It’s always important to highlight the importance of a diversified portfolio in investing. That goes for diversifying by geography, size, and industry; but it also goes for a mix of value and growth companies, and maybe dividends, if that’s your thing. Growth stocks have been decimating the returns of value stocks over the last decade, but the market works in cycles so who knows, value might just have the last laugh.
The difference between growth and value
Growth stocks are what it says on the tin. These are the high-flyers that we expect to become dominant, not necessarily now, but one day. As a result, companies will often trade on higher multiples than usual for things like price/sales ratios, and price/earnings ratios. In some cases, they aren’t even profitable, but they are at least proving the demand is there for its product or service. The risk of growth stocks is high valuations crashing down because of changes in market sentiment, and when you get down to the nitty-gritty, their financials can’t back them up.
Value stocks, on the other hand, are generally companies that have reached maturity. They aren’t going out of business, but they probably have flat to low growth rates, and they still have a strong plan in place to continuously make profits. The risk with value stocks is deprived business models, and failure to innovate, which can eventually push them out as technologies progress and new players enter the scene.
What to look for in a value stock
Well, for the most part, the strategy doesn’t change. It’s always great to see a solid management team with a defined mission and long-term goals. We want to see diversified revenue streams and a company that has developed a strong brand and competitive advantages in its industry. But in particular, we want solid financials.
First and foremost, the price/earnings (P/E) ratio has been a first look indicator used by value investors for decades, which means the company needs to be profitable, to begin with — no earnings means no P/E ratio. Although it’s not perfect, a P/E ratio below the industry average could indicate a value pick. Share buybacks are another great way of determining value, as they show a company’s willingness to purchase back its own stock where it believes it is undervalued — you can see this information through quarterly reports. Another indicator of a company operating successfully is lots of cash on the balance sheet. It means it has the funds to invest in new projects or research and development, and that it will have security in the event of a black swan event or market downturn.
So now you know that you know some key stats to look out for, what companies look like good value picks?
3 Top Value Stocks To Invest In
All of the below are profitable household names, and every single one has exceeded expectations in their last four quarterly reports.
1. eBay (Market Cap: $48 billion)
- P/E Ratio (TTM): 4.20
- Shares outstanding: Flat/slight increase
- $1.4 billion in cash
It’s easy to forget about eBay (NASDAQ: EBAY) in an Amazon-dominant e-commerce world, but the company is still outperforming and innovating. It has launched eBay Managed Payments, and eBay ads in 2021, which gives its sellers the tools to maximize potential on the platform.
2. Walgreens Boots Alliance (Market Cap: $42 billion)
- P/E Ratio (TTM): 17
- Shares outstanding: Flat
- $1.2 billion in cash
Walgreens (NASDAQ: WBA) is a consumer staple. It’s the second-largest pharmacy chain in the U.S. and the essential nature of its business safeguards it even in potential downturns.
3. Intel (Market Cap: $208 billion)
- P/E Ratio: 10
- Shares outstanding: Decreasing
- $5.8 billion
Intel (NASDAQ: INTC) could very well be the best pick on this list. The business generated over $78 billion in revenue in the last year alone and $21 billion in net income. The company faces challenges from rivals like AMD, but they are still the leader in the CPU market, and its chips are used in computers and mobile devices all over the world.
If there’s any point to hammer home here, it’s the importance of a mix of both value and growth for your portfolio. Some of us lean towards one style, but it’s important to include both, just so we can offset risk. A value strategy is great for anyone new to the markets, just so you can wrap your head around the financials and how to navigate researching other stocks from there. Never focus on price, only focus on the value you get for every dollar invested.
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Financial Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.