Investing in Value Stocks

Value investors want to buy stocks for less than they're worth. If you could buy $100 bills for $80, wouldn't you do so as often as possible?

Even high-quality companies with strong fundamentals see share prices fall when the overall stock market drops. Plus, value stock companies tend to be well established and less volatile than growth stock companies.

Here's an overview of value stocks, including some excellent beginner-friendly value stocks and key concepts and metrics that value investors should know.

Top value stocks

3 best value stocks for beginners

Value stocks are publicly traded companies trading for cheap valuations relative to their earnings and long-term growth potential. Let's look at three excellent value stocks: Berkshire Hathaway (BRK.A 1.3%) (BRK.B 1.17%), Target (TGT 1.33%), and General Motors (GM -0.1%). Then, we'll dive into some metrics that can help you find the best value stock investments.

1. Berkshire Hathaway

Since CEO Warren Buffett took over in 1964, Berkshire Hathaway has grown into a conglomerate with more than 60 wholly owned businesses and a massive stock portfolio with over four dozen different positions.

Berkshire has steadily increased its book value and earnings power over time. It operates under the same business model that has led the stock to almost double the annualized return of the S&P 500 index for more than 55 years.

Buffett and his late business partner, Charlie Munger, kept large cash reserves to deploy when they spotted an opportunity as part of their value investing strategy. They're also content to own companies outright that can generate profit and don't need to grow, using those profits to fund stock purchases and new acquisitions.

One sign that even value stocks are getting expensive is that Berkshire was a net seller of stocks in 2024, signaling that Buffett believes the market is overvalued. Stocking up on dry powder is another smart strategy of value investors like Buffett, and it will likely pay off if stocks continue to pull back as they did to start 2025.

2. Target

Target is one of the largest retailers in the U.S., one of only a handful of national multi-category retailers, along with Walmart (WMT 1.68%), Costco (COST 1.29%), and Amazon (AMZN 0.09%). The company has been a steady engine of growth throughout most of its history.

However, Target has struggled in recent years due to weak consumer discretionary spending, inventory fluctuations, and internal issues like employee theft. As a result, the stock traded at a price-to-earnings (P/E) ratio of 12 as of April 2025.

That's a great price to pay for a retailer with differentiated positioning and one that's still opening new stores. Target is also a Dividend King with a dividend yield of 4%, offering a reward to income investors.

Target still has a long-term growth opportunity in retail, both through new stores and e-commerce. This includes its range of same-day fulfillment options, such as curbside pickup, known as Drive Up, and same-day delivery through Shipt.

Target stock has fallen for a number of reasons, but its challenges are fixable. The company expects to grow sales by 15% over the next five years, and at its current valuation, the stock looks like an easy winner if it can accomplish that goal.

3. General Motors

Valuation is arguably the most important test of a value stock, as a value investor is ultimately looking to buy a stock worth more than its price. As Warren Buffett has said, "Price is what you pay. Value is what you get."

On that account, General Motors (GM) is one of the best-value stocks around. GM has been a leading player in the auto industry for a century and continues to be one of the world's largest automakers.

Based on its adjusted earnings per share, GM currently trades at a P/E ratio of less than 5, a reflection of investors' low growth expectations. However, GM has continued to deliver solid results, and it should benefit from slowing growth in electric vehicles (EVs), even though it has a number of them on the market.

The company recently announced that it would end its Cruise autonomous vehicle business, which had cost billions of dollars. Investors responded positively to the move because it will help GM's cash flow. Concerns about tariffs have also pushed the stock lower, but it's unclear how the import taxes will affect the business, as higher car prices could be good for GM, at least for its American-made inventory.

As a value stock, GM is also able to aggressively repurchase stock to lift its earnings per share (EPS), which is one way value stocks can grow profits even without growing revenue.

What are they?

What are value stocks?

Most stocks are classified as either value stocks or growth stocks. Generally, a value stock trades for a lower price than its financial performance and fundamentals suggest it's worth. A growth stock is a company expected to deliver above-average returns compared to its industry peers or the overall stock market.

Some stocks have both attributes or fit in with average valuations or growth rates, so whether they are value stocks depends on the number of pertinent characteristics they possess. Value stocks generally have the following characteristics:

• They are typically mature businesses.
• They have steady (but not spectacular) growth rates.
• They report relatively stable revenues and earnings.
• Most value stocks pay dividends, although this isn't a set-in-stone rule.

Some stocks easily fit into one category or the other. For example, package delivery giant FedEx (FDX -1.38%) is clearly a value stock that's fallen out of favor with Wall Street due to some short-term challenges. Conversely, fast-moving Tesla (TSLA 1.52%) is an obvious example of a growth stock.

On the other hand, some stocks can fit into either category. For example, there's a case to be made either way for tech giants Apple (AAPL -0.3%) and Microsoft (MSFT -0.69%), though their valuations may be a little too stretched currently to be seen as value plays.

Regardless of a stock's category, economic downturns present an opportunity for a value investor. The goal of value investing is to scoop up shares at a discount, and the best time to do so is when the entire stock market is on sale.

Finding them

How to find value stocks

The point of value investing is to find companies trading at a discount to their intrinsic value, with the idea that they'll likely outperform the overall stock market over time. However, finding undervalued stocks is easier said than done. That said, here are three of the best metrics to keep in your toolkit as you search for a bargain:

• P/E ratio: This is the best-known stock valuation metric -- and for good reason. The P/E ratio can be a very useful tool for comparing the valuations of companies in the same industry. To calculate it, simply divide a company's price per share by its past 12 months of earnings per share.
• Price-to-earnings-to-growth (PEG) ratio: This is similar to the P/E ratio, but the PEG ratio adjusts to level the playing field between companies that might be growing at slightly different rates. By dividing a company's P/E ratio by its annualized earnings growth rate, you get a more apples-to-apples comparison between different businesses.
• Price-to-book value (P/B) ratio: Think of the book value as what would theoretically be left if a company stopped operations and sold all its assets. Calculating a company's share price as a multiple of its book value can help identify undervalued opportunities, and many value investors specifically look for opportunities to buy stocks trading for less than their book value.

Value investors

Value investors

Long-term investors can generally be classified into one of three groups:

• Value investors try to find stocks trading for less than their intrinsic value by applying fundamental analysis.
• Growth investors try to find stocks with the best long-term growth potential relative to their current valuations.
• Investors who take a blended approach do a little of each.

Buffett is perhaps the best-known value investor of all time. From the time he took control of Berkshire Hathaway in 1964 to the end of 2024, the S&P 500 generated a total return of 31,223%. Berkshire's total return during the same period has been a staggering 5,502,284% (that's not a typo).

Although he isn't as well-known as Buffett, Benjamin Graham is often referred to as the father of modern value investing. His books, The Intelligent Investor and Securities Analysis, are must-reads for serious value investors. Graham was also Buffett's mentor.

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Their power

Don't underestimate the power of value stocks

While they might not be quite as thrilling as their growth stock counterparts, it's important to realize that value stocks can have just as much long-term potential as growth stocks, if not more. After all, a $1,000 investment in Berkshire Hathaway at the beginning of 1965 would be worth more than $28 million today. Finding companies that trade for less than they are truly worth is a time-tested investment style that can pay off tremendously.

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