Finding the hidden gem!
Generally, value-style managers look for companies that are trading below their fair value.
Some companies may be undervalued because markets tend to overreact to news, resulting in price movement that may not
reflect the long-term fundamentals of a company. Overtime, value managers expect the market to recognize the true worth of these companies.
The idea is to select stocks that are trading at a heavy discount to reduce the margin of error in value estimation.
Pros & Cons
Since value stocks by definition trade at a discount, they may offer less volatility than growth stocks
and could offer stronger performance during slower-growth environments. In addition, since prices do not
move in tandem, value stocks and growth stocks can help investors diversify their portfolio.
Identifying value stocks can be a challenge since there is no foolproof method to determine intrinsic value.
It is possible for two different fund managers to derive varying intrinsic values for the same stock.
Commonly used parameters are price-to-book or P/E ratio. These ratios are typically compared to industry peers and lower than the average may be considered a value stock.