When the Pakistan Stock Exchange (PSX) remains flat for years, many investors wonder if there's any value left to find. The reality is that while investing in the stock market can be risky, having the right strategy — like value investing — can help you spot hidden gems and grow your wealth over time.

In this article, we’ll explore the basics of value investing, how it works, how to identify undervalued stocks, and how it compares with growth investing. If you’re new to the stock market and want to understand how to build a long-term investment strategy, this guide is for you.

What is Value Investing?

Value investing is a strategy where investors look for stocks that are trading below their intrinsic value. This means buying shares at a lower price than what the company is actually worth. The belief is that eventually, the market will recognize the real value of the company and the stock price will rise, allowing the investor to make a profit.

This approach is based on the idea that the stock market is not always efficient. Sometimes, companies with strong fundamentals are overlooked or temporarily fall out of favor, which can make their shares undervalued.

Value investing is not about quick profits — it’s a long-term strategy that requires patience, research, and discipline.

How to Identify Cheap or Undervalued Stocks

When investors say a stock is “cheap,” they usually mean it's undervalued — not just low in price. A Rs. 10 stock may be expensive if the company is not performing well, while a Rs. 500 stock may be cheap if the company has strong earnings.

To find undervalued stocks, investors often use price multiples and compare them with industry peers.

Two Basic Approaches:

• Compare Price Multiples with Competitors: An investor calculates key financial ratios for a company and compares them to those of similar companies. If the company’s ratios are lower, it may be undervalued.
• Calculate Fair Value Using Competitor Multiples: After averaging the multiples of peer companies, the investor uses this benchmark to calculate what the stock should be worth. If the current market price is lower than this fair value, the stock is considered undervalued.

Key Financial Metrics in Value Investing

Value investing requires a fundamental analysis of a company's financial health and business model. Here are some key ratios and metrics used to evaluate value stocks:

• Price-to-Earnings Ratio (P/E): The P/E ratio is calculated by dividing the stock’s price by its earnings per share (EPS). It tells you how much investors are willing to pay for one rupee of the company's profit. A low P/E may indicate the stock is undervalued — but this must be compared within the same industry.
  Example: A company with a P/E of 6 might be a better value than one with a P/E of 12 in the same sector.
• Price-to-Book Ratio (P/B): The P/B ratio compares a company’s market value to its book value (assets minus liabilities). A lower P/B may indicate that the stock is undervalued, especially if the company owns valuable assets.
• Return on Equity (ROE): This measures how much profit a company generates with the money shareholders have invested. A high or rising ROE suggests strong business performance. If a stock has a low P/E but high ROE, it’s often a good sign.
• Debt-to-Equity Ratio: This shows how much debt a company has compared to its equity. A lower ratio is usually better because too much debt can make a company risky, especially during economic downturns.
• PEG Ratio (Price/Earnings to Growth): The PEG ratio adjusts the P/E ratio for the company’s earnings growth rate. It helps identify stocks that are both growing and undervalued. A PEG ratio below 1 is generally considered favorable.

Value Investing vs Growth Investing

Let’s understand Value investing vs growth investing — two of the most popular stock investment strategies.

What is Growth Investing?

Growth investing focuses on companies expected to grow at an above-average rate compared to others in the market. These stocks might not be profitable yet but are expanding rapidly in terms of revenue, market share, or technology. Investors in this strategy pay a premium for the potential of future earnings.

Value investing, on the other hand, is about buying solid companies at a bargain price, based on their fundamentals.

When is Value Investing Most Effective?

Value investing is particularly effective during periods of market downturns or recessions. In tough economic times, even good companies can see their stock prices fall. This creates opportunities for value investors to buy quality stocks at discounted prices.

For example: during the COVID-19 market crash, many fundamentally strong companies were available at bargain prices. Those who practiced value investing during that time benefited when markets recovered.

Risks of Value Investing

• Time Risk: The stock may remain undervalued for a long period.
• Value Traps: Sometimes, a stock is cheap because the company’s business is genuinely deteriorating.
• Wrong Analysis: Misjudging the company’s value or financial health can lead to poor decisions.

Quick Recap:

• Value investing is a strategy that involves buying stocks at prices lower than their intrinsic value.
• Investors use ratios like P/E, P/B, ROE, and PEG to identify undervalued stocks.
• Value investing vs growth investing: Value focuses on buying cheap, strong companies; growth focuses on fast-expanding, high-potential companies.
• It’s a long-term strategy, especially effective during economic slowdowns.
• It requires in-depth research, patience, and discipline.
• Avoid confusing a cheap stock with a good stock — always look at the company’s fundamentals.

Get Started with Azee Securities

Ready to start your investment journey with Azee Securities? Open a Stock Trading Account and gain access to the Pakistan Stock Exchange (PSX). Let Azee Securities help you make informed decisions. Our expert advisors, advanced trading platform, and real-time market data ensure you stay ahead of the curve.

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