Value stock.
In plain English
A value stock trades at a relatively low multiple of its earnings, book value, or cash flow. The category is dominated by mature businesses with steady but unspectacular growth: banks, utilities, energy companies, consumer staples. Many value stocks pay reliable dividends. The 'value premium' (the historical tendency for cheap stocks to outperform expensive ones over very long horizons) is one of the most-studied results in financial research, and one of the most argued over.
01Why it matters
Value stocks tend to outperform during periods when interest rates rise and inflation runs higher, because their lower P/E ratios are less sensitive to the discount rate applied to future earnings. Holding both growth and value funds is one of the simplest forms of style diversification.
02The math, step by step
JPMorgan Chase has traded at a P/E around 11 to 14 for much of the post-2008 era while paying a dividend yield of 2.5% to 3.5%. Its earnings grow modestly each year but reliably. That profile is the textbook value stock.
03What this is NOT
A value stock has a low ratio of price to fundamentals. A cheap stock is just one with a low dollar price (e.g., $5 a share). Penny stocks are not value stocks; they are usually small, speculative companies regardless of share price.