The market is currently a good place to invest in value, with the S&P 500 index dropping by approximately 15% as of August 20,22. Stock prices will fall when the overall stock markets drops. Even companies with strong fundamentals can see their shares drop. Plus, value stocks companies are typically more stable and established than growth stock businesses.
Here’s a quick overview of value stock, with some very beginner-friendly options, and key concepts and metrics worth knowing for value investors.
3 Best Value Stocks For Beginners
Value stocks, which are publicly traded companies, trade for relatively low valuations relative their earnings and long term growth potential.
Let’s have a look at three value stocks. Berkshire Hathaway is (NYSE.BRK.A). (NYSE.BRK.B), Procter & Gamble(NYSE.PG), and TGT are (NYSE.TGT). We will then explore some of the metrics that could help you identify the best stock investments.
Berkshire Hathaway Berkshire Hathaway is a conglomerate consisting of over 60 businesses owned by Warren Buffett and an extensive stock portfolio that contains more than 4000 stocks. Berkshire has experienced steady increases in book value and earnings power. Berkshire operates under the same business plan that enabled it to grow into a conglomerate with more than 60 wholly owned businesses and a large stock portfolio with over four dozen positions. Buffett reported that Berkshire Hathaway owned $144 billion cash and cash equivalents, in his annual letter to shareholders in February 2022. Buffett discovered value investing opportunities quickly afterward, however. He revealed later at Berkshire’s annual shareholder meeting, that the company had purchased $40 billion in stock purchases within three weeks from the date of the shareholder letter.
Procter & Gamble Procter & Gamble are the manufacturers of consumer products such as Gillette, Crest and Febreze. However, there are many other products in their product portfolio. Procter & Gamble’s many brands have helped it steadily grow its revenue and make it one of most reliable dividend stocks. The company is only one of 44 stocks who have achieved the coveted Dividendking status. They have increased their dividend for 65 consecutive years.
P&G can be described as a recession-resistant share because its demand for its products has remained steady in all stock market cycles. The growth of the consumer staples giant is impressive. P&G experienced an organic increase of 7% in sales and increased its market share by 7% in 36 niches. Although the company expects that sales growth will slow in fiscal 2019, its size, stability and breadth of products make them a solid choice for times when they are tough.
Target Target, big-box retailer Target continues to enjoy a cult-like following. It is due in part to the popularity of its own brands. Target-owned brands sales rose 18% to more then $30 billion in 2021. As with other retailers, online sales at Target have risen significantly since the start the pandemic. Target’s unique digital business model — 95% of sales including online orders are fulfilled by Target stores — has given it an edge over its competitors. This allows them to lower costs and maximize speed. Target is also a Dividend Kings, having increased its dividend for 50 consecutive year.
What are value stocks and what do they mean?
Most stocks can be divided into either value stocks and growth stocks. A value stock sells for less than its financial performance and basic information suggest. A stock called a “growth stock” is one in which the company expects to earn above-average returns, compared to other stocks in its industry or the stock market.
Some stocks combine both attributes or are compatible with average valuations and growth rates. It is not possible to call these value stocks without knowing the specific characteristics of each stock. These are some of the most important characteristics that value stocks have:
They are typically mature businesses.
They are able to experience steady, but not dramatic, growth.
They report relatively stable revenues, earnings.
Value stocks generally pay dividends but this isn’t a set-in stone rule.
Some stocks fit easily into either the one or other categories. Package delivery giant FedEx is an example of a valued stock that has fallen out favor with Wall Street due short-term issues. One obvious example is fast-moving Tesla (NASDAQ :TSLA).
However, stocks may be able to fit into both. For tech giants Apple, (NASDAQ:AAPL), and Microsoft, it’s possible to make a case for either. (NASDAQ:MSFT).
Whatever the stock category, there is an opportunity to become a value investor in economic downturns. Value investing seeks to buy shares at a bargain price.
How to locate value stocks to buy
Value investing is about finding companies trading at discounts to their intrinsic values with the expectation that they’ll outperform overall stock markets over time. However, it is much easier to find stocks undervalued than you might think.
Here are three great metrics to have in your toolbox when you’re looking for a bargain.
The P/E Ratio It is one of the most widely-used stock valuation metrics. The P/E ratio (price-to-earnings) can be used to compare valuations between companies within the same industry. It is simply calculated by dividing the stock price of a company with its past twelve months earnings.
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). It is possible to compare apples with apples the P/E ratio of a company by its annualized earnings rate.
Book-to-Price (P/B), : A company’s book value is the theoretical amount of what would be left if it stopped operating and sold its assets. The value investor will look for opportunities to purchase stocks trading at less than their actual book value.
Value investors
There are three types of long-term investors:
Value investors use fundamental analysis to identify stocks trading at less than their intrinsic values.
Growth investors are looking for stocks that offer the highest long-term growth potential relative with their current valuations.
Blended investors use a mixture of both.
Warren Buffett is perhaps one of the most famous value investors. The S&P 500 generated a total return in excess of 30,209% between 1964, when Buffett took control of Berkshire Hathaway. Berkshire’s total return in the same time period was staggeringly 3,641,613% (that’s no typo).
While Benjamin Graham may not be as well known as Buffett but he is widely regarded as the father and founder of modern value investing. For serious value investors who are serious about investing, his books The Intelligent Investorand Securities Analysis should be read. Graham was Buffett’s mentor.
