Value investing is a time-honored and battle-tested investing discipline that focuses on finding and investing in stocks that are underappreciated and thus undervalued by other investors and the market as a whole. These stocks typically look inexpensive based on common valuation metrics such as price-to-earnings or EV-to-EBITDA ratios.
Stocks can be undervalued for any number of reasons. The market may not appreciate their potential, perhaps overlooking the value of a new business segment or growth driver or believing that current results are a passing fad as opposed to the beginning of a long-term trend.
Value stocks are often mature companies and often (but not always) pay dividends or return capital to shareholders via share buybacks. Value investing doesn't have to be boring -- famed value investors like Warren Buffett, Peter Lynch, and Benjamin Graham rank among the greatest investors of all time, and produced spectacular results for investors throughout their careers.
Here are three of the top value stocks to consider buying today.
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1. Crocs
NASDAQ: CROX
Key Data Points
Footwear-maker Crocs (CROX +3.54%) is trading at a low price-to-earnings (P/E) multiple of just four. The stock was one of the big winners of the past two years, rising from as low as about $11 in March 2020 to over $180 last November.
But after this run, the stock is now down 63% year-to-date, and finds itself in deep value territory. It seems many investors believe Crocs was just a "work from home" winner as people bought its comfortable, colorful clogs to wear around the house or neighborhood when they didn't have to go into work.
But this takeaway seems shortsighted. Crocs has been around since 2002, so it isn't just a flash in the pan. Furthermore, the company's products have remained popular well into 2022. Its classic clog is currently the number-one-selling product for men's footwear on Amazon (AMZN +0.26%), and products from Crocs -- as well as recently acquired HeyDude -- litter the top-10 list.
Revenue increased by 44% year-over-year in the last quarter, so Crocs is outperforming its comps from 2021, which dispels the notion that it was just a work-from-home beneficiary. Management's goal is to grow the Crocs brand to $5 billion in revenue by 2026, which would be much larger than the stock's current market cap.
It is rare to find a company growing like Crocs at such a cheap valuation, making it a top value stock to buy today.
2. Stellantis
NYSE: STLA
Key Data Points
When looking at price-to-earnings multiples in searching for value stocks, it doesn't get much cheaper than Stellantis (STLA +6.01%). The company came into its current form in early 2021 when Fiat Chrysler (parent company of Jeep, Dodge, Chrysler, and more) merged with PSA Group (parent of Peugeot, Opel, and others) to create a new global auto giant that is now the world's fourth-largest automaker by volume.
The company plans on doubling revenue by 2030, and says it has plenty of synergies to wring out of the merger. But investors don't seem ready to give the company much credit yet -- shares trade at a bargain-bin multiple of just three times next year's earnings, one of the lowest that investors will see in the market today.
It seems that investors are assigning a low valuation to Stellantis because of factors outside of its control, like the semiconductor shortage, rising inflation, and the war in Europe. With such a cheap valuation, there is a margin of safety here and not a lot has to go right for the multiple to increase. The stock also pays a compelling dividend, which currently yields 8.5%. Note that this dividend is paid on an annual basis and is dependent on the company's business results, so it is subject to change from year to year.
The company's Ram pickup, Jeep Wrangler, and Jeep Grand Cherokee all ranked among the top 25 best-selling vehicles in the United States last year, with the Ram pickup taking second place on the list. Stellantis is investing heavily into electrification and battery technology, and will start rolling out electric versions of some of its most popular vehicles in 2023 and 2024.
In terms of value stocks, you can't get much cheaper than Stellantis, and the company's future looks too compelling for it to remain in the bargain bin for long.
3. Ally Financial
NYSE: ALLY
Key Data Points
Ally Financial (ALLY +8.44%), a new addition to Warren Buffet's portfolio, is another stock trading at a low-single-digit earnings multiple -- just four times earnings. Furthermore, Ally trades at a price-to-book ratio of just 0.8, meaning it is being valued at less than the value of its assets if it were liquidated.
The company pays out a generous dividend that yields 3.6%, and also places a priority on returning capital to shareholders via share buybacks. Ally enacted a $2 billion share repurchase authorization for 2022, which means that it could buy back up to about 20% of its current market capitalization.
Ally started life as the finance arm of General Motors (GM +4.11%), but later branched off on its own. Thanks to these roots, the company still has a large presence in auto lending, but has since rapidly expanded into other business segments like banking, brokerage, mortgages, and credit cards. Ally has rapidly expanded its presence in online banking and has doubled its customer count since 2016.
As an online bank, Ally has been able to generate higher returns on equity than legacy banks with significant brick and mortar operations. Overall, Ally looks like a steady, growing business with a nice dividend and a sizable share buyback plan, all for a rock-bottom valuation.
Looking ahead
In a market where some tech stocks trade at triple-digit P/E multiples, even after the current sell-off, there is an appeal to finding solid stocks trading at just three or four times earnings. These three value stocks all low earnings multiples, and all offer investors margins of safety and the chance to invest in a compelling business at an undemanding price. All three look like solid buys for long-term, value-oriented investors.
