few years, it is being expected that there will be a 25% increment in the earnings of NortonLifeLock, showing a positive future ahead.
What is the definition of small-cap value stocks in simple words?
Small companies’ stocks that are growing more slowly than other small-cap stocks or are less expensive are called small-cap value stocks.
What are the points that differentiate value and growth stocks from each other?
Growth stocks vs Value stocks
The following explanation can help you understand the differences between value and growth stocks:
Growth stocks, because of their significantly high growth rate, are often relatively correctly valued or even sometimes overvalued. Thus, they come at a high price in the market.
Value stocks are undervalued stocks. They have the potential to grow and generate a considerable amount of returns in the future, and thus, they have a much lower price than similar stocks in the market.
Growth stocks are innovative companies, and most companies continue to progress over time.
The majority of the value stocks are well-established, large companies. Such companies are undervalued for a variety of reasons, such as a bad earnings season, but they gain value back in the long-term.
Generally, growth stocks have high P/E ratios and P/B ratios.
Generally, value stocks have low P/E ratios and P/B ratios, and this is because of their undervalued nature.
Generally, growth stocks offer very low or no dividends at all, and this is because growth stock companies mostly reinvest all their retained earnings back into the company.
Generally, value stocks offer high dividends, and unlike growth stocks, they don’t reinvest all the retained earnings back into the company.
Since the growth rate of growth stocks is high and increasing, they are less risky. Compared to the overall market, growth stocks are relatively less sensitive to adverse economic conditions, and thus, they are less risky investments.
On the off chance, expectations aren’t met, and the stock doesn’t appreciate the value, investors may lose their money. Thus, value stocks are relatively risky.