What Is a Large-Value Stock?
A large-value stock refers to an investment style categorization comprising a large-cap stock that is also a value stock. 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 often considered underpriced based on fundamental analysis, often paying a relatively high dividend to shareholders and having a low price to equity (P/E) ratio.
Value stocks are often contrasted with growth stocks, where a growth company invests its earnings back into corporate growth instead of paying a dividend and have high P/E's.. Large-cap stocks are contrasted with companies with lower market capitalizations.
Key Takeaways
- Large-value stocks refer to those companies that are both large-cap (greater than $10 billion in market capitalization) and also value stocks.
- Large-value stocks are often mature and stable companies that pay regular dividends, attractive to lower-risk value investors.
- Like all value stocks, however, investors should be wary of value traps and deteriorating financials being responsible for undervaluation.
Understanding Large-Value Stock
A large-value stock is the stock of a big cap company where the intrinsic value of the company's stock is greater than the stock's market value.
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.
