The current market offers value investors a chance to make money, with the S&P 500 index falling by about 15% as of August 2022. Even high-quality companies that have strong fundamentals will see their share prices drop when the stock market overall drops. Value stock companies are more stable than growth stock companies and tend to have a long history.
This overview includes some value stocks that are easy to use for beginners, as well as some key concepts and metrics value investors need to be aware of.
Three best value stocks to start with
Value stocks are publicly traded companies that trade at relatively low valuations in relation to their earnings or long-term growth potential.
Let’s look at three great value stocks: Berkshire Hathaway(NYSE:BRK.A), (NYSE.BRK.B), Procter & Gamble, and Target. (NYSE.TGT). We’ll then discuss some metrics that can help us find the best value stocks investments.
Berkshire Hathaway Berkshire Hathaway was founded by Warren Buffett in 1964. It has since grown to include more than 60 businesses that are wholly owned and a stock portfolio of more than 40 different stocks. Berkshire Hathaway has seen a steady increase in its earnings power and book value over the years. It operates under the same business model as the S&P 500 Index, which has allowed it to nearly double its annualized return.
Buffett, his business partner Charlie Munger, and have always kept large cash reserves that they can deploy when they see opportunity. This is part of their value investing strategy. Buffett stated that Berkshire Hathaway had $144 billion of cash and cash equivalents in his February 2022 annual letter to shareholders. Buffett spotted value investing opportunities shortly after. At Berkshire’s annual shareholder meetings, he revealed that the company had bought $40 billion in stocks within three weeks of the shareholder letter being sent.
Procter & Gamble Procter & Gamble is a consumer products manufacturer. It owns brands like Gillette, Crest, Febreze and Bounty. But it also has dozens of other brands in its product portfolio. Procter & Gamble, with its numerous brands’ success, has been able steadily increase its revenue over the years and has established itself as one of the most reliable dividend stocks on the market. This company is one of 44 stocks that has achieved the coveted Dividend King Status. It has increased its dividend for 65 consecutive year and is an excellent example of a recession-resistant stock. Demand for its products remains steady through stock market cycles. P&G continues to show impressive growth. P&G saw an increase in organic sales of 7% and maintained or increased its market share within 36 of 50 niches. Although sales growth is expected to slow in fiscal 20, the company’s size and stability as well as its wide range of products makes it a solid investment for difficult times.
Target: Target is a big-box retailer with a loyal following. This is partly due to the success of its in-house brands. Target’s brands saw their sales rise by 18% to $30 billion in 2021. The company’s online sales, like other retailers have risen since the start of the pandemic. Target’s online sales have risen like other retailers since the pandemic.
What are value stocks?
Stocks can be classified as either growth stocks or value stocks. A value stock is a stock that trades at a lower price than its financial performance or fundamentals indicate it to be worth. A stock that is considered a growth stock is one that is expected to return above-average returns relative to the industry peers and the overall stock market.
Some stocks can have both attributes and fit with average growth rates or valuations. Therefore, it is difficult to determine whether they are value stocks. These are the characteristics of value stocks:
These are usually mature businesses.
They show steady, but not extraordinary, growth.
They report stable earnings and revenues.
While most value stocks pay dividends it is not a fixed rule.
Some stocks are easy to fit in one or the other category. The FedEx package delivery company (NYSE:FDX), is an example of a value stock that has fallen out of favor with Wall Street because it faces short-term challenges. The obvious example of a growth stock is the fast-moving Tesla(NASDAQ:TSLA).
Some stocks, however, can be classified in either of these categories. There are, for example, tech giants Apple and Microsoft (NASDAQ :MSFT).
No matter what stock you are investing in, an economic downturn can be a great opportunity for value investors. Value investing is about buying shares at a discounted price. The best time to do this is when the stock market is closed.
How to identify value stocks to invest
Value investing is about finding companies that are trading at a discount relative to their intrinsic value with the hope that they will outperform the stock market over time. Finding stocks that are undervalued can be difficult.
These are the three best metrics you should keep in your toolkit when searching for bargains.
: This metric is widely used for stock valuation. For comparing the valuations of companies within the same industry, the price-to-earnings (or P/E) ratio can be very helpful. Simply divide the stock price of a company by its earnings over the past 12 months to calculate it.
PEG ratio: This is similar to the P/E ratio but adjusts to level the playing field between companies that might be growing at slightly different rates (thus, PEG, or price-to-earnings-to-growth, ratio). Divide a company’s annualized earnings growth rate by its P/E ratio to get an apples-to-apples comparison.
Price to book (P/B), : The book value is what would be left if the company ceased operations and sold all its assets. A company’s share value is calculated as a multiple on its book value. Value investors look for stocks that trade at a lower price than their book value to identify undervalued opportunities.
Value investors
Generally, long-term investors fall into one of these three categories:
Fundamental analysis is used by value investors to determine if stocks are trading at a price lower than their intrinsic value.
Growth investors seek stocks that have the highest long-term potential for growth relative to current valuations.
Mixed approach investors do a bit of each.
Warren Buffett is probably the most well-known value investor. The S&P 500’s total return has been 30,209% since Buffett took over Berkshire Hathaway, 1964. This includes the time that Buffett was able to take control of Berkshire Hathaway. The Berkshire total return over the same period was a staggering 3,641,613% (this is not a typo).
While he may not be as well-known than Buffett, Benjamin Graham is often called the father of modern value investment. For serious value investors, his books The Intelligent Investor as well as Securities Analysis are essential reading. Graham was also Buffett’s mentor.
