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What Is Value Investing?

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What is value investing?

This is the practice of finding undervalued stocks.

Okay, hold your horses. That's really hard to do. The market is often efficient, making it very hard to find stocks that are priced below their "intrinsic" value.

Sounds pretty esoteric. Don't worry. We're going to walk you through this. Let's do an analogy first.

You walk into a department store and find a pretty sweet deal. There's a nice winter sweater for $40. But this sweater, compared with other similar sweaters, should be more like $100. You're getting $100 of value and paying $40.

Stocks are similar.

Let's say you read equity research reports for company 'X.' Company 'X' is trading at $100 a share, representing a market cap of $100. There are $10 shares outstanding, so the company is worth $1,000. It's clear to you, from the research, that the company can produce cash flows into the next 10-plus years that get you to a net value of $1,200. Divide that by 10 shares and you get a per share value of $120.

But the market only recognizes the company as worth $100 a share. Moreover, one of the company' s competitors, company 'Y,' is expected to grow earnings at the same rate as company 'X.' and Company 'Y' is worth $1,200. 

You're waiting for the other show to drop. But to find out which shoe will drop, you have to watch the quick video above. 

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