A truly good value can take some work to spot

ByABC News
February 22, 2008, 2:38 AM

— -- Way back in the late Jurassic period, when you could buy a comic book for less than $5, you could also buy X-ray Specs for just $1. X-ray Specs would have been a great value, except they didn't really let you see through solid objects like Superman.

As a generation of deeply disappointed boys discovered, "value" isn't the same thing as "cheap." They fell into the value trap. For something to be a great value, it has to be something you can buy for less than you'd normally expect to pay.

Given the stock market's dreadful performance this year, you might expect that you can now find great bargains. You'd be right. And some of the best bargains may be among the funds that do the searching for you.

But value investing isn't the stock market's equivalent of the Northwest Passage a quick shortcut to riches. Value endures bad years, too, and last year was one of them. Large-company growth funds soared an average 13.4% last year, compared with a 1.5% gain for large-company value funds.

Financial services stocks were the biggest value traps last year. Value funds are often attracted to financial stocks, because they often have low price-to-earnings ratios. (The price-to-earnings ratio is a stock's price divided by its past 12 months' earnings. Lower is cheaper.)

The typical large-company value fund has 23.8% of its assets invested in financial services stocks, vs. 9.8% for the average growth fund.