Stock strategy: How value investing can make you money

What is value investing?

Value investing involves picking quality stocks that are presumably trading below their true or “intrinsic value,” also called book value. This may give investors an opportunity to buy strong stocks at a discount.

Investments in value stocks stem from the idea that people overreact to market news hype, thereby moving the prices of some stocks in directions that don’t reflect the fundamentals and potential of certain companies.Value investors, including most famously business icon Warren Buffett, believe over time the market will recognize these companies’ real worth.

How to invest in value stocks

Value investors conduct deep financial analysis to find stocks they believe are undervalued. But there are easier ways to engage in value investing. For example, you can buy shares of exchange-traded funds (ETFs) that invest in several value stocks. This minimizes the risk of putting all your money in one or two value stocks that may fail to meet expectations. Here are some examples of top value ETFs.

• Invesco S&P SmallCap Value with Momentum ETF (XSVM)
• Invesco S&P SmallCap 600 Pure Value ETF (RZV)
• Avantis U.S. Small Cap Value ETF (AVUV)

You can also track what the top value investors are buying. Here are four of the latest value stocks handpicked by Warren Buffett and his lieutenants.

• United Parcel Service (UPS.US)

  Company summary

  United Parcel Service, Inc. provides letter and package delivery, transportation, logistics, and financial services. It operates through three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. The U.S. Domestic Package segment offers time-definite delivery of letters, documents, small packages, and palletized freight through air and ground services in the United States. The International Package segment provides guaranteed day and time-definite international shipping services in Europe, the Asia Pacific, Canada and Latin America, the Indian sub-continent, the Middle East, and Africa. This segment offers guaranteed time-definite express options. The Supply Chain & Freight segment provides international air and ocean freight forwarding, customs brokerage, distribution and post-sales, and mail and consulting services in approximately 200 countries and territories; and less-than-truckload and truckload services to customers in North America. This segment also offers truckload brokerage services; supply chain solutions to the healthcare and life sciences industry; shipping, visibility, and billing technologies; and financial and insurance services. The company operates a fleet of approximately 127,000 package cars, vans, tractors, and motorcycles; and owns 58,000 containers that are used to transport cargo in its aircraft. United Parcel Service, Inc. was founded in 1907 and is headquartered in Atlanta, Georgia.

  Historical performance

  Stock information

  • Market capitalization: $168764391424
  • P/E ratio: 27.8777
  • PEG ratio: 1.3947
  • Dividend yield: 0.0212%

  Get more detailed information and learn how to buy UPS.US stock

• Mondelez International (MDLZ.US)

  Company summary

  Mondelez International, Inc., through its subsidiaries, manufactures, markets, and sells snack food and beverage products worldwide. It offers biscuits, including cookies, crackers, and salted snacks; chocolates; and gums and candies, as well as various cheese and grocery, and powdered beverage products. The company's snack brand portfolio includes Cadbury, Milka, and Toblerone chocolates; Oreo, belVita, and LU biscuits; Halls candies; and Trident gums and Tang powdered beverages. It serves supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, gasoline stations, drug stores, value stores, and other retail food+ outlets through direct store delivery, company-owned and satellite warehouses, distribution centers, and other facilities, as well as through independent sales offices and agents, and e-commerce channels. The company was formerly known as Kraft Foods Inc. and changed its name to Mondelez International, Inc. in October 2012. Mondelez International, Inc. was incorporated in 2000 and is based in Chicago, Illinois.

  Historical performance

  Stock information

  • Market capitalization: $84596072448
  • P/E ratio: 20.0265
  • PEG ratio: 3.4506
  • Dividend yield: 0.0209%

  Get more detailed information and learn how to buy MDLZ.US stock

• Pfizer (PFE.US)

