Deep Value Stocks: Everything you Need to Know
Investors interested in deep value stocks believe they do better in a bear market. They can also perform well in bull markets. Value stocks are stocks that have a low valuation. A low valuation may mean a low P/E ratio, price-to-cash flow ratio, or other valuation metrics that tell investors that the stock price may be a bargain.
A deep value stock may become a great bargain because the company has run into some severe short-term trouble. Sometimes when a company runs into trouble, the stock tanks dramatically. When this happens, investors may buy the stock because they think the company can overcome its short-run problems.
The key to deep value investing is to do your homework and be sure that the company can turn things around. If the investor is correct and the company can recover, the stock may recover also. In that case, the investor may earn handsome returns on the stock.
The stock market can also bring down the price of value stocks and many other stocks. So far this year, the stock market is down. The drop in the stock market is important because a deep value stock may have already fallen and may have fallen further due to the stock market being down. Therefore, they may be even cheaper now than before.
Great, but where can we find them?
How to Find Deep Value Stocks
The key to finding value or deep value stocks is to look down, not up. In other words, look for stocks that have fallen, not those that have risen. It is important to find stocks that are down because most valuation metrics show that a lower stock price represents better value.
One place to look is the 52-week lows. Every day the Wall Street Journal shows a list of stocks that have fallen to their lowest price in the past 52 weeks (or one year). If looking every day is too much, check Barron’s. Barron’s is published every Saturday and lists every stock that has reached its 52-week low throughout the week.
A quick Google search can produce many value investing or deep value investing subscription services. Each service is different, so check them out first. The services may also give you a free trial before you commit. Not every recommendation will be a winner. As always, do your own homework.
Investors may also find websites that allow them to screen for them. A stock screen enables users to enter search criteria and get a list of stocks that fit the criteria. For instance, you may be able to screen for stocks with a low P/E ratio or stocks in a sector that you know well.
Best Deep Value Stocks Today
Finding deep value stocks may be difficult. Deep value stocks are out of favor, and most investors want nothing to do with them. Being out of favor attracts deep value investors and keeps them out of the headlines.
The key is to look where everyone is not looking. That is because the best deep value stocks today look like duds. It may feel easier for the average investor to buy stocks on the way up because everyone else is doing it.
Deep value investors think the opposite way. They’re looking for the stocks of good companies that have gone down. Sometimes way down.
Like any stock, they have risks. These stocks amplify risk because the companies of deep value stocks may be dealing with some problems. So, if you get a deep value stock right, the results could be fantastic. If you get a deep value stock wrong, the results could be disastrous.
Investing in deep value stocks is not easy. Otherwise, everyone would do it. It is always essential to know a company as much as possible before buying its stock. In deep value investing, it is key. Because the companies of deep value stocks may be in short-term trouble, you must understand how they can get through their problems.
For instance, a company may be going through a change in strategy to turn around the company. Many times, during a turnaround, the company will voluntarily suffer through the changes and hopefully return as a stronger company. While suffering through changes, the stock can also suffer. If the strategy does not work, the stock could be a big loser for your portfolio.
Some deep value companies may have debt problems. If you do your homework and believe the company can resolve its debt problems, it may appear to be a great investment. If you’re wrong, the company could go bankrupt in the worst-case scenario.
Though deep value investing can offer great returns if you get it right, you can also get burned if you don’t.
About BJ Cook
BJ Cook is a long-time stock nerd. He has held several roles in the equity research world and earned the right to use the CFA designation in 2014. When he’s not writing for Investment U, you can find him searching for new investment ideas. Outside the investment community, BJ is a die-hard Cubs fan.