Know the Difference Between Value Stocks and Cheap Stocks

Investing in Value Stocks Is a Proven Strategy

By Ken Little, About.com

There is a difference between a value stock and a cheap stock. If you don’t know the difference, you may end up owning a stock that will not respond when the market and economy rebound.

A value stock trades below what analysts think it’s worth. Of course, in the middle of a raging bear market it seems like almost every stock fits that definition.

What distinguishes a value stock from a cheap stock is the quality of the company.

Even good companies get beat up when the market is free styling down the price slope. And here is where problems come in for investors.

It is easy to become overwhelmed by the low prices on a large number of stocks.

Those low prices seem to suggest that these are bargains too good to pass up.

However, a cheap stock may not have any bounce left if the company has been severely injured by the economy.

The brutal truth is a number of companies are lost every time the economy takes a strong dip.

These companies suffer a large loss in revenue and customers. Compounding their problems, larger and stronger competitors may take market share.

When the economy recovers and customers begin buying again, these weak companies are so financially decimated they cannot recover.

While both value and cheap stocks may be trading at historic lows during an economic crisis, only the strong companies have a chance to recover.

How do you tell a value stock from a cheap stock?

There is no single magic answer, but here are some indicators that may help:

• Debt is below its sector’s average
• The company is generating enough cash to avoid refinancing
• The company has a successful brand that will survive economic slowdowns
• It should trade at a P/E below industry averages, but not at rock bottom

This article can help you find this comparative information.

Being a good value investor is a proven strategy that has worked in good times and bad, however it takes about the same amount of work no matter what the market and economy are doing.