Simply put, value investing is a strategy to invest in companies that are relatively inexpensive compared to their own financial standing and that are considered undervalued by the market. Value investors focus on company fundamentals and valuation metrics to distinguish if the company is under or overvalued relative to its true (‘intrinsic’) value. Companies with below-average valuations as compared to their peers, using metrics such as the price-to-earnings ratio or price-to-book value ratio, are considered value companies. Additionally, value stocks often pay dividends and have slower and more stable growth rates. Value stocks are most commonly found in the Financials, Health Care, Consumer Staples and Utilities sectors. A few well-known value companies are JP Morgan Chase & Co., Pfizer and Procter & Gamble.
Value investing tends to perform best during the early and late stages of an economic cycle, either when the market is starting to heat up or cool down. During economic inflection points as well as during volatile episodes, investors typically gravitate to more stable and low valuation stocks, thus benefitting a value investing style. On the other hand, value stocks typically trail during sustained bull markets, when economic and earnings growth is strongest.
Given that many value stocks pay a dividend, value investing follows a total return approach, meaning that the investment return is driven from both income (dividends) and capital appreciation (share price movement). Due to the dividend component and more stable growth aspects of value companies, value investing has historically been less volatile than growth investing over the long-term.