With the S&P 500 index down approximately 15% as of August 2022, the current market presents an opportunity for value investors. When the overall stock market drops, even high-quality companies with strong fundamentals see share prices fall. In addition, value stock companies tend to be well-established and less volatile compared to growth stock companies. This paper provides an overview of value stocks, including some beginner-friendly value stocks, and key concepts and metrics that value investors should know. Three excellent beginner-friendly value stocks, namely Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.45%), Procter & Gamble (PG -0.14%), and Target (TGT -0.86%), are discussed, followed by an explanation of the metrics that can assist investors in finding the best value stock investments.
Berkshire Hathaway, led by CEO Warren Buffett, has grown into a conglomerate with more than 60 wholly-owned businesses and a massive stock portfolio with more than four dozen different positions since 1964. Buffett and his business partner, Charlie Munger, have long kept large cash reserves to deploy when they spot opportunities as part of their value investing strategy. In his annual letter to shareholders released in February 2022, Buffett wrote that Berkshire Hathaway held $144 billion in cash and cash equivalents. Later, at Berkshire’s annual shareholder meeting, Buffett revealed that the company bought $40 billion worth of stocks in the three weeks after the shareholder letter went out.
Procter & Gamble, the consumer products manufacturer behind such brands as Gillette, Tide, and Crest, has been able to steadily add to its revenue over time and has become one of the most reliable dividend stocks in the market. P&G is a classic example of a recession-resistant stock since demand for its products holds steady throughout stock market cycles. In fiscal 2022, P&G increased organic sales by 7%, and it held or expanded its market share in 36 of 50 competitive niches. Although management expects sales growth to slow in fiscal 2023, the company’s size, stability, and diversity of products make it a solid play for tough times.
Big-box retailer Target has a cult-like following that continues to grow, fueled in part by the popularity of its in-house brands. Sales of Target-owned brands soared by 18% in 2021 to more than $30 billion. Target’s unique digital model, where 95% of sales, including online orders, are fulfilled by stores, gives it an edge over competitors and allows it to reduce costs and maximize speed. As of mid-2022, Target had a price-to-earnings ratio of around 14, making it cheap compared to rivals Walmart and Costco, which respectively trade for about 28 times and 42 times their earnings. Target is also a Dividend King, having boosted its dividend for 50 consecutive years, which is another perk for value investors.
What are value stocks?
In the stock market, stocks are commonly classified as either value stocks or growth stocks. A value stock typically trades for a lower price than its financial performance and fundamentals suggest it is worth, while a growth stock is expected to deliver above-average returns compared to its peers or the overall market.
The classification of a stock as a value stock depends on its pertinent characteristics. Value stocks usually belong to mature businesses that exhibit steady but not exceptional growth rates and report relatively stable revenues and earnings. While most value stocks pay dividends, this is not always the case.
Some stocks fit into one category more clearly than the other. For instance, FedEx is a clear example of a value stock that has fallen out of favor with Wall Street due to short-term challenges. On the other hand, Tesla is an obvious example of a growth stock. However, some stocks can fit into either category, such as tech giants Apple and Microsoft.
Regardless of the classification of a stock, economic downturns present opportunities for value investors. Value investing involves finding companies trading at a discount to their intrinsic value, with the idea that they will likely outperform the market over time. However, finding undervalued stocks can be challenging.
To find value stocks to invest in, investors may use several metrics. The price-to-earnings (P/E) ratio is a well-known stock valuation metric that can help compare the valuations of companies in the same industry. The PEG ratio adjusts the P/E ratio to level the playing field between companies growing at slightly different rates. Finally, the price-to-book (P/B) ratio compares a company’s share price to its book value, which can help identify undervalued opportunities. Many value investors specifically look for opportunities to buy stocks trading for less than their book value.
Value investors are a group of long-term investors who utilize fundamental analysis to identify stocks that are trading below their intrinsic value. In contrast, growth investors search for stocks that have the highest long-term growth potential relative to their current valuations, while blended investors take a combined approach. Warren Buffett is widely recognized as one of the most prominent value investors in history, having led Berkshire Hathaway to an astonishing total return of 3,641,613% from 1964 to the end of 2021, outperforming the S&P 500’s total return of 30,209%. Benjamin Graham, known as the father of modern value investing, was Buffett’s mentor and author of the must-read books The Intelligent Investor and Securities Analysis for serious value investors.
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