What is Value Investing? & 7 Examples of Value Stocks

There are many options for investing your money and each comes with its own benefits and risks. If you’re just starting out as an investor, then it can be a little overwhelming to understand all the terminology around investing and learn enough to make the best decisions for your financial future.

At Addition Financial, we want our members to have all the information and guidance they need to achieve their financial goals. One of the most important questions you’ll need to ask is this:

“What is value investing?”

With that in mind, here’s our overview plus seven examples of value stocks to consider adding to your portfolio.

What is value investing?

Value investing is an investment approach that focuses on buying value stock. The value part refers to undervalued stock, meaning stock that is trading for less than its intrinsic value. Said another way, when you buy value stock you are essentially buying stock at a sale price that will allow you to realize a profit when the market catches up.

Why are stocks sometimes undervalued?

Stocks may be undervalued for a variety of reasons, most of which are not readily apparent to the market itself. We say that because if it were obvious that a stock was trading for less than it was worth, investors would quickly begin to buy it and drive the price up.

It’s important to remember that the assessment of value is always going to be at least somewhat subjective. Billionaire Warren Buffett has been vocal about using a value investment strategy, but he does so after making calculations about any company he invests in and buying only those stocks that he believes are undervalued based on what he has reviewed.

Some of the reasons that a stock may be undervalued include the following:

• The company is in an industry that is struggling or experiencing a downturn.
• There has been specific news about the company that has decreased the stock’s market value.
• The company has moved into a new sector or launched a disruptive product and has not yet found its footing with investors.
• The company’s profits rise and dip seasonally and market prices have responded to a dip.
• Investors have sold off a company’s stock in a response to a dip in the price and others have followed, leading to low prices that don’t reflect the company’s value.

One thing that may be helpful is to remember that the stock market (and investors in it) can be quite reactive when economic conditions are less than ideal. Investing in the stock market is mostly a long-term game, meaning that the overall trend is up. However, a lot of investors and even brokers can lose sight of that fact and their reactions may cause a company’s stock to decrease in price and sell for less than it’s worth.

How does value investing work?

For value investing to work, value investors must research companies they believe are undervalued and make an educated guess about the intrinsic value of the company’s stock before they buy.

How do you identify value investing opportunities?

Here are some of the metrics that value investors use to decide whether to invest in a company:

• Price-to-Earnings Ratio. The price-to-earnings ratio, or P/E ratio, measures the market value of a stock relative to the earnings per share. A low P/E ratio may indicate that a company’s stock is trading below its intrinsic value.
• Price-to-Book Ratio. The price-to-book ratio, or P/B ratio, measures the difference between a company’s share price and its book value. You can calculate it by dividing the market price by its net value (assets-liabilities divided by number of shares.) If the result is close to 1.0, it means the stock is trading close to its actual value. If it’s significantly less than 1.0, then it may mean the stock is undervalued and underpriced.
• Debt-to-Equity Ratio. The debt-to-equity ratio, or D/E ratio, demonstrates how a company is financing its assets. You can calculate it by taking the company’s total liabilities and dividing that number by the total shareholder equity. A low number means the company is using its equity for growth, while a high number may indicate that the company has taken on more debt than it can handle.
• Free Cash Flow. Free cash flow, or FCF, is an indication of how much cash a company has on hand. The easiest way to calculate it is by subtracting capital expenditures from cash flow for operations.
• Price/Earnings-to-Growth Ratio. The PEG ratio, as it is sometimes called, uses the P/E ratio to estimate a company’s future growth potential. You can calculate it by dividing the P/E ratio by the company’s percentage growth rate. It’s possible to use historical growth, future growth, or a combination of the two.

Crunching the numbers can help you get a handle on whether a stock may be considered a value investment or not. It’s not an exact science but these ratios can help you evaluate stocks before you buy them.

How do investors earn a return on value investments?

Investors can earn a return on value investments in two basic ways. The first is that the company’s stock price increases to match its intrinsic value, or sometimes even exceeds it. In other words, if you calculate the intrinsic value of a stock to be $100 per share and buy it at $75, you’ll have earned a 33% profit per share if the price rises to $100 and more if it goes higher than that.

The other way you can earn a return is by investing in value stocks that pay dividends. Dividends are typically paid on a quarterly basis. They may translate to slower growth in the stock’s market value, but you’ll be collecting money on your investment on a regular basis.

7 examples of value stocks to buy

Value stocks fall into some categories that may help you identify them. For example, most value stocks are mid-sized to large companies. They may be in stable industries that experience steady and predictable growth. They are also typically companies that have a long history and may even be considered blue chip stocks. Many of these companies pay dividends.

Value stocks do not typically come from small-cap companies or companies that are in more volatile industries, with tech being a common example. While there are exceptions (think IBM or Amazon) many tech companies’ stocks would fall into a growth investment strategy instead of a value investment strategy.

As of April 2023, here are some examples of stocks that experts would say fit into a value investing strategy:

1. Target. Target has been in operation for decades and has a P/E ratio of about 14, putting it far below other comparable companies such as Walmart and Costco. It has steadily increased its dividends for 50 straight years, making it a solid value investment.
2. Alphabet, Inc. Alphabet is a tech company that falls into the category of value stock due to its work with artificial intelligence. As the parent company of Google, it has a monopoly on AI-powered search, but the rise of Chat GPT has made some wonder whether its search superiority might be challenged.
3. Procter & Gamble. P & G is a stable company that is responsible for an array of popular household products that include cleaning products and personal hygiene products. It has boosted its dividends for 65 straight years, making it a safe (and largely recession-proof) investment.
4. Zoom Video Communications. Zoom is a company that benefited greatly from the COVID-19 pandemic, as businesses and schools relied on its video conferencing technology to work and learn remotely. While the stock was certainly overvalued at its height during the pandemic, it has decreased beyond what most experts believe is reasonable, making it a value if you buy it today.
5. Redfin. Redfin is a real estate company that has managed to disrupt a fairly traditional industry by trying to turn itself into a one-stop shop for buying and selling real estate. Down from a high of over $100 per share, today’s low prices are likely to look like a real bargain in the long run.
6. Qualcomm. As a large telecommunications company, Qualcomm has been around for a long time. As of 2023, it’s trading well below its all-time high and declined steadily throughout 2022. Given the company’s overall financial performance and growth, it’s likely that the price drop has had more to do with inflation than any internal problems, meaning that as the economy recovers, Qualcomm’s stock price is likely to rise.
7. Ford Motor Company. Ford is one of the leading automobile manufacturers in the world, but inflation has taken a toll. As of 2023, Ford stock is trading at about half of its 52-week high. However, its strong efforts in producing electric vehicles and its performance relative to other auto manufacturers indicate that it’s the best value stock in the auto industry.

These seven stocks are just a few value stocks that you may want to consider as part of your value investing strategy.

Keep in mind that your portfolio should contain a mix of value and growth stocks. Growth stocks are typically from small-cap companies in growth industries such as tech, healthcare and may often be companies with the potential to disrupt the market with new and innovative products.

Build your portfolio with value stocks

If you’re willing to do the research required to identify value stocks, then a value stock investing strategy can be a good way to balance your portfolio and earn a solid return on your investment. The information and seven examples of value stocks we’ve included here can help you decide if a value investing strategy is right for you.

Do you need assistance building your investment portfolio? Addition Financial is here to help! Click here to read about our Financial Services program and schedule an appointment with a Financial Professional today.