The Top 6 Value Stocks
Simply buying up great companies isn’t the wisest investing strategy.
Instead, you should buy great companies that trade at great values.
Too often, folks buying stocks overlook this crucial advice. They become enamored with a business’ products and services... But by itself, that focus can lead to dangerous investing. Let me explain...
Imagine a silver dollar that originally cost $1. Now, today, it’s still in good condition - but there’s no collector’s value. For whatever reason though, the owner decides it’s time to sell.
The owner lists the silver dollar on the open market and, as it turns out, there happens to be a surge in interest for the product. Within minutes, it’s bought for $13. That’s roughly the intrinsic value of the silver in the coin.
The next day, the same coin is up for sale again, but it shoots above its underlying silver value and sells for $26. Then it sells for $31. Seeing all of this, the owner concludes that there’s further profit to be made in the silver-coin market frenzy and buys it back for $42… Yet its silver content is still only around $13.
This sounds ridiculous. It’s just a silver dollar… right?
Yep, it’s the same coin. Its silver value hasn’t changed, and there still isn’t any collector’s value. The only change is what investors are willing to pay for it.
The same is true of stocks, no matter if it might appear more complicated.
A company’s intrinsic value rarely changes as much as its share price. There are thousands of moving parts, and it’s hard to find the underlying value. That’s why we developed a system to uncover six great companies trading at great values.
This system ensures that you’re buying stocks at an undervalued price. Then, all you need to do is hold tight, collect the dividends and wait for shares to return to their true value.
But before I show you these six picks, let’s take a closer look at the larger art of value investing...
A Lesson From the Legends
Value investing isn’t anything new. It’s an investment strategy that’s been around since the 1930s.
It derives its roots from investment legends Benjamin Graham and David Dodd. And it is one of the most straightforward and sound investment strategies you can follow.
The main goal is to buy companies that are trading well below their fundamental worth or intrinsic value.
An example would be a stock trading at $30 that has an intrinsic value of $40.
There are many reasons that sectors or stocks trade below their intrinsic values. Sometimes it’s simply that they fall on hard times. (Think of the current state of the oil industry.)
Other times, uncontrollable external events might briefly pull them down. The financial crisis of 2008-2009 showcased hundreds of examples. Stocks in every industry were pulled down to ridiculous lows. But the values of the underlying companies didn’t really change much.
Take Coca-Cola (NYSE:KO), for example. The company continued to sell its 500-plus beverages. Its business prospects still looked great... but investors fled, and the stock traded down to a steep discount... for a time. Since then, investors have piled right back into the stock.
The first ones in were value investors, who bought shares at $20. And at that time, Coca-Cola’s dividend yield had climbed to 4.3%. An increasing, sustainable dividend yield is a great indicator for undervalued stocks. I explain more about that in a moment. But first, let’s look at one more example that created a value investing opportunity...
A massive earthquake-and-tsunami combination hit the Fukushima Daiichi nuclear power plant on March 11, 2011. It caused a meltdown that sent radioactive materials into the environment.
The Japanese market dropped more than 20% in the aftermath of this tragic event. And many industries and stocks - even those that had little or nothing to do with nuclear power generation - got dragged down as a result.
But this temporary market pullback created an excellent long-term buying opportunity in the world’s leading automaker, Toyota Motor Corp. (NYSE: TM).
In the years following the disaster, the share price jumped to new highs. This is a perfect example of value investing.
Now, a major disaster isn’t always required for stocks to trade at a discount. Stocks trading at or near all-time highs can still be great value investments. You just need to uncover their true values.
One of the best ways to find deep-value stocks is by comparing them to competitors within the same industry, and then comparing current value metrics to the past metrics.
Value Metrics to Watch
Dividend Yield - The dividend yield can be calculated by dividing the annual dividend per share by the share price. So if the dividend stays the same and the share price drops, the yield increases. It’s a great strategy to invest in undervalued companies that keep paying steady or growing dividends. A reliable dividend-paying stock that jumps from a 3% dividend yield to 5% is a much better deal. You get more bang for your buck when the yield is higher.
EV/EBITDA - This is similar to the price-to-earnings ratio, but it’s less manipulated. It takes the enterprise value of the business (including debt) and divides it by earnings before interest, tax, depreciation and amortization. Normal earnings numbers come in many flavors... basic earnings per share, adjusted EPS, diluted EPS, etc. EV/EBITDA, meanwhile, gives you a cleaner, more consistent look into a company’s valuation. The lower this ratio is, the better the deal you’re getting.
Profit Margin - Profit margin is the net income divided by the total revenue. The bigger the profit margin, the more profitable the company. The profit margin varies based on the sector a company is in. But consistent profit margin and growth are usually a positive sign.
These aren’t the only metrics our stock-picking system watches for... But they play an important role. Our system scans thousands of companies and has recently uncovered six great value stocks that have great value metrics, including the key ones above.
Today’s Top Six Value Stocks
Chevron (NYSE: CVX) is an energy company that operates both upstream and downstream businesses. The world depends on its products, which has allowed it to pay a growing dividend over the last few decades. The dividend yield is above 3.9% today.
AT&T (NYSE: T) is one of the world’s leading communication network providers. The business has a great history of rewarding shareholders. The company’s dividend yield is around an amazing 4.7% today. As the world uses more data, AT&T will push its profits higher.
AbbVie (NYSE: ABBV) is a biopharmaceutical company. It develops therapies for a wide range of diseases and keeps bringing new drugs to market to treat the world’s growing population. This allows it to pay a growing dividend, which is at about 3.9% today.
Caterpillar (NYSE: CAT) is one of the world’s leading builders of construction and mining equipment. Its revenue has dropped with energy prices and emerging markets, but that misfortune has turned it into a better value play. Today, the company pays more than a 3.1% dividend yield. It’s a great addition for any stock value portfolio.
Pfizer (NYSE: PFE) is another biopharmaceutical company. It develops a wide range of healthcare products to help the world’s growing population. The company has paid a dividend for decades, and now features a 3.7% dividend today. Pfizer will continue to save lives and push profits to investors.
International Business Machines (NYSE: IBM), better known as IBM, is a constant innovator. The company develops and sells thousands of hardware and software products. Right now, IBM is shifting toward big data, cloud computing and artificial intelligence. IBM is a technology leader for the future, which will allow it to continue paying a big dividend. Its dividend yield is about 3.2% today.
A few of the stocks above are current picks from Marc Lichtenfeld’s Oxford Income Letter. And one of them is already up 50% from its initial recommendation. That’s why I have to give a shout-out to Marc, The Oxford Club’s Chief Income Strategist. After all, this isn’t the first cash-gushing revenue stream he’s uncovered in his monthly newsletter.
The Oxford Income Letter is an unparalleled investment newsletter that provides income investments that trade at great values. You can learn more by clicking here.
And always remember... Price is what you pay; value is what you get. This is an invaluable lesson for investors. Going back to the silver coin example, it’s easy to see that the true value of the coin doesn’t change much. What folks think the coin is worth is the only change.
Folks that keep on bidding up the price of goods or investments eventually fall prey to the negative side effects of what’s known as the “greater fool theory.” They buy assets well above their underlying value, always hoping that there’s a greater fool out there to buy the stocks from them for more money.
The greater fool theory runs rampant in investing due, in part, to the complexity of valuing stocks. That’s why we’ve developed a system to find undervalued stocks. And you’ve gotten a nice introduction to it above.
As I mentioned before, value investing was created by investment legends. It should be a core strategy in your investing arsenal that supplies a core portion of your portfolio picks.