What characterizes value stocks?

Value stocks are characterized by trading below their intrinsic value, which is the perceived or calculated true value of the company based on fundamentals such as earnings, revenue, and overall financial health. Investors often seek these stocks because they believe that the market has undervalued them, presenting an opportunity for future price appreciation as the market corrects the mispricing.

This intrinsic value perspective often leads to the identification of companies with strong fundamentals but that have faced temporary challenges, causing their stock prices to decline. By purchasing these undervalued stocks, investors hope that the market will eventually recognize the true value, leading to capital gains.

The other choices highlight different aspects that do not define value stocks specifically. While high dividends can be characteristic of some value stocks, it is not a requirement, as not all value stocks pay significant dividends. A high price-to-earnings ratio typically indicates overvaluation rather than value, and the ownership composition of a stock, such as whether it is held by institutional investors, does not inherently define it as a value stock. Thus, the defining feature of value stocks is their trading below intrinsic value.