2 ways I find value stocks

When it comes to value investing, I like to ‘stay small, be boring’.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There are many different ways to invest. You could invest for growth, or for income. You could invest in real estate, or you could get involved in index investing. You might also choose to invest in value stocks. If you do choose to follow in the footsteps of giants like Warren Buffett and Peter Lynch, here are two principles you should consider when assessing your investment landscape.

1) Skew small and obscure

What makes a stock cheap? Price is simply a reflection of the demand for that stock at any given moment in time. Whether that price accurately represents the stock’s intrinsic value is another question. As the great value investor Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine”. In other words, prices can be be out of line with intrinsic value for a while, but over time they will re-adjust.

As value investors, we are looking for opportunities to buy these undervalued securities. Therefore, we are looking for stocks that have relatively low demand. The fewer buyers there are, the less the price will be bid up. This will typically mean that we are looking at companies with smaller market capitalisations than those that you may see on the front pages of the business newspapers.

Smaller companies are also relatively underfollowed by analysts. Large companies, on the other hand, are usually followed by at least two or three analysts from each of the major investment banks. As huge institutions, they are privy to much more accurate information than the average retail investor, meaning that the cards will be stacked against you from the outset. You are far more likely to find an edge in an underfollowed stock than in the large caps.

2) Boring is good

In a similar vein, value is often found in industries that many lay people would consider bland or boring: telecommunications, logistics, industrials, and so on. The dullness of these sectors acts as a filter against the wave of casual buyers who will get easily excited about the next big tech stock. Going back to our discussion of price dynamics, what do you think happens to a hot new technology stock when a large number of casual investors jump on it? The price shoots up. This is unlikely to happen for a ‘boring’ oil company.

Now, it may be possible to make money by timing your entry into these stocks by employing swing or momentum strategies. But this is difficult, and there is much research to suggest that success in this endeavor is largely a product of one’s luck. It is far easier to study the cyclical patterns in sectors like energy, telecommunications and transportation, and to look for value plays in these more predictable markets. It won’t make you a millionaire overnight, but are you really in that much of a hurry?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »

Investing Articles

Could this be the FTSE 100’s best bargain for 2025?

The FTSE 100 is full of cheap stocks but there’s one in particular that our writer believes has the potential…

Read more »