Our Thoughts on Value Investing

What is value investing? Value investing in a nutshell is simply to buy stocks when they are undervalued.

Despite the simplicity of the above sentence, the investment industry has been incorrectly classifying value and growth stocks based on a set of rigid criteria.

True value investing, as made popular by Warren Buffett, isn’t simply buying stocks that have low price-to-earnings ratios, low price-to-book ratios, or high dividend yields. A stock can appear to be “cheap”, but there could be good reasons why it’s inexpensive. In other words, a “cheap” looking stock could be overvalued based on its potential future prospects.

Conversely, high-priced stocks may actually be undervalued, because accounting principles don’t capture the true intrinsic value of the business. As an example, there are a few companies that reinvest large amounts of capital for the long-term, and these investments are treated as expenses under accounting principles. This clouds the true profitability of the company’s current core businesses.

Finally, ratings companies such as Morningstar, are very slow to update their classifications of value and growth stocks. Stock prices often move significantly over 1-2 years and should be classified as value at a certain price, and growth at another price. As an example, Netflix was as high as $700 in 2021, when it fell close to $200 in 2022, we were buying it. In 2021, it was correctly classified as a growth stock. Later, at our purchase prices, Morningstar should have classified it as a value stock, but they didn’t.

To sum it up, if the stock price is lower than the intrinsic value of the company, then it is undervalued. These undervalued stocks are what value investors look for, and that’s where WealthArch Investment Services thrives.

For even more information, see our blog post about Value Stocks vs. Growth Stocks.

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