Value investors have a great opportunity to profit from the current market, which has seen the S&P 500 Index drop by 15% since August 2022. Share prices can fall when the overall stock market falls, even for high-quality companies with solid fundamentals. Additionally, value stock companies are generally more established and less volatile than growth stock firms.
Here is a brief overview of value stocks. It includes some great beginner-friendly value stock options. There are also some key concepts that value investors should be familiar with.
The 3 Best Value Stocks for Beginners
Value stocks are publicly listed companies trading at relatively low valuations relative to earnings and long-term potential growth.
Let’s take a look to three outstanding value stocks: Berkshire Hathaway NYSE:BRK.A (NYSE.BRK.B), Procter & Gamble NYSE:PG, and target NYSE:TGT. Next, we’ll discuss the metrics that will help you choose the best value stock investments.
Berkshire Hathaway Berkshire Hathaway, founded in 1964 by Warren Buffett, has grown to be a conglomerate that includes more than 60 companies owned wholly by Buffett and a large stock portfolio with over four dozen positions. Berkshire’s book value has increased steadily over time, as well as its earnings power. The stock operates under the exact same business model that helped it almost double the annualized returns of the S&P 500 index for over 55 years.
Buffett has long maintained large cash reserves in order to deploy opportunities when they see them, part of their value-investing strategy. Buffett revealed that Berkshire Hathaway was holding $144 billion in cash, cash equivalents and other cash reserves in his February 2022 letter to shareholders. Buffett did however see value investing opportunities very soon. Later, Buffett revealed to Berkshire’s Annual shareholder Meeting that the company purchased $40 billion of stock within the first three weeks following the publication of the shareholder letters.
Procter & Gamble Procter & Gamble, a manufacturer of consumer products, is behind brands such as Gillette and Crest. There are many more in the company’s product portfolio. Procter & Gamble is one of the best dividend stocks because of the many brands it owns. Procter & Gamble is one of 44 stocks to achieve the coveted Dividend Kings status. The company has increased its dividend for 65 years consecutively and is considered a reliable dividend stock. This is because demand for its products is steady during stock market cycles. The giant consumer staples company continues to grow. P&G’s organic sales increased by 7% in fiscal 2022. It also maintained or increased its market shares in 36 of the 50 most competitive niches. P&G’s stability, size, and variety of products make it a strong play in difficult times. However, sales growth will slow in fiscal 2023.
Target Target’s big-box retailer Target enjoys a cult following that is growing, in part due to its in-house brands. Target-owned brands’ sales jumped 18% to more than $30 Billion in 2021. Similar to other retailers, Target’s online sales have increased since the outbreak. Target’s unique digital model, where 95% of sales are fulfilled by stores, gives it an advantage over other retailers and allows it to minimize costs and maximize speed. Another perk for value investors is Target’s status as a Dividend King. It has increased its dividend for 50 years consecutively.
What are value stock?
Stocks are either considered value stocks or growth stock. A value stock generally trades at a less expensive price than its financial performance, fundamentals, and other factors suggest. A growth stock refers to a stock in a company that is expected deliver higher returns than its peers or the entire stock market.
Some stocks may have both attributes, or they fit in with average growth rates and valuations. So whether you call them value stocks or not depends on how many relevant characteristics they have. The following are common characteristics of value stocks.
They are often mature businesses.
They experience steady growth, although not remarkable.
They report stable revenues and earnings.
Although dividends are a common feature in value stocks, this is not a standard practice.
Some stocks can easily be classified in either one of these categories. One example is FedEx, a package delivery company. It’s clearly a stock of value that has lost favor with Wall Street as a result of some short-term problems. A clear example of a growth stock would be the fast-moving Tesla. (NASDAQ:TSLA).
However, there are stocks that can fit in both categories. It’s possible to argue either way for tech giants Apple (NASDAQ;AAPL) or Microsoft(NASDAQ:MSFT).
Economic downturns can present a chance for value investors, regardless of stock type. Value investing is all about buying shares at a discount. This is why it is best to do so when the entire stock exchange is on sale.
How to find high-quality stocks to invest in
Value investing is the search for companies trading at a discount of their intrinsic value. This will ensure that they outperform other stock markets over time. It is not easy to find stocks that are undervalued.
Here are three metrics that you can use to help you find a bargain.
This is the most well-known stock valuation metric. A useful tool to compare the valuations for companies in the same industry is the price-to earnings ratio, or P/E. Divide the company’s stock prices by its earnings for the last 12 months.
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). You can compare apples to apples by dividing the company’s P/E rate by its annualized earnings increase rate.
Price/Book (P/B, ) You can think of the book value as the amount left after a company ceases operations and sells all its assets. To identify undervalued opportunities, value investors often look for stock trading opportunities that are less than their book price.
Value investors
The three main categories for long-term investors are:
By applying fundamental analysis, value investors seek to find stocks that trade at a lower price than their intrinsic worth.
Growth investors look for stocks with the greatest long-term growth potential relative their current valuations.
A mixed approach to investing involves a combination of both.
Warren Buffett is the greatest-known value investor. The S&P 500 has a return of 30,209% from the moment he took control in 1964 of Berkshire Hathaway to the end 2021. Berkshire’s total returns over that same period have been staggering 3,641,613% (that’s real and not a typo).
Although not as well-known and respected as Buffett’s, Benjamin Graham is often considered the father of modern investment. For serious value investors, his books the Intelligent Investor (and Securities Analysis) are essential reads. Graham was Buffett’s mentor.
