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 such as Joseph Milano of the T. Rowe Price New America Growth (PRWAX) fund 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. Shares of Immucor (Nasdaq: BLUD  ) sold for 34 times earnings in 1998. Investors longing for a below-market P/E would have missed out on the 28-bagger to come.

The very best value stocks
Stock market myth says that only value investors zig as others zag. Hogwash. Milano owns shares of Adobe (Nasdaq: ADBE  ) , Cisco (Nasdaq: CSCO  ) , Quanta Services (NYSE: PWR  ) , and Whole Foods Market (Nasdaq: WFMI  ) , 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. Ten stocks in David's Motley Fool Rule Breakers portfolio have at least doubled, including Baidu (Nasdaq: BIDU  ) . 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 on 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. Baidu is a Rule Breakers recommendation. Whole Foods is a Stock Advisor selection. T. Rowe Price New America Growth is a Champion Funds pick. The Motley Fool's disclosure policy is a rebel on Wall Street.


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