The Best Value Stocks

"Growth and value investing are joined at the hip."

You think that's crazy? Tell Warren Buffett. He's the one who said it, not me.

But, of course, I think he's right. I'm writing today because the largely semantic differences between value and growth often get lost, even here at The Fool.

Head to head
That's because there is a temptation to equate growth investing with speculation, as fellow Fool Chuck Saletta did.

But that's just wrong. Real growth investors don't bet on companies whose "sky-high" expectations make it nearly impossible to produce meaningful returns. More often, gurus like Michael Lippert of Baron iOpportunity invest in firms whose superior growth characteristics haven't been fully recognized or rewarded by the stock market.

Value investors, on the other hand, look for stocks that trade for less than their intrinsic value, or stocks that the market has unfairly undervalued. Often, these firms are experiencing problems that investors believe to be temporary.

Both strategies, although seemingly different on the surface, operate on the premise that the market has mispriced a stock.

The obvious won't help you
History proves that you'll need more than math to discern what, exactly, is mispriced. Take the market's 10 best stocks. Asta Funding (Nasdaq: ASFI  ) didn't have any earnings to report in 1998. Neither did Celgene (Nasdaq: CELG  ) . Investors longing for a below-market P/E would have missed out on the 82-bagger and 67-bagger, respectively, to come.

The very best value stocks
Stock market myth says that only value investors zig as others zag. Hogwash. Lippert owns shares of CME Group (NYSE: CME  ) , Research In Motion (Nasdaq: RIMM  ) , and Blue Nile (Nasdaq: NILE  ) , none of which look "cheap" by the numbers. Yet Lippert, by investing where others won't, has doubled the return of the S&P 500 since taking over iOpportunity two years ago.

David Gardner can claim similar success. And that's in spite of the current market malaise. Eleven stocks in David's Motley Fool Rule Breakers portfolio have at least doubled, including BioMarin Pharmaceutical (Nasdaq: BMRN  ) . No surprises there. It was misunderstood. It was cheap relative to its growth potential. In short: It was a value stock.

Rules breaking, fortunes in the making
So, please, don't make the mistake of confusing growth investing with speculation. You'll miss out on just about all of the market's best value stocks -- the misunderstood multibaggers in the making -- if you do.

This article was originally published Jan. 31, 2007. It has been updated.

Click here now if you'd like to join us at Rule Breakers in our quest to find the market's next 10 best stocks. Your pass is free for 30 days and there's no obligation to subscribe. 

Fool contributor Tim Beyers is a sucker for growth stocks and a regular at Rule Breakers. Tim didn't own shares in any of the stocks mentioned in this article at the time of publication. BioMarin and Blue Nile are Rule Breakers recommendations. The Motley Fool's disclosure policy is a rebel on Wall Street.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2009, at 11:56 AM, topgearrocks wrote:

    Top 250 list of the highest dividend yielding stocks:

    http://www.TopYields.nl/Top-250-dividend-yields.php

  • Report this Comment On November 27, 2011, at 9:30 PM, shirlhinkle wrote:

    My plan is to get ahead of the game for once!

    I have more mortgage than house value.

    A large number of people lost jobs and houses in 2008 and 2009.

    Many had to declare bankruptcy.

    A portion of these people have been back to work for at least 1 year.

    They are in a good position to purchase a new home at discount prices.

    They will start qualifying for new mortgages 3 yrs after bankruptcy.

    That means these homes can get financed in 2012 and 2013.

    I'm getting on board with FNMA while it is a sleeper.

    It’s only going for 20¢!

    I don’t think the government will let it’s own property fail, do you?

    It jumped up to $1.00 last Feb 2011, so it has potential now.

    I think it is going to go far past this level - to $35 within 10 years.

    By betting $200 for 1000 shares I could lose my little investment.

    But, when it goes to $2 I make 10x my money, or $10,000.

    It was at $70 in 2008.

    When it goes to 10% of that amount or $7 that's 35x gain.

    For 1000 shares that's $35,000.

    I will use this benefit from FNMA to pay my mortgage down.

    Then I will have more house value than mortgage.

    That is the way life should be.

    It is definitely worth risking $200.

    Shirl

  • Report this Comment On January 25, 2012, at 3:44 PM, jhubbarth wrote:

    I'm with you on the FNMA scenario. Although I do believe it to be a gamble. There are no shortage of politicians in Washington targeting Fannie Mae, amongst others, as a useless relic with ties to the market crash and subsequent bailouts. The blame game is big business now in DC (see latest State of the Union address). Fannie is indeed an instrument of the government but if any real change happens in Washington, Fannie may be done in. I'm betting that doesn't happen. There are literally hundreds of millions of Americans that need Fannie Mae and any sensible politician can see the damage it would cause to let it die. I'm with Shirl, I believe it's headed for a huge come back over the next 5 years. And I've got a lot more than $200 riding on it!!

  • Report this Comment On January 15, 2014, at 9:45 AM, jmaranhao wrote:

    How to beat the S&P 500 is by using the high growth value investing. Another good read: http://www.big5roireports.com/1/post/2014/01/how-to-beat-the...

  • Report this Comment On July 17, 2014, at 1:05 PM, DavidDavis wrote:

    I think, medical marijuana stocks will be increased. Colorado state has already proved it. They show fascinating results.

  • Report this Comment On July 18, 2014, at 5:59 AM, NinaSerentsia wrote:

    There are many posibilities, but mary jane stuff could be good only with totally legalization, so I put investments in Groupon or in Apple in spite on the fact it's overrated

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