Extending our previous discussion on P/E, P/BV and EV, we would like to explain the concept of Value Stocks.
I’m sure everybody would have been to Big Bazaar Stores. What is the reason we buy a product from Big Bazaar. We feel we get the value for money. Generally we get into Big Bazaar to pick where I can earn an immediate discount. When it comes to buying a big purchase say a blackberry, do we think of going to Big Bazaar or Nokia Showroom? Obviously a Nokia Showroom right?

Value stocks are nothing but stocks which are available in the market at a big bargain to what they are really worth. The performance of the company need not be so great. For example a company with a sales growth of 5% yoy, decent earnings growth and has not gone into losses in the past few years, but trading with a much less P/E or a P/BV (compared to industry average) can be stated as a value stock. This stock in your portfolio might not give stellar returns, but the downside is limited as well. I would say a value stock is a better pick compared to a cyclical stock which has huge volatility in the stock returns.

Verdict:
These stocks have the potential to give spectacular returns if the markets recognize its potential one day. That may take a very long time may be years or it might not even really happen. But whats the big deal? Your money will be safe in this kind of stocks.