  Company summary

  Pfizer Inc. discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers medicines and vaccines in various therapeutic areas, including cardiovascular metabolic and pain under the Eliquis, Chantix/Champix, and Premarin family brands; biologics, small molecules, immunotherapies, and biosimilars under the Ibrance, Xtandi, Sutent, Inlyta, Retacrit, Lorbrena, and Braftovi brands; and sterile injectable and anti-infective medicines under the Sulperazon, Medrol, Zithromax, Vfend, and Panzyga brands. The company also provides medicines and vaccines in various therapeutic areas, such as pneumococcal disease, meningococcal disease, tick-borne encephalitis, and COVID-19 under the Prevnar 13/Prevenar 13 (pediatric/adult), Nimenrix, FSME/IMMUN-TicoVac, Trumenba, and the Pfizer-BioNTech COVID-19 vaccine brands; biosimilars for chronic immune and inflammatory diseases under the Xeljanz, Enbrel, Inflectra, and Eucrisa/Staquis brands; and amyloidosis, hemophilia, and endocrine diseases under the Vyndaqel/Vyndamax, BeneFIX, and Genotropin brands. In addition, the company is involved in the contract manufacturing business. It serves wholesalers, retailers, hospitals, clinics, government agencies, pharmacies, and individual provider offices, as well as disease control and prevention centers. The company has collaboration agreements with Bristol-Myers Squibb Company; Astellas Pharma US, Inc.; Myovant Sciences Ltd.; Akcea Therapeutics, Inc; Merck KGaA; Valneva SE; BioNTech SE; Arvinas, Inc.; and Syapse, Inc. Pfizer Inc. was founded in 1849 and is headquartered in New York, New York.

  Historical performance

  Stock information

  • Market capitalization: $241984733184
  • P/E ratio: 18.4287
  • PEG ratio: 1.6564
  • Dividend yield: 0.0359%

  Get more detailed information and learn how to buy PFE.US stock

• Biogen (BIIB.US)

  Company summary

  Biogen Inc. discovers, develops, manufactures, and delivers therapies for treating neurological and neurodegenerative diseases. The company offers TECFIDERA, VUMERITY, AVONEX, PLEGRIDY, TYSABRI, and FAMPYRA for multiple sclerosis (MS); SPINRAZA for spinal muscular atrophy; and FUMADERM to treat plaque psoriasis. It also provides BENEPALI, an etanercept biosimilar referencing ENBREL; IMRALDI, an adalimumab biosimilar referencing HUMIRA; and FLIXABI, an infliximab biosimilar referencing REMICADE. In addition, the company offers RITUXAN for treating non-Hodgkin's lymphoma, chronic lymphocytic leukemia (CLL), rheumatoid arthritis, two forms of ANCA-associated vasculitis, and pemphigus vulgaris; RITUXAN HYCELA for non-Hodgkin's lymphoma and CLL; GAZYVA to treat CLL and follicular lymphoma; and OCREVUS for treating relapsing MS and primary progressive MS; and other anti-CD20 therapies. Further, it develops BIIB061, BIIB091, and BIIB107 for MS and neuroimmunology; Aducanumab, BAN2401, BIIB092, BIIB076, and BIIB080 to treat Alzheimer's disease and dementia; BIIB067, BIIB078, BIIB105, BIIB100, and BIIB110 to treat neuromuscular disorders; BIIB124, BIIB094, BIIB118, BIIB101, and BIIB122 for treating Parkinson's disease and movement disorders; BIIB111 and BIIB112 to treat ophthalmology related diseases; BIIB125 and BIIB104 for treating neuropsychiatry; Dapirolizumab pegol and BIIB059 to treat immunology related diseases; BIIB093 and TMS-007 to treat acute neurology; BIIB074 and BIIB095 for neuropathic pain; and SB11 and SB15 biosimilars, which are under various stages of development. The company has collaboration and license agreements with Acorda Therapeutics, Inc.; Alkermes Pharma Ireland Limited; Bristol-Myers Squibb Company; Eisai Co., Ltd.; Genentech, Inc.; Neurimmune SubOne AG; Ionis Pharmaceuticals, Inc.; Ginkgo Bioworks; Capsigen Inc.; and Mirimus, Inc. Biogen Inc. was founded in 1978 and is headquartered in Cambridge, Massachusetts.

  Historical performance

  Stock information

  • Market capitalization: $38897262592
  • P/E ratio: 21.1772
  • PEG ratio: 6.2424
  • Dividend yield: 0%

  Get more detailed information and learn how to buy BIIB.US stock

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How do I determine if a stock is undervalued?

