Value Stocks come with a low price based on the historical earning records and value of assets. When it comes to the best value stocks to buy, value investors want to buy stocks for less than they’re worth. This concept certainly makes sense. If you can buy a $100,000 car for $50,000, why wouldn’t you? Of course, this is easier said than done. In this post, we will go through an overview of what value stocks are, why they are viewed as an investment bargain, examples of some excellent beginner-friendly value stocks, and some key concepts and metrics that all value investors must know.
Value Stocks: All You need to Know
Value stocks are usually publicly traded companies that are valued cheaply when compared to their earnings and long-term growth potential. Most stocks are generally classified as either value stocks or growth stocks. In a more generalized way of speaking, stocks that trade for valuations below than that of the average stock in the S&P 500 are considered value stocks, while stocks with above-average growth rates are considered growth stocks. Some stocks have both attributes or fit in with average valuations or growth rates, so their proper nomenclature depends on a number of factors.
Value stocks tend to feature some common characteristics. They typically are mature businesses, have steady (but not spectacular) growth rates, and have relatively stable revenues and earnings. Most value stocks pay dividends, although this isn’t a set-in-stone rule.
Some stocks clearly fit into one category or the other. For example, 130-year-old spice manufacturer McCormick is clearly a value stock, while fast-moving Tesla is an obvious example of a growth stock. On the other hand, some stocks can fit into either category. For example, there’s a case to be made either way for tech giants Apple and Microsoft.
However, that a stock is classified by someone as a value stock doesn’t necessarily mean it’s a good value right now. That’s where your analysis must come in. Let’s take a look at three excellent value stocks:
- Berkshire Hathaway: Since CEO Warren Buffett took over in 1964, Berkshire Hathaway has transformed into a conglomerate of more than 60 wholly-owned businesses and a massive stock portfolio with more than four dozen different positions. Berkshire has steadily increased its book value and earnings power over time — and currently still operates under the same business model that has led the stock to more than double the annualized return of the S&P 500 for over 55 years.
- Procter & Gamble: Consumer products manufacturer Procter & Gamble owns some of the most recognizable brands in its various industries. It is the company behind brands such as Gillette, Tide, Downy, Crest, Febreze, and Bounty, but there are dozens more in its product portfolio. Through the success of its many brands, Procter & Gamble has been able to increase its revenue steadily over time and has become one of the most reliable dividend stocks in the market, increasing its payout annually for more than 60 consecutive years.
- Johnson & Johnson: The healthcare giant is best known for its consumer healthcare products, such as the Band-Aid, Tylenol, Neutrogena, Listerine, and Benadryl brand names, just to name a few. But the majority of its revenue comes from its pharmaceutical and medical device businesses. Healthcare is one of the most recession-resistant businesses in the economy, and Johnson & Johnson has produced steady revenue (and dividend) growth over time.
What is the difference between a value stock and a value investor?
A value stock is a company to which traditional methods of fundamental analysis can be applied. A value investor, on the other hand, refers to someone with a primary investing goal of identifying good companies trading for a discount to their intrinsic value.
Long-term investors can generally be classified into one of three groups. Value investors try to find stocks trading for less than their intrinsic value by applying fundamental analysis. Growth investors try to find stocks with the best long-term growth potential relative to their current valuations. Investors taking a blended approach utilize a little bit of each.
The world has seen many successful and famous value investors, and no one is more well known than Warren Buffett, the CEO of Berkshire Hathaway, is perhaps the best-known value investor of all time and has a proven track record of investing in stocks and even entire companies at significantly less than their intrinsic value. The proof is in the performance: From the time that Buffett took control of Berkshire in 1964 to the end of 2019, the S&P 500 has generated a total return of 19,784%. Berkshire Hathway’s total return during the same period has been a staggering 2,744,062%. Yes, you read it right. That wasn’t a typo.
Who is the father of modern value investing?
Although he isn’t as well known as Warren Buffett, Benjamin Graham is often referred to as the father of modern value investing. As a matter of fact, Buffet was a student of Graham’s. Benjamin Graham has authored books like The Intelligent Investor and Securities Analysis which are essential reading for all value investors.