Question: Value stocks are often in the news. What is it about them that makes them valuable?

Lynda Taylor

Answer:

Dear Ms. Taylor,

Value stocks are stocks of companies that seemingly have not been correctly valued by the market. In other words, for various reasons, the prices of value stocks are lower than they perhaps should be, given their fundamentals - earnings, sales, dividends and other factors. To state it another way, their prices do not accurately reflect the true value or true worth of the company.

The reason a stock might fall into the "value" category is that the overall industry is having a difficult time. You've seen this happen relatively recently with the automobile industry; sometimes with airline companies or the home building sector. Likewise, Internet stocks over the years have been in and out of favor. The same has been true for the gold and mining sector.

Yet within a currently troubled industry, certain companies are viewed as basically strong, stronger than reflected in their prices.

Another possible cause - negative publicity. Perhaps questionable actions of a departing president or CEO. Perhaps a product that turned out to be flawed or tampered with. Over the years, this has happened with several over-the-counter medications.

Whatever the underlying reason causing a stock to be under appreciated, those who buy a value stock believe that the company is inherently sound enough, well run enough, and has a product or service that is needed enough... and therefore shares will eventually rise in price.

You should realize, however, that this is not a sure-fire situation. The stock may or may not go up in price. It is, however, quite a good strategy for the true buy-and-hold investor.

In order to make sound decisions about a value stock, you must look at the total financial picture. In other words, do not select a stock solely because its price is low. The company should have steadily increasing earnings, low debt, sound management and valid products or services. Many value stocks also hold important tangible assets, such as cash, real estate and equipment.

As you know from reading this column, a good place to begin your search for value stocks is the weekly research publication, Value Line Investment Survey (www.valueline.com).

Good luck!