Value investment style
Also written Value investing · Value style
An investment management style of buying stocks priced below their intrinsic value, on the belief that the market has mispriced them and will correct that mispricing over time.
In plain language
Some companies get overlooked. They are steady, profitable businesses, but the market has moved on to more exciting stories elsewhere, and their share price has fallen behind what the business is actually worth.
The value investment style looks exactly there. A value manager buys stocks priced below their intrinsic value — the value a company's own financials and prospects justify — and waits for the market to notice and correct the price.
This is different from the growth investment style, which pays up for companies expected to grow fast, betting on the future rather than on a bargain today.
How it works
The workbook defines it directly (section 18.8): "Value Investment Style: Investing in stocks which are undervalued compared to their intrinsic value and therefore provide superior return when mispricing disappears."
Section 18.8.2 lists the characteristics used to identify value stocks: steady earnings, profit and cash flow; high dividend yield or pay-out ratio, because the business is in a mature state; valuation lower than peers; and low risk parameter compared to peers. Section 18.8.2.1 then lists the primary screens used to build a value universe: low Price-to-Earnings ratio, low PEG ratio, low Price-to-Book ratio, low Price-to-Sales ratio, low Price-to-Cash-Flow ratio, high dividend yield, and low debt-to-equity ratio — seven named screens in total.
The workbook also warns that value investing 'requires much rigorous analysis as compared to any other investment style,' and that a manager must watch for the value trap, where the apparent mispricing never corrects because the business is genuinely, not just apparently, weaker than it looks.
A worked example
Illustrative figures, applying the workbook's own screens. A value manager screens the market and shortlists Coastal Cement Ltd: P/E of 9 against a sector average of 18, P/B of 1.1 against a sector average of 2.8, and a dividend yield of 5.2% against a sector average of 2%, with steady profit for the last six years.
The manager buys Rs 30,00,000 worth of shares at this depressed valuation. Over the following two years, as the market re-rates the stock toward peer multiples, the price rises 48%, taking the holding to about Rs 44,40,000 — the 'superior return when mispricing disappears' the workbook describes, on top of the dividend income collected along the way.
Why NISM asks about it
Chapter 18 (Equity Portfolio Management Strategies), sections 18.8 and 18.8.2–18.8.2.1, define the value investment style, its identifying characteristics, and its seven screening criteria, immediately followed by the workbook's own value-trap warning. Expect a question contrasting value with growth investment style, or one asking which screen (P/E, P/B, dividend yield, and so on) identifies a value stock.
Common exam traps
- Value investing focuses on price relative to intrinsic value; growth investing focuses on future earnings growth — the workbook's clean contrast between the two styles.
- High dividend yield in a value stock reflects a mature business paying out profit, not necessarily distress — the workbook frames it as a positive screening characteristic.
- The workbook explicitly warns of the value trap in the same breath as defining the style — a question may test whether a candidate remembers this caution belongs to value investing specifically, not growth investing.
- Seven screens are named, not three — P/E and P/B are only two of the seven; do not stop at the two most familiar ratios.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
- PEG ratioThe price to earnings ratio divided by the expected earnings growth rate — Peter Lynch's way of asking whether a high P/E is justified by the growth behind it.
- P/E ratioShare price divided by earnings per share — how many rupees investors pay for each rupee of earnings. The most common relative valuation measure.
- Value stockA stock classified, typically for index and benchmarking purposes, as cheap relative to its fundamentals — low price-to-book, low price-to-earnings and high dividend yield being the workbook's own ratio criteria.
- Value trapA stock that looks cheap on value screens like low P/E and high dividend yield, but never re-rates because its business is genuinely weaker than the screens suggest, not merely overlooked by the market.