Investors want stocks for less than they’re worth when investing in value stocks. Wouldn’t you buy $100 bills as frequently as possible if you could do so for $80? Here’s a rundown of value equities, including some excellent beginner-friendly value stocks and essential ideas and metrics that value investors should be aware of.

Best value stocks for beginners

Value stocks are stocks that, in comparison to their long-term growth potential, are undervalued or sell at a low price-to-earnings ratio.

Let’s look at three great value stocks: Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), Procter & Gamble (NYSE:PG), and Johnson & Johnson(NYSE:JNJ). After that, we’ll look at some of the statistics you can use to pick the best ones to invest in.

Berkshire Hathaway

Since 1964, Berkshire Hathaway has grown into a conglomerate.  They have more than 60 wholly-owned businesses and an extensive stock portfolio containing more than four dozen diverse holdings. Over time, Berkshire’s book value and earnings power have risen steadily – and it now runs on the same business model that has led the stock to more than double the annualized return of the S&P 500(^GSPC) for over 55 years.

Procter & Gamble

Procter & Gamble is a multinational consumer goods corporation known for brands such as Gillette, Tide, Downy, Crest, Febreze, Bounty, and numerous other names. Over time, through the success of its many brands, Procter & Gamble has been able to grow its revenue at an annual pace. As a result, they have become one of the most stable dividend stocks in the market. Their payout has increased annually for more than 60 years.

Johnson & Johnson

Johnson & Johnson is best known for its consumer health products such as Band-Aid, Tylenol, Neutrogena, Listerine, and Benadryl. However, the bulk of the firm’s revenue comes from pharmaceutical and medical device businesses. Healthcare is one of the most recession-resistant sectors in the economy; over time, Johnson & Johnson has provided consistent revenue and dividend growth.

Johnson & Johnson’s plan to split its consumer products unit from its pharmaceutical and medical device sector in November 2023 is worth monitoring. Because producing medicines and medical devices is a high-risk, high-reward business, Johnson & Johnson may become a more growth play when the spinoff is over.

What are value stocks?

Stocks divide into two categories: value and growth. A value stock sells for less than its financial performance, and fundamentals indicate it is worth. A growth stock is a share in a firm forecasted to deliver above-average returns compared to its industry peers or the overall market.

Some stocks have both qualities or fall within acceptable valuations, or growth rates range. Thus the term “value stock” is subjective.

How to find value stocks to invest in

Value investing is a strategy for finding firms that trade at less than their intrinsic value to outperform the stock market as a whole over time. Unfortunately, identifying undervalued stocks is not as simple as it may sound.

However, as you seek a bargain, here are three of the best metrics to have in your toolkit.:

  • P/E ratio: The price-to-earnings (P/E) ratio is the most widely known stock valuation statistic. For a reason, this is the case. The P/E ratio might be a beneficial tool for comparing company valuations in the same sector. Simply divide a firm’s stock price by its previous year’s earnings to get the P/E ratio.
  • PEG ratio: This is a more complex version of the P/E ratio, which adjusts for the variable growth rates of firms that may be improving at different rates (thus, PEG, or price-to-earnings-to-growth, ratio). You get a more comparable comparison between businesses by dividing a company’s P/E ratio by its year-over-year earnings growth rate.
  • Price-to-book (P/B) ratio: Consider the book value to be what a company’s assets would be worth if it shut down and sold everything. The share price of a firm as a multiple of its book value can assist in identifying undervalued possibilities. Many value investors search for stocks trading at less than their book value to invest in.

Investing in value stocks

Long-term investors can split into three categories:

  • By applying fundamental analysis, value investors look for equities priced below their true worth.
  • Growth investors look for stocks with the most significant long-term growth potential relative to their current prices.
  • Investors who take a blended approach do a little of everything.

The value investor known most of all is Warren Buffett, the CEO of Berkshire Hathaway. From 1964, when Buffett took control of Berkshire Hathaway, until the end of 2020, the S&P 500 has produced a total return of 23,454%. During the same period, Berkshire’s overall return was 2,810,526%.

Although Benjamin Graham isn’t as well-known as Warren Buffett, he is frequently referred to as the “father of modern value investing”.  His books, The Intelligent Investor and Securities Analysis are must-reads for serious value investors, and Graham was Buffett’s mentor.

Don’t underestimate value stocks

Investing in growth stocks may be more thrilling than investing in value stocks. However, it’s critical to recognize that value stocks have the potential to provide long-term returns comparable, or greater, than growth stocks. After all, a $1,000 investment in Berkshire Hathaway at the start of 1965 would be worth over $18 million today. Investing in firms that trade for less than their intrinsic value is an investing approach that can pay off handsomely.

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