What Are Value Stocks?
In the simplest terms, a value stock is a security trading at a lower price than what the company's performance indicates it should be worth. This determination is generally made using various valuation metrics that are then compared to a company’s peers. But it can extend to its industry in general. For example, if a stock is trading roughly in line with its industry peers, but its whole industry is trading below where it should be relative to other industries, we would qualify that as a value stock as well.
Where to Find Data
Gathering the valuation data can take a little legwork, but it’s worth the time. The easiest thing is to subscribe to paid services, like S&P Capital IQ, FactSet or Bloomberg. However, there are some good free sites as well. Finviz.com has a free screening platform. Yahoo! Finance and Nasdaq.com provide a lot of good data as well. Briefing.com’s earnings archive is also good for historical data.
You can also go old school and compile the data directly from earnings press releases. Also, some companies maintain nice tables of historical data on their websites in the Investor Relations section. The caveat here is that it’s a lot easier to find historical data as opposed to forward consensus estimates. Among the free options, Yahoo! Finance, under the Analysis tab, has some good forward consensus data.
Once you compile the data, we recommend setting up an Excel worksheet and maintaining the data as it changes over time. And that includes not just the company you’re interested in, but also its competitors which can be found in 10-K filings on the SEC Edgar website.
Valuation Metrics
There are lots of valuation metrics people use, here are some of the more common ones:
- Price/Earnings: This is simply the stock price divided by adjusted earnings per share (annual) for the current year and forward year.
- PEG Ratio: The idea here is to compare P/E ratios relative to their earnings growth rates. For example, assuming two companies trade at a P/E of 20x, but one is growing EPS by 10% and the other by 20%, the PEG ratios would be 20/10 or 2.00x and 20/20 or 1.00x, respectively. The lower the PEG ratio, the cheaper the stock relative to its earnings growth. A ratio below 1 suggests a discount.
- Price/Sales: Here, you take the company’s market cap and divide it by LTM sales, or current year sales or you can use forward sales as well. P/S is typically used for companies that are not yet profitable, oftentimes they are startups or perhaps recent IPOs.
- EV/EBITDA: Enterprise value (EV) is the total value of a company, including debt. You can calculate using market cap + cash + ST and LT debt. The drawback on just using market cap is that it reflects only the equity side of the balance sheet whereas EV looks at the whole company, including its debt. EBITDA is a profitability metric we think should be used more because it backs out depreciation which is a non-cash expense and is a better proxy for cash flow. Many companies provide EBITDA numbers, but you can calculate by starting with operating income (EBIT) and adding depreciation & amortization (DA).
In sum, valuations are always important in all industries and all market environments.
Briefing.com Valuation Resources
We highly recommend compiling the data and running valuation screens. But you can also utilize Briefing.com, which runs weekly screens that you can use as a starting point for your research. On Wednesdays, we publish our VALUE Leader rankings, which is a proprietary quantitative system that combines multiple valuation factors with above-average Relative Strength. On Fridays, we publish our YIELD Leader rankings, which focuses more on share buybacks and dividends. YIELD is not a pure valuation screener, but companies spending money on their own stock is a great indication that insiders think their stock is cheap. YIELD has uncovered some big movers over the years.
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