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For those new to the stock market, choosing which stock to invest in is not as easy as selecting companies that you like. With stocks often categorised between value and growth, investment strategies range from basic to complex.
Value stocks are defined as the share price of a company trading at a value lower than its intrinsic value or fair price value. The expectation is that the market will eventually reflect the company’s true value and generate returns for the investor (this can also be referred to as a reversion to its mean price or fair value). Value companies also regularly pay reasonably high dividends, which are found in sectors such as consumer staples and financial services.
This differs from growth investing, which involves seeking companies that have the potential to outpace the growth of a market index and seldom pay out dividends. Typical growth stocks are innovative companies in the technology and communications sector. They are often more expensive than your average stock, trading at a high price-to-earnings ratio (P/E ratio).
Valuation methods tend to be focussed on two core areas: the intrinsic value approach and the ratio-based approach.
Here’s a brief overview:
As a final point, be aware that value traps are common: a stock appears undervalued based on low valuation metrics but is not immediately apparent. It is important that investors conduct due diligence and research the companies thoroughly.
And with that, here are two stocks widely considered as potential value companies this year (analysis correct at the time of writing).
Founded in 1690 in London, Barclays plc (Ticker: BARC) is a UK-based banking institution listed on the London Stock Exchange (LSE). Headquartered in London, the bank’s primary function is to provide financial services through personal and business banking. This is achieved through its consumer banking division, investment banking division and corporate division.
Shares of the FTSE 100 stock are currently trading at 177.80p. The previous two years saw consecutive declines for the major bank. 2022 dropped 15.0%, followed by another moderate drop of 3.0% in 2023. Be that as it may, year-to-date performance (+15.5%) has seen price action recoup last year’s losses and has made a substantial dent in 2022’s downside move. Should the stock move beyond the 193.18p high (formed on 9 February 2023), we could then see 2022 highs challenged at 219.60p, a whisker below the fair value target.
Founded in 1974, Glencore plc (Ticker: Glen) is a large producer and marketer of a wide range of commodities in the mining sector, focusing on metals, minerals, and energy products. Headquartered in Baar, Switzerland, Glencore plc operates in more than 35 countries and has nearly 150,000 employees.
Shares of the FTSE 100 stock currently trade at 420.00p. Last year was disappointing for its share price, dropping 14.5%, with 2024 also down slightly more than 10.0% as of writing. There is a clear downtrend present, though a pullback is currently unfolding, and a trendline resistance is seen overhead (taken from the high of 584.00p). According to analyst estimates, a break of this trendline could be seen, and this may lead to the stock transitioning to an uptrend to challenge highs of 479.00p, just north of the fair value price of 452.00p.
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