- 1Value stocks trade below intrinsic worth based on fundamental metrics
- 2Our Value factor uses earnings yield, cash flow yield, and book-to-market
- 3Avoiding value traps requires pairing value with profitability and momentum
- 4The best value stocks score high on value AND other quality indicators
- 5Value has outperformed growth over most long-term historical periods
#What Makes a Stock "Good Value"?
Value investing — buying stocks for less than they're worth — is the oldest systematic investment strategy. Benjamin Graham pioneered it in the 1930s. Warren Buffett refined it. And academic research has confirmed the value premium across decades and global markets.
But finding value stocks isn't as simple as sorting by P/E ratio. Many "cheap" stocks are cheap for good reason — declining businesses, structural headwinds, or poor management. These are value traps.
Our approach uses quantitative factor analysis to distinguish genuine bargains from traps.
#How We Identify Value Stocks
Our Value factor score combines three metrics:
1. Earnings Yield (Inverse of P/E)
Earnings ÷ Enterprise Value. Higher earnings yield = cheaper stock relative to its profits.
2. Cash Flow Yield
Free cash flow ÷ Enterprise Value. Focuses on actual cash generation, which is harder to manipulate than accounting earnings.
3. Book-to-Market
Book value ÷ Market cap. One of the original Fama-French value factors. Identifies stocks trading near or below their net asset value.
We use enterprise value (market cap + debt - cash) rather than just market cap, so we're comparing on an apples-to-apples basis regardless of capital structure.
#Value Factor Performance
The Fama-French HML (High Minus Low) factor has historically delivered a premium of approximately 3–5% per year. However, value significantly underperformed from 2010–2020 as growth stocks dominated.
Since late 2020, value has staged a comeback:
| Period | Value vs. Growth |
|---|---|
| 1927–2024 | Value wins by ~3-5% annually |
| 2010–2020 | Growth wins by ~8% annually |
| 2021–present | Value outperforms most years |
The lesson: value works over full market cycles but can underperform for extended periods.
#Avoiding Value Traps
A value trap is a stock that looks cheap but keeps getting cheaper. To avoid them, we overlay value with other factor scores:
Profitability
High-value + high-profitability stocks outperform pure value screens. A company earning strong returns on capital is cheap for no good reason — that's a true bargain.
Momentum
If a cheap stock is in a price downtrend, the market may know something you don't. Adding a momentum filter avoids catching falling knives.
Stability
Cheap stocks with stable earnings and low debt are less likely to be value traps than cheap stocks with erratic results and high leverage.
#Where to Find Value Stocks
Value tends to concentrate in certain sectors:
| Sector | Why It's Often "Cheap" |
|---|---|
| Financials | Complex businesses, regulatory risk |
| Energy | Commodity cyclicality |
| Healthcare | Drug pipeline uncertainty |
| Industrials | Economic sensitivity |
| Consumer Staples | Slow growth = low multiples |
Tech stocks can also be value plays when the market overreacts to short-term misses.
#See Our Current Value Rankings
Our rankings page lets you sort all 3,000+ U.S. stocks by Value factor score, updated regularly with the latest financial data.
You can also combine value with other factors — for instance, finding stocks that score high on both value and profitability (the Warren Buffett approach).
Last updated: February 6, 2026