Value Stocks

Stocks that trade at a lower price relative to their fundamentals is referred to as value stocks.

Value investors look for the following criteria:

1.) Low price-to-book ratio or P/B. This is a stock's capitalization divided by its book value. This ratio compares the markets valuation of a company to the value of that company as it appears on its financial statements. A low P/B ratio indicates a good investment opportunity. However, this does not apply to all companies.

2.) Low price to earnings ratio or P/E. If a company reports a profit of $10 per share and the stock is selling for $200 per share, the P/E Ratio is 20 (Price of the share divided by the share earnings). A low PE may be an indication that the stock is undervalued.

3.)High Dividend Yield: The yield a company pays out to its shareholders. If a stock pays out a $1 dividend annually and the stock tades at $50, then the dividend yield is 2%. Dividend paid divided by the stock price equals dividend yield.

4.) PEG or Projected Earnings Growth is determined by Price Earnings Ratio and divide it by the expected growth in earnings. A low PEG is an indication that a stock may be undervalued.

5.) P/S or Price to Sales ratio. This can be calculated by taking the market capitalization of the stock and dividing it by the total revenues of the company. The lower the P/S the better the value.

6.) Book Value is a simple method to determine a company's value, yet very effective in many cases. It is done by simply taking a company's assets and subtracting its liabilities.

Two investors can be given the exact same information on a company and come up with different analysis. Certain investors might look for a P/E of 10 or lower, whereas another investor may require a P/E of 7 or lower. The criteria used to determine whether a stock is trading below its fundamentals is very subjective.

I have isolated an undervalued stock in the Banking industry. This particular financial institution is a leader in its field. A healthy dividend yield, plus the promise of possible double-digit appreciation, make this stock very attractive.

I have also isolated an undervalued Homebuilder stock that could return triple-digits.

Financial Institutions

Value Stocks -Banks

Homebuilders

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