Value Stocks: The Cornerstone of a Strong Portfolio
Value stocks, as the name implies, offer investors a chance to boost the future value of their portfolio. Stocks in this category are notable because they trade at a discount in relation to their fundamentals. And this is what makes them so, well, valuable.
The hallmark of a good value stock is that it’s trading below its intrinsic value. This is determined by measuring any number of metrics. A low price-to-earnings (P/E) ratio is a classic sign of a value stock. Historically, the average P/E ratio for the S&P 500 is around 15. So anything below that would equate to a low P/E ratio.
Another way to determine a stock’s value is by calculating its price-to-book (P/B) ratio. To do this, divide the market price per share by the book value per share. Anything below 3.0 can be a good sign that a stock is undervalued.
That being said, P/B ratio can be distorted by underlying conditions like share buybacks or recent acquisitions. A low P/B ratio can also be a sign of fundamental problems with the company. So P/B ratio shouldn’t be considered the be-all, end-all when it comes to identifying a value stock.
A good way to qualify a valuable P/B ratio is by comparing it with the amount of profit the company is making from shareholder equity. This is referred to as a company’s return on equity (ROE).
If the P/B ratio and the ROE are similar, it is seen as a healthy sign for a company. And this means that it’s a good candidate for a value stock.
Five Straightforward Value Stocks
These are only two simple ways to determine if a stock is a value stock. Truth be told, there are lots of other metrics investors can look to.
Some value investors look to a company’s revenue as an indicator of value. Others look at the earnings per share (EPS). And others still factor in dividend payouts, other underlying factors or any combination of these to decide whether an investment is a good deal.
But not all investors have the time or wherewithal to crunch the numbers and find the perfect value stock to invest in. That’s why we’ve put together this simple list of five value stocks to consider adding to your portfolio.
- MetLife (NYSE: MET)
- Lowe’s (NYSE: LOW)
- Berkshire Hathaway (NYSE: BRK.B)
- Best Buy (NYSE: BBY)
- UGI (NYSE: UGI)
Shares of MetLife are trading cheap compared with their value. That makes sense due to the economic downturn triggered by the COVID-19 pandemic. It should surprise nobody that a provider of insurance, employee benefits and financial services would take a hit during a pandemic. But MetLife’s struggles were stemmed by the Federal stimulus package distributed earlier in the year.
In addition to positive potential future revenue growth, the company also offers a solid 2.72% dividend yield that will keep any long-term investor happy.
How low can Lowe’s go? Apparently, around $60 a share. Since hitting it’s 52-week low in March of 202, Lowe’s has been marching upward as steadily as any stock out there. And it’s still selling at a discount. Lowe’s has an attractive P/B ratio well below the industry standard, meaning it’s poised to continue on its upward trajectory.
Thanks to the uptick in do-it-yourself projects triggered by folks staying at home, Lowe’s has an exceptionally strong earnings outlook. And that makes it a strong contender as one of the best value stocks on the market right now. The company also rewards investors with a 1.65% dividend yield. While that might not be much right now, long-term investors should take note that Lowe’s has steadily increased its dividend payouts since going public back in 1961.
Anyone looking for value stocks needs look no further than one of the fathers of value investing, Warren Buffett. The CEO and founder of Berkshire Hathaway knows a good value when he sees it. And the same can be said for the multinational conglomerate holding company he helms.
Not long ago, Berkshire made an unexpected announcement that triggered interest. It used to be that Berkshire wouldn’t pay more than a 20% premium above book value per share. That made it almost impossible for the firm to buy back shares. But the company got rid of that self-imposed rule. Now when the company believes that its shares are trading below their intrinsic value – even when they are more than 1.2 times book value – the company can buy back shares. And the company has since bought back a record number of shares. All of this makes a strong case for Berkshire as a very strong value stock.
Some will be surprised to see a big box retail outfit described as a value stock. But Best Buy is just that. And it’s got the steady profits to prove it. The company’s EPS has improved handily in the past year. And it’s positively crushing the industry average. Amid economic uncertainty, Best Buy has managed to post better-than-expected financial numbers… even when it wasn’t letting many people shop inside of its stores.
This all comes on the tails of Best Buy having expanded its toy inventory to fill the gap left by Toys R Us. Best Buy is also benefiting from the shuttering of Sears stores and grabbing up their big-appliance customers. Best Buy has shown a deft ability to change with the times. And that, plus its 3.91% dividend yield, make it a value stock to hold on to.
The natural gas and electricity distributor UGI might be seen by some as another surprising pick for a value stock. But it’s got the fundamental bona fides to back it up. This utility company based out of Pennsylvania has a respectable P/E ratio that has gone down significantly in the past five years. And that makes it a strong contender for future growth.
Another strong reason to consider UGI a good value stock is that its P/E ratio is exceptionally strong in comparison with the average for the utility sector.
And another thing that catches value investors’ eyes is UGI’s above-average dividend yield of 3.89%.
The Bottom Line on Value Stocks
Investors looking for solid, long-term wealth-building investments often look to value stocks. They’re the cornerstone of a well-balanced portfolio. But by no means is value the only metric to look at when researching stocks. There are all sorts of investment strategies to look into when trying to build wealth. But it’s important to find you that’s right for you and fits your budget and timeline.
Read next: Follow The Smart Money: 10 Stocks Insiders Are Buying
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.