How to find the best value stocks

By: Jonah Keri

Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes… read more.

Updated: May 28, 2021

Well, that defines value stocks – an asset class that has long been a popular choice for investors looking to make smart moves in the stock market. In this article, we’ll explain what value stocks are, how to find the best ones, and how to make money from them.

The top 10 best value stocks to buy

Latest value stock analysis

What are value stocks?

A value stock is the stock of a company that’s generating positive earnings and revenue growth, but is trading at a value that’s lower than that of other companies in the same industry. This is judged by investigating the company’s current price-to-earnings ratio. As a result of that divergence, some investors view value stocks as potential bargains and snap them up accordingly.

Typical characteristics of value stocks

The most common characteristic of value stocks is a price that’s lower than average compared to other companies’ stocks in the same industry. That lower price is reflected in a low price-to-earnings ratio, a low price-to-book ratio, or both. Value stocks also often issue dividends, and frequently produce fairly high dividend yields. 

Are value stocks a good investment?

Value stocks can be a good investment in the right circumstances, but it’s important to do your research. To succeed with value stocks, you’ll want to look into different ones, find those with the strongest fundamentals, then assess the reason their stock price is depressed. It could be you’ve uncovered a bargain, but there could also be deeper reasons for the stock’s lack of price strength. It is also important to react to prevailing market conditions; you’ll want to avoid buying value stocks (or any stocks) during bear markets, to avoid racking up big losses.

How do I find the best value stocks?

In order to be successful with value stocks, it’s important to put the time into researching them thoroughly. Here’s a quick list of methods you can use to find the best ones, with a summary of each point below.

1. Use experts and news aggregators
2. Follow big players and wealth managers 
3. Look out for trends and societal changes
4. Consider your own spending habits and the products you prefer
5. Use stock screening tools and set criteria

1. Use experts and news services

Bloomberg and Yahoo Finance are among the websites that offer excellent economic insights and company updates. For more trading-focused news, check out the news and analysis that we offer right here on our site. If you want up-to-the-minute updates on leading value stocks such as NRG Energy, we’ve got you covered.

2. Follow big players and wealth managers

The biggest investors are the ones that make the market move. Large hedge funds, pension fund managers, mutual fund managers, and investment banks manage portfolios worth hundreds of millions or even billions of dollars. Follow what those whales do, since they’re often well ahead of the curve when it comes to finding the next great value stocks.

3. Look out for trends and societal changes

As times change, new opportunities emerge for companies to grow and gain market share, and for their stocks to become great investment opportunities. The push for lower-priced medications in the United States has turned AmerisourceBergen has propelled the company’s earnings growth to impressive levels, with AmerisourceBergen ranking number 10 on the Fortune 500 list in 2019.

4. Consider your own spending habits and the products you prefer

While societal changes in spending habits can be a good marker for future investment opportunities, your own habits can teach you a lot too. If you’re excited about a new product that you started using, you can apply that enthusiasm toward investing in the stock of the company that makes that product.

5. Use stock screening tools and set criteria

You’ll find lots of stock screening tools that will allow you to sort stocks based on all kinds of different criteria. Since the goal is to identify top value stocks, you can set your search to sort stocks based on many different criteria, including earnings growth, price-to-earnings ratio, and price-to-book ratio. Yahoo Finance and Marketwatch are both large investing sites that offer those kinds of tools. You’ll also find strong screening tools for value stocks right here on this site, along with lots of detailed stock analysis.

Are there any risks I should know about?

The main thing to bear in mind is that sometimes a stock is underperforming for reasons related to its fundamentals, rather than external factors which will change over time. Sometimes stocks struggle to rise in price for a reason, and a prevailing lack of interest among big-money institutional investors prevents those stocks from moving higher. That failure to launch can be especially frustrating when faster-moving growth stocks fare better at the same time. Also remember that value stocks, like other types of stocks, risk going down hard during bear markets.

What should I do now? 

If you’re ready to invest, pick an online broker, select the value stock (or stocks) you want, and make your purchase. If you need more time first, check out the easy-to-understand trading courses and up-to-the-minute news updates that we offer right here on this site to make sure you’re fully prepared to invest.