This week on the One Minute Retirement Tip podcast, I’m exploring the question: Are Value Stocks Coming Back In 2021?

Today, I’m laying the groundwork for this week’s value stock discussion by making sure that you understand what a value stock is and how it’s different from a growth stock. 

Value stocks are those companies where the intrinsic value is more than where the stock is trading for today. For example, when you watch all those flipping house shows on TV, the buyer is looking to find a house that’s selling for less than what it’s actually worth. The difference is with stocks, you usually can’t flip your value stock right away for a profit, but you don’t have to demo the kitchen either.   

Intrinsic value is a measure of what an asset or a business is worth. When figuring out intrinsic value, it’s usually done by an objective calculation or financial modeling, and it’s not based on the current price of the stock.

A stock is a value stock then if it’s currently trading for $100 a share, but it’s intrinsic value is much higher, say $120 or $150 a share. Warren Buffett is the world’s most famous value investor. He only buys businesses that he thinks are worth much more than their current selling price. And this isn’t just a hunch or a wild guess. His instincts are certainly important, otherwise everyone would be able to replicate his methods and there would be many more billionaire investors. But it’s his disciplined approach in investing in quality businesses that are trading at attractive valuations relative to their real, intrinsic worth that has made Warren Buffett perennially one of the wealthiest people in the world. 

When you understand value, it’s a bit easier to understand the other side of the coin - growth. Growth companies may be trading at or more than their intrinsic value. But you’re anticipating that the company will continue to grow revenues, cash flow, and future profits, so even though it’s not a bargain price business right now, by investing in it, you’re counting on the future growth of the business and the future potential to make money in the business.

Growth stocks have been the place to for the last decade, and I’ll dive more into that tomorrow. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.

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