Value investing, as the name suggests, is an investment strategy that seeks to identify undervalued stocks or businesses that have the potential for long-term growth. The goal is to purchase these stocks at a price lower than their intrinsic value, then hold them until the market recognizes their true worth and drives their prices up. This approach is based on the belief that the market sometimes undervalues good companies due to temporary setbacks or negative sentiment, providing investors with an opportunity to buy low and sell high.
The distinction between value and growth investing is not always straightforward, as it often appears. The traditional definition of value is buying stocks that are cheap relative to their earnings, dividends, book value, or other fundamental metrics. On the other hand, growth investing focuses on companies that have the potential for above-average earnings growth, even if their current valuations seem expensive. However, some argue that growth stocks can also be undervalued if the market underestimates their long-term prospects and future cash flows.
Value investing has a long and successful history, dating back to the early 20th century and popularized by legendary investors like Benjamin Graham and Warren Buffett. Graham, who is considered the father of value investing, developed a systematic approach to stock selection based on a company's financial strength, earnings stability, dividend history, and valuation metrics. Buffett, Graham's most famous disciple, refined and expanded these principles by emphasizing the importance of quality management, competitive advantage, and long-term thinking.
Value investing offers several potential benefits, including higher returns, lower risk, and greater margin of safety. Studies have shown that value stocks have historically outperformed growth stocks in the long run, although there may be periods of underperformance or volatility. Value stocks also tend to have lower price-to-earnings ratios, higher dividend yields, and more conservative balance sheets, which can reduce the downside risk and provide income to investors. Moreover, value investing is a disciplined and rational approach that requires patience, discipline, and independent thinking, which can help investors avoid emotional biases and herd mentality.
However, value investing also has some potential risk and limitations. One risk is that the market may not recognize the true value of a stock for a long time, or even permanently, resulting in poor returns or losses. Another risk is that value stocks may be cheap for a reason, such as poor growth prospects, high debt, or declining industry trends, which can erode their intrinsic value over time. Additionally, value investing requires skill, knowledge, and experience to identify the right stocks and avoid value traps or value traps. Moreover, value investing may not be suitable for all investors, as it requires a long-term horizon, a contrarian mindset, and a willingness to withstand short-term fluctuations.
Legendary value investors Warren Buffett and Charlie Munger have different views on the future of value investing. While both of them advocate for the principles of value investing, they see divergent paths for value investors in the coming years. Buffett has repeatedly emphasized the importance of patience and discipline in value investing, stating that "the stock market is a device for transferring money from the impatient to the patient." He also believes that value stocks will continue to outperform if investors focus on the underlying fundamentals and avoid the noise and hype of the market. Munger, however, has warned that value investing may face headwinds from technological disruption, global competition, and changing consumer preferences, which can make some traditional value stocks obsolete or less relevant.
Over the past three years, value stocks have outperformed growth stocks across the board, from large-caps on down. That should come as no surprise, as value stocks tend to do well in the late stages of an economic cycle, when investors seek safety and stability. However, the recent COVID-19 pandemic and the subsequent market crash have created new challenges and opportunities for value investors. Some sectors, such as energy, financials, and retail, have been heavily battered by the pandemic, while others, such as healthcare, technology, and e-commerce, have benefited from the shift to remote work and online shopping. As a result, value investors need to be selective and flexible in their stock picking and portfolio management.
A value stock is one that seems to be undervalued based on a combination of factors, such as its valuation history, current stock price, earnings growth potential, dividend yield, and balance sheet strength. Value stocks may also have a wide moat, or sustainable competitive advantage, that protects them from competitors and secures their market share. Examples of value stocks include Berkshire Hathaway (BRK.A, BRK.B), Johnson & Johnson (JNJ), Procter & Gamble (PG), and Exxon Mobil (XOM), among others.
At a time when certain NASDAQ-100 growth stocks are soaring upward based on 'AI' involvement, here are four stocks that look to be cheap from a value standpoint: Apple (AAPL), Microsoft (MSFT), Visa (V), and JPMorgan Chase (JPM). These companies have strong financials, diversified revenue streams, and attractive valuations, which could provide long-term capital appreciation and income. However, investors should do their own research and analysis before making any investment decisions, as the market can be unpredictable and volatile.
While the proven Zacks Rank places an emphasis on earnings estimates and estimate revisions to find strong stocks, we also know that value investing is an effective approach to uncovering underrated companies. By using proven metrics like price-to-earnings ratios (P/E), price-to-sales ratios (P/S), and price-to-cash-flow ratios (P/CF), investors can identify stocks that are trading at a discount to their intrinsic value. Moreover, value investors should focus on companies that have a strong competitive position, sustainable growth prospects, and a shareholder-friendly management team. By combining value investing with fundamental analysis, investors can build a diversified and profitable portfolio that can weather any market conditions.
