Value stocks and the cryptocurrency Bitcoin have had two wildly differing years. The former is back in fashion after years in the doldrums, while the latter is in meltdown.
Investing goes in cycles. So we should not be surprised that what goes down can just as quickly go up, and vice versa.
Investopedia defines a value stock as a company “that appears to trade at a lower price relative to its fundamentals, such as dividends or sales”. Some investors make a name for themselves out of targeting value stocks, buying good companies when they look cheap, then waiting for them to recover. US billionaire Warren Buffett is by far the most famous.
There are value stocks everywhere
The FTSE 100 is crammed with stocks that meet that definition. Insurance companies like Aviva and Legal & General Group instantly spring to mind. Their share prices have been trading at low, low valuations for years.
Today, they are valued at just 7.1 and 6.9 times earnings respectively. That’s roughly half the 15 times earnings seen as fair value. Both yield around 7.6% a year.
Banking stocks also look undervalued. Barclays trades at 4.1 times earnings and yields 3.89%, while Lloyds Banking Group trades at 5.6 times and yields 4.73%.
Both are still in the post-financial crisis recovery phase, and I would expect their dividends to increase over time.
Virtually the entire housebuilding sector looks like a value play. Barratt Developments trades at 7.1 times earnings and yields 6.42%, while Taylor Wimpey trades at 7.34 times and yields 6.42%.
FTSE 100 stocks Anglo American, BT Group, Imperial Brands, Kingfisher, Rio Tinto, Sainsbury’s, and Smith (DS) all look good value to my eyes. By which I mean they trade at less than 10 times earnings, and yield more than 4%.
A decent level of income is particularly attractive right now, as inflation rockets. While most FTSE 100 dividends can’t match today’s 9.1% inflation rate, many come close. Today’s low valuations also offer the prospect of capital growth, when markets finally recover.
This also reduces the danger that I am overpaying for the stocks, by offering some downside protection if this year’s equity sell-off worsens.
Bitcoin may rebound but I’m wary
Bitcoin also looks relatively cheap, having fallen by two-thirds since peaking at $67,734 in early November. Yet I would not buy it today. It pays no income, is highly speculative, and has failed to match up to its billing as digital gold.
While I accept that Bitcoin may have a place in a balanced portfolio, I would only want it to be a very small part of mine.
Right now, my focus is on scouring the FTSE 100 for top value stocks. Despite performing relatively well this year, they still look nicely priced to me.
My intention would be to target the biggest bargains and hold them for years or even decades. They will swing in and out of fashion over a lengthy timescale, but I will hang on, and continue reinvesting my dividends for long-term growth.