When most investors in the stock market go looking for stocks they’re usually hoping to find a share that will be good value.
In other words, they want to buy it cheap and see its share price go through the roof.
This chart of Afterpay is a graphical portrayal of what everyone wants, but stocks like this don’t come along as often as most stock players would like.
But not all stocks that look like good value to an individual are seen as value stocks by the pros in the market. This is a bit of a problem with the definition of what a value stock actually is.
So, what is a value stock?
Investopedia says: “A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors.”
It also makes the point that value stocks are different from growth stocks.
OK, so what’s a growth stock?
The definition of a growth stock is: “Those companies expected to grow sales and earnings at a faster rate than the market average. Since investors are paying a high price for a growth stock, based on expectation, if those expectations aren’t realised, growth stocks can see dramatic declines. Growth stocks typically don’t pay dividends.”
What are some examples of growth stocks?
Tech stocks like Tesla, Afterpay and so on are typical growth stocks. That said, some tech companies can look like a value stock in terms of being under-priced by the market, but there aren’t many that pay dividends. And that’s the confusing bit for those searching for pure value stocks.
What history shows is growth stocks can do well after a recession and stock market slump, like last year’s Coronavirus crash. However, history also shows that eventually the smarties on the stock market go looking for ignored value companies that will do well as an economy throws off the recession fears and becomes more normal.
It’s why companies like Qantas, Webjet, Flight Centre and other hospitality businesses have seen their share price rise recently, as there’s a belief that the end of lockdowns, higher vaccination rates and open borders will help companies that have been smashed by the restrictions of life with a pandemic.
And I reckon over 2022 they’ll see further rises. Another company that’s likely to do well is Tyro Payments. I might be talking through my pocket but this company (that supplies those devices we swipe our credit card over when we go to pubs, restaurants, cafes, etc.) is going to be doing better in 2022 when we start enjoying hospitality as normal.
Right now, the market experts are searching for those reopening trade stocks and many of them will be value stocks.
This chart from Perpetual shows the history of value stocks after a market crash.
The dark blue line shows how value stocks do well over growth stocks for a few years after a crash — and we’re in that phase of the stock market cycle right now.
6 stocks that could surge soon
Over the past week, I’ve asked my market expert colleagues for some value stocks they like. And here are six of them:
4. Qantas (QAN)
6. HUB24 (HUB)
I hope my experts are on the money.
Remember, this is not financial advice because I don’t know your personal circumstances. I urge you always to tread very carefully when it comes to anything to do with investing.