In the dynamic world of investing, one method has endured the test of time — buying stocks on sale. The endeavor involves a combination of skill and art honed through a disciplined study. Much like shopping for discounted goods at a store, purchasing stocks when they’re trading below their intrinsic value can offer investors the opportunity to capitalize on potential future gains.
When the market offers a sale, it is often a result of some disconcerting event or series of events. But to those looking for a bargain, it is an invitation to sift through the noise and uncover value where others may see only uncertainty. Whether driven by broader market gyrations, sector-specific headwinds, or company-specific challenges, these price drops present an opportunity for those with the foresight to recognize intrinsic value. This is the essence of buying stocks on sale, a strategy that has been at the core of our investment philosophy here at The Prudent Speculator for decades.
Generally, value stocks are characterized by having lower price-to-earnings ratios, higher dividend yields, among numerous other metrics that we keep close tabs on (See “What is your valuation methodology” on our Frequently Asked Questions page). Despite several nuances, there are historical examples frequently cited as successful value stocks, especially those that have shown strong performance over many decades. Some of these include:
1. Berkshire Hathaway (BRK.A, BRK.B)
Perhaps the most quintessential example of value investing paying off. Under Warren Buffett’s leadership, Berkshire Hathaway has grown through acquisitions and investments focused on undervalued companies with strong fundamentals. Buffett’s approach epitomizes value investing.
2. Johnson & Johnson (JNJ)
A healthcare company known for its steady dividend growth and strong financial health, which has been a consistent performer over many decades.
3. Procter & Gamble (PG)
Known for its wide array of consumer goods and strong brand presence, PG is often highlighted for its dividend history and solid performance, making it a classic value investment.
4.Exxon Mobil (XOM)
As one of the largest global energy companies, Exxon Mobil has often been identified as a value stock with robust dividend payments and a strong track record of profitability, especially during periods of high oil prices.
5. JPMorgan Chase (JPM)
One of the largest financial services institutions in the world, JPMorgan has been a resilient performer through various economic cycles, supported by its substantial earnings power and dividends.
6. Walmart (WMT)
As a leader in the retail sector, Walmart is often cited for its operational efficiency and market dominance, traits admired by value investors.
7. 3M (MMM)
Known for its diversified range of products and consistent dividend payouts, 3M has been a preferred choice for value-focused portfolios.
8. McDonald’s (MCD)
This global fast-food chain has demonstrated considerable growth and profitability through efficient operations and a strong franchise model.
When evaluating the performance of value stocks, investors typically look not just at share price appreciation but also at dividends, stability, and resilience during economic downturns. Historical data often shows that many successful value stocks are not the fastest growers but are companies that can sustain performance and offer dividends over long periods.
Historical experience suggests that when Wall Street holds a sale, few show up. As our founder Al Frank put it, “Successful speculating is more a matter of character than mathematics, analysis or luck.” This is the Art part of the equation–Avoiding the short-term noise requires gumption and a willingness to periodically look very wrong and potentially foolish for a time. It also involves the ability avoid bailing on previous purchases throughout the various ups and downs of the market, staying with them for their long-term potential.
But how does one distinguish between a true value opportunity and a value trap? This is where the skill part comes into play. Through meticulous research and rigorous analysis, investors can identify companies with strong balance sheets, sustainable competitive advantages, and robust cash flows—qualities that help the companies underlying depressed stocks endure in the face of temporary market turbulence.
When evaluating potential investments, we also look beyond the numbers to understand the broader narrative unfolding within each company. Is the price drop justified by deteriorating fundamentals, or is it merely a short-term aberration in an otherwise solid business? By delving into the intricacies of each company’s operations, management team, and competitive positioning, we aim to uncover the truth hidden beneath the surface.
At The Prudent Speculator, our proprietary screening methodology assists with the process of identifying undervalued bargains. Then, by employing a combination of quantitative and qualitative analysis, we aim to separate the wheat from the chaff, identifying companies that are trading below their intrinsic value due to temporary factors rather than underlying flaws.
Of course, market sentiment can be fickle, and prices may remain out of alignment with what might be perceived as a company’s sensible valuation for longer than initially hoped. So, the art of buying stocks requires patience, discipline, and a keen eye for value.
For those willing to weather the storm, we welcome you to join us on the journey to reaching your long-term financial goals in this potentially very rewarding endeavor.
Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.