Value Stocks are stocks which are trading at a relatively lower price than as suggested by the company fundamentals like earnings, dividends, industry prospects etc. attracting more value to investors to invest in it. Value stocks are often evaluated in contrast to growth stocks (which have outlook for steady state of growth).
Some of the common characteristics of a value stock is high dividend yields, lower price to book value multiple, lower price to earnings ratio making it look more attractively priced compared to its peers. These fundamentals give an opportunity to value investors for huge gains. A value investor is always seeking to buy such stocks which are valued at a price which is less than what they are worth.
A mature company having a stable dividend history and currently experiencing negative sentiment due to some outcomes is mostly considered a value stock. Also some companies having been listed recently on the exchange and investors not having much knowledge about it can also be considered as a value stock.
However, value stocks are considered to be more risky than the growth stocks for whatever potential upside because of the sceptical attitude towards value stock. Once the sentiment in the market for the stock changes only then a value stock will be able to grow to its utmost potential and turn profitable for the investor. This is why most value investors have a higher long term return as compared to a growth stock due to the risk involved. The duration of investment must be observed to allow the stock to emerge from its undervalued position and also involves a risk that the investment would never materialize due to prolonged negative sentiment or lack of triggers for unfolding of the specific events.
One of the examples of value stocks today may be Tata Motors which is trading at a price lower than its book value but the price of the stock is only expected to rise once the company’s core business of JLR gets sorted.