What Is Large-Value Stock?
A large-value stock is the stock of a large company where the intrinsic value of the company's stock is greater than the stock's market value. A large-cap stock is generally considered to be the stock of a company with a market capitalization of more than $10 billion. A value stock is contrasted with a growth stock in that a value stock is sometimes underpriced and pays a dividend while a growth company invests its earnings back into corporate growth instead of paying a dividend.
Understanding Large-Value Stock
The philosophy that underpins the strategy of seeking out and investing in value stocks whose prices are undervalued is the belief that the market has "gotten it wrong" and the price of the stock will eventually recover, leading to significant gains for the investor. Reasons for the market mispricing a value stock include management changes or corporate turnaround strategies that haven't yet been priced into the market. There can also be temporary disruptions to the company's market share or artificially depressed earnings. Essentially, the analyst working up the stock sees something in the company's future that the market hasn't yet recognized which the analyst believes will lead to increased prices as this future positive event comes to fruition. The stock's intrinsic value can be determined by using a valuation model such as discounted cash flow and multiples.
Pitfalls of Large-Value Stock Investing
One of the largest pitfalls of investing in a large-value stock is something called the value trap. The value trap springs from the classic investing idea that markets are efficient and if a stock's price is depressed then there is a legitimate reason for it. There is not some stock price savior out on the horizon that everybody is but that one particular value analyst is failing to see. A stock's market value can fall below its intrinsic value for a number of reasons.
For example, if a company seeks Chapter 11 bankruptcy protection, many shareholders could become concerned that the company will go bankrupt, and therefore sell their stock. If the company has enough assets to pay all of its liabilities, then there will be intrinsic value left in the company's stock. This value may be greater than the stock's market value, which results in a large-value-stock investing opportunity.