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Who doesn’t love a good sale? Investing in value stocks is like buying shares at a discount, as they are currently undervalued by the market. This investing strategy assumes that broader markets will eventually wake up to how a company’s intrinsic value might have been mispriced, usually due to market forces beyond a company’s control.
Finding discounted stocks on sale can be challenging. To aid in your search, Forbes Advisor has curated a list of seven of the best value stocks. These companies are trading at an attractive discount given their earnings performance. As an added bonus, they are forecasted to keep growing their earnings, helping you avoid “value traps.”
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Show Summary
- The 7 Best Value Stocks of July 2024
- Celestica, Inc. (CLS)
- Stride, Inc. (LRN)
- Allison Transmission Holdings, Inc. (ALSN)
- T-Mobile US, Inc. (TMUS)
- Bank OZK (OZK)
- Lear Corporation (LEA)
- ACM Research, Inc. (ACMR)
- Methodology
- What Is Value Investing?
- Watch Out for Value Traps
- What Are Value Stocks?
- Value vs. Growth Stocks
- Value Stock FAQs
The 7 Best Value Stocks of July 2024
Company (ticker) | Forward PEG Ratio |
---|---|
0.9 | |
0.9 | |
0.7 | |
0.7 | |
0.6 | |
0.3 | |
0.3 |
Methodology
This curated list of best value stocks is based on stocks that are trading at an attractive valuation with respect to the company’s growth potential.
The stocks on the list must have at least a $500 million market capitalization and trade at least 500,000 shares per day. In addition, each stock adheres to the following criteria:
- Low forward P/E. Only stocks with a forward P/E under 18 were considered for this list.
- Attractive valuation based on PEG. PEG is a ratio that looks at price-earnings as well as growth. Only stocks with a forward PEG of 1.0 or less were considered. A forward PEG of 1.0 or below is generally considered a good value.
- Earnings growth, both historical and future. All the companies on this list grew earnings by at least 14% on average over the last three years, and analysts expect earnings to increase by at least 8% per year over the next five years. The company must also have had positive earnings for the last four years.
- Financially healthy. All stocks on this list have a financial health grade of “A”, “B” or “C” from Morningstar.
- Not diluting shareholders. All the companies on this list kept shares outstanding the same or reduced them. Companies that issued new shares were excluded, as that dilutes existing shareholders.
These initial metrics produced a list of 47 stocks. That list was then sorted by additional metrics such as forward PEG ratio to assess which stocks offered the best value. The stocks on this list were manually selected based on steadily rising earnings and an attractive valuation.
To learn more about our rating and review methodology and editorial process, check out our guide on how Forbes Advisor rates investing products.
Please note that the stocks above were selected by an experienced financial analyst, but they may not be right for your portfolio. Before you decide to purchase any of these stocks, do plenty of research to ensure they are aligned with your financial goals and risk tolerance.
What Is Value Investing?
Value investing is a strategy that involves selecting stocks based on perceived value in their underlying businesses. Value investors typically determine the perceived value per share based on fundamental metrics such as price-book (P/B ratio), price-earnings (P/E ratio), price-sales (P/S ratio) and the debt-equity ratio.
Value investors attempt to identify stocks that are trading below their intrinsic value and buy them, hoping that the market will eventually value them appropriately. Value investors are often contrarian investors, buying stocks when the market is down and selling when the market is up.
Value investors frequently ignore short-term market trends and focus on buying stocks of high-quality companies that have the potential to generate significant returns over the long term. Famous value investors include Berkshire Hathaway CEO Warren Buffett, influential investor and author of “The Intelligent Investor” Benjamin Graham and billionaire hedge fund manager Seth Klarman.
Watch Out for Value Traps
One of the biggest keys to value investing is avoiding value traps, stocks that appear to be attractively valued but are inexpensive for a good reason.
Value traps often have attractive fundamental metrics, such as low price-earnings or price-book ratios. However, value traps typically have structurally challenged businesses that can lead to the deterioration of these value metrics over time. For example, value traps may be losing market share to competitors or suffering from secular sales declines in a shrinking industry.
To avoid value traps, investors should fully understand a company’s business. That means conducting comprehensive due diligence until you are confident in the full picture of a company’s outlook before making a sizable long-term investment.
What Are Value Stocks?
A value stock is a stock that an investor or analysts believes is underpriced based on the business attributes of the underlying company.
Value investors look for bargain prices on value stocks just like bargain shoppers look to hunt for deals at the mall or on Amazon when a sales event is going on.
Because value stocks are typically cheap, they are considered relatively low-risk investments. Unfortunately, many cheap stocks are cheap for good reason, and a low P/E ratio or P/S ratio does not necessarily make a stock an attractive value investing opportunity.
Companies with slowing or even negative revenue growth, shrinking margins, high debt levels or companies operating in markets that are in secular decline may often seem like value stocks at first glance. Stocks that are cheap for good reason are called value traps because they can sometimes trap value investors into a bad investment.
Value investing is typically considered a long-term investing strategy. Just because a stock is presently undervalued doesn’t mean the market will correct its price to a more appropriate level within months or even years.
Value vs. Growth Stocks
Value stocks are companies that investors believe are underpriced based on the performance of their underlying businesses. Growth stocks are stocks of companies that are generating above-average growth in sales or profits, and have the potential to outperform over time as their businesses expand.
Value stocks are considered to be attractively priced based on their current business metrics. Growth stocks may appear overpriced based on their current businesses, but are expected to grow into and even exceed their current valuations in the future.
Value stocks typically have attractive fundamental valuation metrics, such as low P/E ratios and low P/S ratios. Growth stocks often have relatively high P/E and P/S ratios, but they typically generate consistent annual revenue growth at least in the double-digit percentage range.
Value stocks are typically predictably profitable companies that often pay attractive dividend yields. Growth stocks are often not profitable and do not pay dividends.
Value stocks are generally considered low-risk, dependable investments with limited near-term upside potential. Growth stocks are usually considered more volatile, higher-risk stocks that have potential for significant near-term upside.
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Value Stock FAQs
Why invest in value stocks?
Value stocks are relatively low-risk investments with strong underlying businesses and cheap share prices. Some of the most successful investors of all time, including Warren Buffett and Benjamin Graham, have been value stock investors.
How do you find value stocks?
To find value stocks, investors can screen for fundamental value indicators, such as a low P/E ratio, a low P/S ratio and a low debt-to-equity ratio. Investors can also watch for quarterly 13F filings by Warren Buffett or other high-profile value investors to see which stocks they have been buying.
How do value stocks perform when interest rates rise?
Value stocks tend to outperform growth stocks when interest rates rise because value stocks are considered relatively low-risk investments and safe havens during difficult macroeconomic periods. In addition, many growth stocks rely on debt to fund their growth, and that debt can become much more expensive or difficult to access when interest rates are high.
What is a value trap?
A value trap is a stock that superficially appears to be a value stock but has deeper underlying problems that may cause the stock to underperform. For example, a drug company stock may appear to trade at an attractively low P/E ratio and P/S ratio, but it may be a value trap if the patent exclusivity period of its leading drug is soon expiring.