Value investing is about finding companies whose stock prices don’t necessarily reflect their worth, with the belief that as time goes on, the market will recognize their value, and the stock price will rise. For investors looking for long-term growth and diversification across market cycles, value investing can be an attractive strategy.
Finding undervalued stocks with value investing
It’s in our nature to want to find the best deal, and when it comes to investing, the same thinking applies. It’s exciting to get in on an opportunity before the rest of the market takes notice and drives up prices. Value investing aims to do just that. Value investing is about looking for stocks that seem cheaper than they should be. Instead of chasing trends, it’s about investing in solid businesses with the belief that the market will eventually recognize their true value.
How value investing works
The value factor focuses on finding companies that seem to be undervalued, meaning their stock prices are low. These are stocks that trade at lower prices compared with their earnings, book value or cash flow. So even though these stocks might not look exciting at first, they often have a strong business foundation and could end up performing better than expected.
Common ways to measure value include
- earnings yield
- price-to-book value ratio
- cash-flow metrics
These indicators help find companies that may be overlooked by the market and are positioned for a rebound.
Why invest in value ETFs?
- Market mispricing: Investors often underestimate the potential of slower-growing or out-of-favour stocks. Value investing seeks these opportunities before the market catches on.
- Earnings surprises: When undervalued companies report better-than-expected earnings, their stock prices can jump, benefiting investors who got in early.
- Long-term outperformance: Historically, value stocks have tended to outperform their more expensive counterparts over extended periods, especially during economic recoveries.
What is Fidelity’s approach to value factor investing?
Fidelity’s value factor ETFs aim to track the performance of tailor-made indexes that are actively designed and reflect the performance of attractively valued companies. These funds aim to offer:
- single-factor exposure to undervalued stocks
- an outcome-oriented strategy that seeks long-term outperformance
- an efficient complement to a well-diversified portfolio
The Fidelity Canada Value Factor Index is designed to capture these opportunities by focusing on companies with low prices.
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