What are value stocks?
It’s easy to say they’re stocks on a low price compared to the value of the company. But that doesn’t help us to find them.
As well as a low price, I look for some key things in my search for value.
First, I want mature, safe companies. And that tends to mean big ones. So no penny stocks with small market caps here, as that can mean big risks which can easily wipe out any value I see.
Next, I want firms selling essential goods and services. And ones that new competitors can’t easily muscle in on.
Essential good and services
I’m thinking the big banks. Yes, some so-called challenger banks tried to stake their claims after the big bank crash. But they’ve made hardly any real inroads, and the big ones still dominate.
So I like Barclays, on a forecast price-to-earnings (P/E) ratio of under five, with a 4.6% dividend yield. Or Lloyds Banking Group and its 5.3% dividend, on a P/E of 6.2.
I see short-term risk there, but long-term value.
A cornerstone
I’d say the property and construction business is a cornerstone of the economy. So when they’re down, I think house builders can be good value. My picks would be Taylor Wimpey or Persimmon, both with depressed share prices.
Once again, I’m seeing short-term risk but long-term value here.
As an alternative, I like the look of Primary Health Properties. It invests in real estate, and that’s helped push its share price down. But the properties are healthcare ones, let on long-term leases, so it’s not just about property prices.
Another value sign
Good dividend yields are often a sign of good value stocks. The yields can be high because the shares are cheap, but that’s not quite enough.
I want to see likely strong cover by earnings for the long-term future too, not just a big yield today. That’s why I think the 8.7% yield from British American Tobacco looks like good value, with good earnings cover.
And it’s why I think the 10% at Vodafone possibly isn’t, with earnings that don’t match.
Growth shares
Which strategy to adopt is very much a personal decision. And when stock markets are down, it can also be a great time to buy growth stocks.
Some will have been overpriced and deserved to crash. But good ones can be pushed down too. A growth investor who can find the stocks with long-term potential can do very well when we’re in a bear market.
Penny shares
The same goes for penny stocks. They can come with their own risks, and it’s a mistake to think a low price automatically means good value.
I see some today that I expect to go bust, or at least fall a lot further. But again, I see some nice penny share buys out there too.
Safe value
But I’m going to stick with my search for value stocks. So I’m looking for low valuations, good dividends, and long-term earnings prospects. Even better if they come from companies that are essential to the economy.
