Value stocks are normally stocks that are available at a cheap valuation despite their relative attractiveness. There could be many justifications for a value stock. For example, a value stock could be that it has some unique advantages which are not yet recognized in the market. It could also be a case where the stock has corrected more than warranted and that makes them specifically attractive. There could be many such reasons.

Quite often, the concept of value stocks can be a misnomer. Value stocks are those that are available at very cheap valuations. The only problem in this approach is that low P/E or low P/BV does not necessarily guarantee stock market returns. This value stocks approach holds out when the market overall is at all-time low valuations. For example, in the market of 2002 or in the lows of 2009, most of the frontline stocks were available at bargain valuations. Under these circumstances, the value approach works to perfection. However, whenever one takes the value stocks approach to buying, one must be very careful of the P/E trap. In many cases, low P/E is indicative of larger structural problems in the industry or in the company. This is called the low P/E trap and you must be wary of that.