Update: December 21, 2021, 9:13 p.m.
Value investors want to buy stocks for less than their value. If you could buy $ 100 tickets for $ 80, wouldn’t you do it as often as possible? Here’s a look at some great value stocks suitable for beginners, what value stocks are, and some key concepts and metrics value investors should know.
3 most beneficial actions for beginners
Value stocks are publicly traded companies that trade at relatively cheap valuations relative to their earnings and long-term growth potential. Let’s take a look at three great value stocks – Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Procter & Gamble (NYSE: PG), and Johnson & johnson (NYSE: JNJ). Later, we’ll dive into some of the metrics that can help you find the best ones to invest in.
- Berkshire Hathaway: Since CEO Warren Buffett took office in 1964, Berkshire Hathaway has grown into a conglomerate of over 60 wholly-owned companies and a huge stock portfolio with over four dozen different positions. Berkshire has steadily increased its book value and earning power over time – and it currently operates under the same business model that has driven the stock to more than double the annualized return of the S&P 500 Index for over 55 years.
- Procter & Gamble: Consumer goods maker Procter & Gamble is the company behind brands like Gillette, Tide, Downy, Crest, Febreze and Bounty, but there are dozens more in its product portfolio. Thanks to the success of its many brands, Procter & Gamble has been able to steadily increase its income over time and become one of the most trusted dividend paying stocks in the market, increasing its payout every year for over 60 consecutive years.
- Johnson & johnson: The health giant is best known for its mainstream health products, such as the brand names Band-Aid, Tylenol, Neutrogena, Listerine, and Benadryl, to name a few. But the majority of its income comes from its pharmaceutical and medical device businesses. Healthcare is one of the most recession-resistant businesses in the economy, and Johnson & Johnson has generated steady growth in income (and dividends) over time.
What are value stocks?
Most stocks are classified as value stocks or growth stocks. Generally speaking, stocks that trade for lower valuations than average S&P 500 stocks are considered value stocks, while stocks with above-average growth rates are considered growth stocks. Some stocks have both attributes or correspond to average valuations or growth rates, so calling them value stocks depends on how many characteristics of those stocks they have.
If you could buy $ 100 tickets for $ 80, wouldn’t you do it as often as possible?
Value stocks generally have the following characteristics:
- These are generally mature companies.
- Stable (but not spectacular) growth rates.
- Relatively stable income and profits.
- Most value stocks pay dividends, although this is not a hard and fast rule.
Some actions clearly fall into one or the other category. For example, a 130-year-old spice maker Mccormick (NYSE: MKC) is clearly a value stock, while moving rapidly You’re here (NASDAQ: TSLA) is a clear example of growth stock. On the other hand, some actions can fall into one or the other category. For example, there is a case to be made anyway for tech giants Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT).
How to find valuable stocks to invest in
The goal of value investing is to find companies that are trading below their intrinsic value, with the idea that they will be likely to outperform the overall stock market over time. Unfortunately, finding stocks that are trading below their real value is easier said than done. After all, if it were easy to buy $ 1 for $ 0.80 over and over again, everyone would be rich.
That said, here are three of the best metrics to keep in your toolbox when looking for hidden bargains:
- P / E Ratio: This is the most well-known measure of market valuation, and for good reason. The price / earnings ratio, or P / E, can be a very useful tool for comparing valuations of companies in the same industry. To calculate it, simply divide a company’s stock price by its last 12 months of earnings.
- PEG Ratio: It is similar to the P / E ratio, but adjusts to level the playing field between companies that might grow at slightly different rates. (So, PEG, or price / earnings / growth ratio.) By dividing a company’s P / E ratio by its annualized earnings growth rate, you get a more apple-to-apple comparison between different companies.
- Price / book ratio (P / B): Think of book value as what would theoretically be left over if a business went out of business and sold all of its assets. Calculating a company’s stock price as a multiple of its book value can help identify undervalued opportunities, and many value-oriented investors specifically look for opportunities to buy stocks at a price. less than their book value.
Long-term investors can generally be classified into one of three groups.
- Value investors try to find stocks that are trading below their intrinsic value by applying fundamental analysis.
- Growth investors try to find stocks with the best potential for long-term growth relative to their current valuations.
- Investors who take a blended approach are doing a little bit of each.
Warren Buffett, CEO of Berkshire Hathaway, is perhaps the most well-known value investor of all time. From Buffett taking control of Berkshire in 1964 until the end of 2019, the S&P 500 generated a total return of 19,784%. Berkshire’s total return over the same period was a staggering 2,744,062%. It is not a typo.
Although not as well-known as Buffett, Benjamin Graham is often considered the father of modern value investing. His books, The smart investor and Securities analysis, are must read for serious value investors, and Graham was actually Buffett’s mentor.
Don’t underestimate the power of value stocks
While they might not be as exciting as their growth stock counterparts, it’s important to realize that value stocks can have as much long-term potential as growth stocks, if not more. After all, a $ 1,000 investment in Berkshire Hathaway in 1964 would be worth over $ 27 million today. Finding companies that are trading below what they are really worth is a proven style of investing that can pay extremely well.
What are value stocks vs. growth stocks?
Value investing and growth investing are two different styles of investing. Usually, value stocks offer an opportunity to buy stocks below their real value, and growth stocks have the potential for above-average income and earnings growth. Wall Street likes to carefully categorize stocks into growth or value stocks. The truth is a little more complicated because some stocks have elements of both value and growth. However, there are some important differences between growth stocks and value stocks, and many investors prefer one style of investing over another.
What are Value Equity ETFs?
An exchange-traded fund (ETF) that invests in value stocks uses specific criteria to find companies whose intrinsic values significantly exceed the market values implied by their stock price. By investing in a wide range of undervalued companies, Value Equity ETFs provide instant portfolio diversification. Buying stocks in a value equity ETF can be a safe and easy way to invest in companies in cyclical sectors.
How do you start investing in value?
Investing in value requires a lot of research. You will need to do your homework by reviewing many disgraced stocks to measure a company’s intrinsic value and comparing it to its current price. Often times, you will have to examine dozens of companies before you find a single one that is of real value.