What Are Value Stocks And 6 To Buy Now (2023)

Rumors of a looming U.S. recession may have you considering a change to your investment strategy. Fortunately, you can get defensive with your portfolio without taking drastic measures. One common approach is reducing your exposure to growth-oriented assets in favor of value stocks.

Prep yourself for taking a defensive stance this year by learning the essential information on value stocks—including what they are, how to identify them and six good value picks that may suit your portfolio.

Definition Of Value Stocks

Value stocks are shares of companies that appear to be priced lower than their intrinsic value, which is an estimate of a company’s worth based on financial analysis. The theory is that value-priced stocks have higher return potential since the investment community will eventually realize their worth and push the prices up.

Investors have different ways of estimating value, but all of them rely in part on the company's future growth prospects. Predicting growth isn't easy. Economic and industry factors plus temporary changes specific to the company can sway investors to be enthusiastic or pessimistic about growth. Mismatches between the stock's trading price and its value result.

Value investors seek out those mismatches and use them to generate long-term gains.

Differences Between Value And Growth Stocks

Value stocks can also be explained by how they differ from growth stocks. Growth stocks are equities that investors expect to grow faster than their peers and the market. Amazon and Alphabet are examples.

Key differences between value stocks and growth stocks include:

• Value stocks trade at a discount, while growth stocks trade at a premium.
• Value stocks usually have a history of slow, steady growth. Growth stocks often have a history of outperformance.
• Value stocks tend to be the best dividend stocks, paying a good yield that increases over time. Growth stocks pay less in dividends, preferring to use the cash to fund expansion.
• Value stocks have conservative debt loads. Growth stocks often take a more aggressive stance, using debt to expand quickly.
• Value stocks aren't terribly volatile. Growth stocks can gain or lose quickly, depending on how successful their expansion initiatives are.
• Value stocks tend to be mature companies operating in slow-growing industries. Growth stocks can be younger and often appear in rapidly changing industries, like technology.

Mispriced stocks are hiding in plain sight and present great investment opportunities in 2023. Forbes’ top investment experts share 7 overlooked stocks for the year ahead in this exclusive report, 7 Best Stocks To Buy for 2023. Click here to download it now.

Identifying Value Stocks

Value investors rely heavily on technical analysis to identify good stocks. Through that analysis, they estimate the company's intrinsic value, then look at how that value relates to the current stock price.

The difference between intrinsic value and trading price is called the margin of safety. Generally, a value investor will set a minimum margin of safety. Stocks that meet that threshold are investable, and the rest are not. So if your minimum margin of safety is 30%, you'd only buy a $70 stock if you believe it's worth $100.

Metrics commonly used to inform an intrinsic value estimate include price-to-earnings (PE) ratio, price-to-book (PB) ratio, free cash flow (FCF), PEG ratio and debt-to-equity ratio. Below is a quick review of each of these metrics.

PE Ratio

PE ratio tells you what investors are paying for each $1 of the company's earnings. The formula is the current stock price divided by earnings per share (EPS).

You'd evaluate a PE ratio by comparing it to competitors and to the company's historical averages. Lower is better.

PB Ratio

PB ratio indicates how the company's share price relates to its book value. Book value is assets less liabilities, or the amount left if the company liquidated and paid off its debts. The formula is the current share price divided by book value per share.

As with the PE ratio, PB ratios vary by industry. While a PB ratio of less than 1 does indicate the stock is undervalued, it's best to compare the number to competitors' ratios.

FCF

Free cash flow is cash from operating expenses less capital expenditures. A company uses free cash flow to repay debt or return value to shareholders via dividends and buybacks.

You want to see rising free cash flow in your value stock prospects.

PEG Ratio

The PEG ratio looks at the PE ratio relative to the company's earnings growth, usually over the last 12 months. This helps you distinguish between a stock that's cheap because it has low growth potential and a stock that's truly undervalued. You calculate it by dividing the growth rate into the PE ratio.

A PEG ratio of less than 1 indicates the stock is undervalued.

Debt-To-Equity

The debt-to-equity ratio describes a company's reliance on external financing. The formula is total debt divided by total shareholder equity.

Acceptable debt-to-equity ratios vary by industry, so this metric is best used in comparisons with competitors. A lower ratio is better.

Examples Of Value Stocks In Different Industries

You can find value stocks in almost any mature industry, from automotive to telecom. Examples include General Motors (GM), consumer staples retailer Target (TGT), financial company Bank of America (BAC), healthcare company Walgreens Boots Alliance (WBA) and telecommunications provider AT&T (T).

Learn more about these value picks below, under Best Value Stocks To Buy In 2023.

Advantages Of Investing In Value Stocks

An analysis by asset manager Dimensional concludes that value stocks have outperformed growth stocks by 4.1% annually since 1927. That outperformance hasn't been consistent, however. Between 2008 and 2021, growth stocks beat out their value counterparts in 11 of 14 years.

While history doesn't predict the future, the data does suggest that long-term investors might do better with the value approach.

Beyond the long-term track record, there are other advantages to value investing, which include:

• Lower downside risk: You have less to lose by investing in discounted stocks vs. stocks trading at a premium.
• Predictability: Value stocks have proven business models, while a growth company's results rely on success of expansion initiatives.
• Cash income: Dividend-paying value stocks pay you to wait for long-term appreciation.

No investing strategy comes without risk, of course. With value investing, your main risks are:

• Lower growth: Value stocks don't have the appreciation potential that growth stocks do. If you define the best stocks as those with the highest growth potential, then value stocks may not be a good fit.
• Value traps: Value traps are stocks that are cheap for a reason, usually because of weak growth prospects. Avoid these by analyzing value relative to the company's outlook.
• Lack of diversification: A value stock portfolio can easily become heavy in certain industries like consumer staples, utilities, healthcare and financials.

