With stock markets continuing to hit all-time highs, many investors are looking for value investments. But finding value stocks isn’t always easy, especially if you don’t know what to look for.
There are always apps out there to help you with investing, but you should better educate yourself in the stock market to ensure you’re using those apps properly. The more you understand the stock market and companies, the easier it will be to make investment decisions.
Here are ways to find value stocks that have high growth potential.
Check the P/E Ratio
The price-to-earnings (P/E) ratio is an indicator of the value of a stock. A stock with a lower P/E can sometimes be considered a value stock. But this isn’t always true.
The P/E is based on the earnings per share (EPS) and the current trading price. The P/E is the stock’s current price divided by EPS.
You need to compare the P/E of a company to the average of the industry. If the stock’s P/E is significantly lower than the industry average, there could be a problem.
However, if it’s a stable company with a lower P/E, it can be considered a better value for investing.
Check the P/B Ratio
The price-to-book value or ratio (P/B) goes along with the P/E. This compares the stock’s market value to its book value. It is calculated by the current price divided by the latest quarter’s book value per share.
If a company is fairly valued, it will have a P/B ratio of 1. If the P/B is less than 1, it means that the company is trading lower than its book value.
If you measure a lower-than-industry-average P/E against a P/B that is less than 1, you can determine that the stock is undervalued.
Don’t Base an Investment on a Single Metric
While understanding metrics such as P/E and PBV can be helpful in investing, they shouldn’t be the only factors for investing. You need to look at the overall economy and the specific industry.
You need to consider the company’s future prospects. Is it a company that will continue on a similar path in the next few years or will it falter?
If you look at companies that have been around for a long time, you may come across some that are value stocks. Some of these companies get overlooked because they aren’t innovators or have had a recent bad quarter or two.
While such stocks’ prices may not increase significantly in the short term, they tend to offer dividends that offset the slower growth. Those dividends will also put you in a better position in the future when growth accelerates.
You should also look at professional ratings of stocks and funds for investments like VHT ETF.
Analysts can help explain investment options.
Research Value Stocks for Investing Opportunities
All investments carry risk and you should be prepared for those risks. You should research your investment options to find the best one for you. The more you know about investments, the easier it is to trust your decisions.