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👉 Outperform the S&P: How Value Stocks Shine Brightest When Growth Fades 📈
👉 Metrics To Watch: Go Further Than Just The P/E Ratio 🔎
👉 Warren Buffett: 3 Pillars of Success ✅
👉 The Secret Weapon You Can’t Afford To Ignore ⚔
“There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.”
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Value Investing in a High-Growth Market
In the roaring bull market of 2025, growth stocks specifically those in AI as well as the tech behemoths, continue to steal the spotlight, pushing the market to new highs.
But there’s a new buzz word in town, and it’s “value stocks”. A contrarian investing strategy that searches for undervalued gems with large upsides and growth runways.
While growth stocks chase the hype, value stocks focus on fundamentals and offer stability and potential upside when markets finally slow down (and they will).
What is Value Investing
Value investing is most effective when buying companies trading below their intrinsic value.
Key sectors that have presented strong bargains lately include financials and industrials, which typically get overlooked in growth environments.
To spot these bargains, metrics like the price-to-earnings (P/E) ratio are important. The P/E ratio is not effective on its own, but rather as a method of comparison. When looking at the P/E ratio, make sure to compare it to other companies in the same industry as well as the market as a whole. Comparing the P/E of a tech stock to a financial stock is irrelevant.
P/E ratios present their own inherent problems, especially between trailing and forward-looking metrics.
A trialing P/E ratio is calculated using a company’s earnings over the past 12 months, which is considered the most objective because it’s based on actual, reported data. The only issue is that it’s backward-looking and may not accurately predict future performance.
On the other hand, a forward P/E ratio is based on nothing more than an educated guess. This “guess” is an analysts estimate of future earnings. The metric has become crucial for evaluating a company’s attractiveness on a forward-looking basis, but it’s still made on a best guess effort, which creates a lot of unpredictability.
Beyond the P/E ratio, other essential metrics include:
Price-to-Book (P/B) Ratio: This ratio compares a stock's market price to its book value, which represents the company's assets minus its liabilities. A P/B ratio less than 1 may indicate the stock is trading below its book value (undervalued). Book values tends to be more stable over time than earnings, so P/B ratios are often used as the basis for estimating value.
Enterprise Value to Cash Flow from Operations (EV/CFO): This metric provides a view of a company's value, including both its equity and debt. The ratio focuses on cash generated from business activities, which is usually more sustainable and reliable than earnings.
Price/Earnings-to-Growth (PEG) Ratio: The PEG ratio considers a company P/E in relation to its expected earnings growth. A PEG ratio below 1 can indicate an undervalued stock that also has strong growth potential, making it a powerful tool for finding "undervalued growth".
No one embodies the above ratios more than Warren Buffett, the Oracle of Omaha.
His strategy is simple: buy high-quality businesses with economic moats at reasonable prices. Then hold them forever.
He proved this strategy through Berkshire Hathaway, where he built a fortune by scooping up undervalued assets during dips, like his stake in Coca-Cola in the 80’s.
Buffett's investment strategy is based on the 3 pillars below:
High-Quality Businesses: Buffett looks for businesses with durable competitive advantages, referred to as an "economic moat," that protect the business from competitors.
Capable Management: Buffett believes that the quality of management is vital to the success of the business. He only invests in companies run by managers he trusts and understands, recognizing that a CEO's actions can have a large impact on an organization's long-term success.
A Sensible Price: No matter how good a business is, he doesn’t buy it for a higher price than what it’s valued at. The ability to wait patiently for a business you understand to become available at a price you like is one of the greatest advantages an investor can have.
Real World Examples of Value Stocks In Action
During the 2008 financial crisis and 2020 COVID crash, value-oriented stocks like Walmart $WMT ( ▼ 0.26% ) outperformed the S&P 500, delivering positive returns while the market tanked.
Data shows that value stocks typically beat benchmarks in recessions, with average outperformance in recoveries reaching as high as 24%. In the 2022 correction, value indices performed better than growth stocks, rebounding stronger as inflation eased.
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A Friendly Reminder
Over the past decade, growth stocks have seen an annualized compound return that has blow value stocks out of the water.
This period of growth has led to a wide view that value investing is irrelevant (it’s not).
When you really start to look into the numbers, this trend has been an anomaly. Value stocks recent performance is consistent with this long-term historical average, while growths recent returns are the outlier.
As markets correct, value investing isn't just smart, it's essential.
Here's a financial paradox I live by:
I refuse to buy a $4 bottle of water
But I'll drop $4,000 in the stock market on any given day
Anyone else?
— #THE DIVIDEND DOMINATOR (#@TheAlphaThought)
6:30 PM • Sep 3, 2025
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