The following are a couple of popular measures investors use to determine the true value of a stock or company:

• Price-to-book (P/B) ratio (or “book value”): This is the value of a company’s assets (minus debts) compared to its current stock price. A company may be considered undervalued if the total of its outstanding stock shares is lower than the total value of its assets (i.e. it has a P/B ratio under 1).
• Price-to-earnings ratio (P/E): This is the ratio of a company’s revenue to its current share price and is calculated by dividing the stock price by the earnings per share (EPS).
• Free cash flow: Free cash flow is the amount of money a company has once you’ve subtracted all costs and expenditures, such as operating expenses and business purchases. Companies with more free cash flow may be in a better position to grow their business.

What are the risks of value investing?

While value investing is generally considered a relatively conservative approach to investing, it’s not without risk. It requires you to be skilled at analyzing a company’s fundamentals. It also requires you to be able to access accurate and up-to-date information on a company’s finances and operations.

If your analysis is incorrect or you’ve applied the wrong metrics to measure a company’s intrinsic value, you may actually end up overpaying for the stock. Worse still, even if your analysis of a company is sound and it is undervalued in relation to its stock price, the wider market will need to agree with this sentiment. Otherwise the share price is unlikely to go up.

Value investing means you’re effectively betting against the market, and this is always a somewhat risky approach. You may find that your value investment stays stagnant for an extended period or even declines in value. This means you’d be missing out on potential gains elsewhere.

As the financial analyst A. Gary Shilling once said, “The stock market can remain irrational a lot longer than you can remain solvent.”

How to succeed in value investing

In order to be a successful value investor, it’s likely you’ll need to be patient, analytical and composed. Value investing involves lots of research and critical thinking. It is inherently a long-term investing strategy. This means it won’t suit emotional or restless investors or those who don’t have the time or resources to work out if a company is undervalued.

Why would a stock be undervalued?

There are a number of reasons a particular stock might be undervalued, including the following:

• Stock market crashes. During market downturns like the one in March 2020, share prices of many companies with strong fundamentals drop. This may be triggered by investor fear and doesn’t necessarily reflect a company’s performance. But it also means you can buy these stocks at a discount before they rebound.
• General market behavior. If the price of a certain share declines, some investors may panic sell, causing the stock to plummet without justification.
• Unpopular companies or industries. Industries like tech and green energy dominate headlines. This can cause investors to ignore undervalued companies in “boring” industries.

Value investing vs growth investing

The opposite of value investing is growth investing. This involves investing in companies that are expected to grow rapidly, regardless of how their fundamentals measure up to their share price.

An example would be investing in a new tech startup that may still be operating at a loss but is poised to secure a large market share or dominate an emerging market.

During prolonged bull markets (and especially stock market bubbles), value investing has historically offered lower returns than growth investing as investors are generally more interested in chasing growth stocks. However, value investing has often outperformed the market following stock market crashes or in the period following a stock bubble bursting.

Frequently asked questions

• Is Warren Buffett a value investor?

  Yes, Warren Buffett is considered to be the most famous, and most successful, proponent of value investing, which he picked up under the tutelage of Benjamin Graham. Graham, along with David Dodd, pioneered value investing at Columbia University, and in their 1934 book Security Analysis.

• Does value investing still work?

  Yes, you can still have success with a value investing approach. However, depending on the state of the market, there may be more profitable strategies available. During bull markets, value investing may offer lower returns. But it also may also help insulate against stock bubbles.

• Can value investing make you rich?

  Yes, you can still make money using value investing, especially if you’re patient and can maintain a long-term approach to investing. Historically, value investing has outperformed the market by around 2% each year, based on analysis done by the American economists Eugene Fama and Kenneth French, and it has been used with great success by investors like Warren Buffett.

• Is value investing dead?

  This will depend on who you ask, but many experts believe value investing is still a valid strategy, despite the popularity of growth investing. According to investment firm AQR, “While undoubtedly many systematic approaches to value investing have suffered recently, we find the suggestion that value investing is dead to be premature.”