- True value investors only buy if a stock is trading substantially below its tangible book value. It’s hard finding these types of situations in all your investments. Use this as a guide and not as a “must have.” Over the years, you will have noticed these types of values in the banking, energy and chemical industries, among others.
- Another factor you need to find in a value stock is a low price to earnings (“P/E”) ratio. You are looking for a beaten down stock in an out-of-favor industry. A nice P/E discount is 20% to 50% of the industry average over a few years. You then have the potential to make a nice return on both the natural rotation of the industry to a higher timeliness, as well as the stock regaining market favor.
When is a cyclical stock also a value stock?
Many investors view cyclical stocks as value stocks. Cyclical stocks are value stocks only if they sell at an earnings (P/E) discount to their peers and meet the book value criteria as mentioned above.
When is a cyclical stock not value stocks but a turnaround stock?
If the company is selling at a discount to its tangible bookvalue, but its earnings have disappeared, it becomes a possible turnaround situation and not a value stock.
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