What if you could just put your excess funds into a stock and then forget about it? What if you could wake up 10-12 years later to see that it has appreciated 100% or 1000%? That would be perfect, wouldn’t it?

You wouldn’t need to worry when market forces pulled it one way or the other in the daily tug-of-war. You’d know that when you needed the cash after so many years, it would be there.

This is what value investing is all about.

There’s also some evidence that with all the guessing and speculating that some people do, their gains and losses tend to balance each other out in the long term, so they don’t really do much better than the market, despite all the risk that they take.

These kinds of arguments are usually forwarded when speaking in favor of value investing.

However, it would never do to just take a wager on any cheap stock. Cheap, by the way, doesn’t always mean that the stock has a low dollar value, and so, is easier to buy. Instead, it means that the stock has a low value relative to others and considering its prospects as against the prospects of those others.     

Thus the stock’s relative valuation is arrived at by dividing its price by its earnings, or earnings growth or sales (these three are the most common) with the resultant ratios being called price-to-earnings (P/E), price-to-earnings-growth (PEG), or price-to-sales (P/S) ratios.

So for example, if the market, or the stocks in any index (like the S&P 500), or the stocks of the industry to which your stock belongs (depending on the group you want to compare with) has an average P/E of 15, and the stock you’re considering has a P/E below that, it is considered cheap. Another way of looking at it would be to compare your stock’s P/E at a given time with the P/E over the past year and if it’s trading in the middle of the annual range or below it, it’s generally considered cheap.

And as far as the PEG or P/S ratios are concerned, we generally need a value below 1, which means that the stock is trading below its expected earnings growth or expected sales for the current year. So you’re paying less than expected sales or expected earnings growth.

However, not all stocks and industries are the same, and it may be standard for some stocks to trade at values above 1. And that’s okay. In such cases, it’s a good idea to also check how it has traded over the past year and draw comparisons, just like we did with the P/E.

But that isn’t all.

Choosing a value stock can be tricky because what if there’s a good reason for the low valuation? What if the company has an innovation crisis, i.e. it’s having difficulty developing new products, or if its competitors are doing a better job? What if it is having difficulty managing costs? Or it doesn’t have good leadership at that moment?

There could be so many reasons. Stocks that have a low valuation because of some reasons for concern are also called “value traps.” And it’s very important to avoid the value traps when picking stocks.

The best way to avoid value traps is to take a look at the recent results and estimate revisions. Because if the company has been reporting positive surprises and if analysts have been raising estimates by notable magnitudes, chances are the stock isn’t a value trap.

Now let’s take a look at some examples.

Lennar Corp. (LEN Quick Quote LEN - Free Report)

This is a fairly well-known home builder constructs and sells single-family attached and detached homes. It also purchases, develops, and sells residential land, directly and through unconsolidated entities.

Zacks #1 (Strong Buy) ranked Lennar operates in a particularly attractive market that Zacks classifies as the Building Products - Home Builders industry. This industry is in the top 6% of 250+ Zacks-classified industries. The industry belongs to the Construction sector, which is the top-ranked sector, according to Zacks. So it’s clear that the company operates in an attractive market with robust growth prospects.

Next, consider its last quarterly report and estimate revision history. In the final quarter of its fiscal year that ends in November, Lennar topped analysts’ earnings estimates by 18.5%.

Moreover, its 2021 earnings estimate has gone from $7.50 to $8.50 (13.3%)

Its revenue and earnings are expected to grow 10.8% and 8.3%, respectively in 2021 and another 12.2% and 15.2%, respectively, the following year.

So it’s apparent that the market is conducive for growth and the company itself is delivering the goods.

Now for the valuation. At 10.6X, its P/E is really low and also close to its median value of 10.1X over the past year. Additionally, it is also well below the current S&P 500 P/E of 22.9X. So LEN would be a true value stock.

USA Truck, Inc. (USAK Quick Quote USAK - Free Report)

This is an interstate transporter of general commodity freight between different points in the continental U.S. and the Canadian provinces of Ontario and Quebec.

The Zacks Rank #1 stock operates in the Transportation – Truck industry (top 15%), which is an attractive segment of the struggling Transportation sector. Around half of a stock’s appreciation is related to the group that it’s in, so this is quite an important criterion to consider when picking stocks, value or otherwise.

In the December quarter, the company topped estimates by 94.4% and estimates are yet to be adjusted. So when analysts raise estimates, share prices will move up.

Revenue and earnings are currently expected to grow a respective 10.1% and 82.4% this year and another 4.8% and 1.1% next year. And these should also move up when estimates are revised.

The shares trade at 10.34X, which is below their median value over the past six months and also below the S&P 500. So this too is a true value.

P.A.M. Transportation Services, Inc. (PTSI Quick Quote PTSI - Free Report)

This irregular route, common and contract motor carrier focuses on automotive parts, consumer goods, such as general retail store merchandise, and products from the manufacturing sector, such as heating and air conditioning units.

Like USAK, this Zacks Rank #1 stock also belongs to the Transportation – Truck industry. So it too enjoys industry-specific growth drivers.

It topped December quarter expectations by 204.6% and analysts are yet to revise estimates. The current revenue and earnings estimates call for a respective 9.6% and 21.8% growth in 2021 followed by 4.8% and 18.6% growth in 2022.

The shares trade at 13.09X P/E, which is above their median value of 11.74X over the past year and of course also below the S&P 500. So this too looks like a great value stock.

Amkor Technology, Inc. (AMKR Quick Quote AMKR - Free Report)

This is one of the largest providers of semiconductor packaging and test services for chip manufacturers, fabless semiconductor companies, and contract foundries.

The Electronics – Semiconductors industry to which Amkor belongs is in the top 24% of Zacks-ranked industries. The top 50% generally outperforms the bottom 50% by a factor of more than 2 to 1. That, in turn, is in the fast-growing Computer and Technology sector.

It topped December quarter estimates by 40.5% and estimate revisions are yet to take place. So this is the ideal time to jump in.

Revenues are expected to grow 5.2% this year with earnings falling 3.6%. In 2022, revenues are expected to grow 5.2% with earnings growing 11.2%. Look for upward revision to these estimates soon.

The shares trade at 13.8X earnings, placing them between their median value of 12.3X and high of 17.6X over the past year. But they’re still below the S&P 500 and also below 15, which is the average for the Zacks universe. Which makes this a value stock.

Alpha and Omega Semiconductor Ltd. (AOSL Quick Quote AOSL - Free Report)

The company designs and sells its MOSFET semiconductors for application in notebooks, netbooks, flat panel displays, mobile phone battery packs, set-top boxes, portable media players, and power supplies.

The Electronics – Semiconductors industry to which it belongs is in the top 24% of Zacks classified industries, which is in the attractive Computer and Technology sector.

Analysts are yet to revise estimates after the company topped December quarter estimates by 22.6%.

2021 revenue and earnings are currently expected to grow 35.2% and 102.3%, respectively. In 2022, these are expected to grow 4.0% and 8.2%, respectively.

At 17.5X earnings, the shares are trading below their median value of 19.2X over the past year. They’re also trading below the S&P 500. So they should also make good value buys.

Price change over the last 6 months-