Tips For Investing In Value Stocks

Value investing requires process and patience. You need processes for:

• Locating prospective stocks
• Estimating value
• Diversifying your positions across industries, geographies and company size
• Monitoring your portfolio
• Deciding when to exit a position if business fundamentals have deteriorated

Additionally, you need the patience to wait for returns to materialize. It can take years for the market to realize a stock's value and drive the price up accordingly. In that time, you may feel like you're one of few believers in that company's potential. That's when it's easiest to second-guess your analysis and exit a position early—especially if the economy is expanding and growth stocks are having a moment.

Trust in your processes can help you avoid the doubt and the resulting urge to make emotional decisions. Spend time refining your processes and continually look to improve them. That's the best way to set yourself up for success with value investing.

Mispriced stocks are hiding in plain sight and present great investment opportunities in 2023. Forbes’ top investment experts share 7 overlooked stocks for the year ahead in this exclusive report, 7 Best Stocks To Buy for 2023. Click here to download it now.

Best Value Stocks To Buy In 2023

1. General Motors

The domestic automaker has a PE ratio of less than 5 and a PB ratio of 0.66. Those are efficient numbers compared to Tesla's PE of nearly 50 and PB of almost 12.

For year-end 2022, GM reported a record EBIT-adjusted of $14.5 billion. EBIT is a cash flow measure, calculated as earnings before interest and taxes. The company expects 2023 to be "consistently strong" relative to 2022.

2. Target

Target's stock price has dipped more than 30% since its 2022 high, achieved in April. Recession worries may have reduced the stock price, but Target still offers some perks to its shareholders. The dividend yield of 2.7% is competitive, and the retailer has a 51-year streak of raising those cash payouts.

Target's PE ratio of 27 compares favorably to Walmart's multiple of 35.

3. Bank of America

Bank of America is a major holding in the Berkshire Hathaway stock portfolio, overseen by famous value investor Warren Buffett.

The bank has an efficient PB ratio of 0.9 and its 8.27 PE ratio compares favorably to competitors JPMorgan Chase and Wells Fargo. BAC also pays a good dividend yield of 3.2%.

4. Walgreens Boots Alliance

Walgreens, like Target, has been beaten down by investors since early-2022. The drugstore chain and healthcare business is also in the midst of a strategy transition, which hasn't (yet) wowed Wall Street. The new model integrates health clinics and stores. And, pursuing that model has added debt to Walgreens' balance sheet.

Still, if you believe in Walgreens' proven leadership team and its new strategy, the stock is a bargain buy. It also produces a solid dividend yield of 6.1%.

5. AT&T

AT&T is another transition play. The telecom is working to pay down the billions in debt it racked up in its failed media strategy. At the end of March, AT&T reported a year-over-year long-term debt reduction of 31%. That lowers the company's interest burden, which means higher bottom-line profits.

In the meantime, mainstream investors generally aren't ready to believe in AT&T again, which is keeping the stock price low and the dividend yield high. AT&T's PB ratio is 1.21 vs. Verizon's 1.66 and T-mobile's 2.55.

6. Berkshire Hathaway (BRK.B)

Berkshire Hathaway is a holding company, so a single share provides diversified exposure. Even better, the company and its investments are also overseen by a legendary value investor team. Buffett and Berkshire Vice Chair Charlie Munger prefer to invest in recession-resistant companies with solid fundamentals and enduring competitive advantages. They might make a few missteps on occasion, but the Berkshire portfolio overall is more likely than most to stand the test of time.

It's tough to value Berkshire based on profits because there are many moving parts contributing to operating results. You can look at the PB ratio, though, with an eye for snapping up a piece of the Berkshire holdings for as little as possible. Berkshire Class B shares have a PB ratio of 1.4 currently.

Value Stocks FAQs

What is the difference between value stocks and growth stocks?

Value stocks are companies that are priced lower relative to their earnings or other fundamental metrics. Growth stocks are companies that are expected to grow at a faster pace than the market average.

What are the characteristics of value stocks?

Value stocks typically have lower PE ratios, higher dividend yields and lower PB ratios than the market average.

How do you identify undervalued stocks?

You can identify undervalued stocks by analyzing their financial statements, including earnings, revenue and book value—and comparing those numbers to the stock price.

What are the pros and cons of investing in value stocks?

Investing in value stocks can provide potential long-term returns and lower risk. The downside is that value stock gains may be lower than what you'd get with growth stocks.

How do value stocks perform in a bear market?

Value stocks tend to perform better in bear markets due to their lower volatility and higher dividend yields.

What are some examples of well-known value stocks?

Some examples of well-known value stocks include Berkshire Hathaway, Coca-Cola and Johnson & Johnson.

What are the most popular valuation metrics for value stocks?

The most popular valuation metrics for value stocks include PE ratio, PB ratio and PEG ratio.

How does the PE ratio affect value stocks?

The PE ratio can indicate whether a value stock is undervalued or overvalued relative to its earnings.

What is a value investing strategy?

Value investing is a strategy that involves using fundamental analysis to identify undervalued stocks. Value investors buy those undervalued positions and hold them as long as business fundamentals remain strong, with the goal of long-term growth.

What are the risks associated with investing in value stocks?

Risks associated with investing in value stocks include slower growth and the possibility of a company's fundamentals deteriorating over time. There's also the chance the investor's initial valuation could prove to be optimistic and the stock doesn't grow as expected.

Mispriced stocks are hiding in plain sight and present great investment opportunities in 2023. Forbes’ top investment experts share 7 overlooked stocks for the year ahead in this exclusive report, 7 Best Stocks To Buy for 2023. Click here to download it now.