Undervalued stocks with strong fundamentals can provide investors outperforming returns.
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If you could add the best value stocks for 2023 to your portfolio now, you stand to make strong returns over time, but identifying a good value stock can be tricky. You must differentiate between stocks that are priced below their true value and stocks that are cheap for a reason. That’s not always easy.
Read on for a look at the characteristics that can help you identify good value stocks, plus nine stock picks that may fit your investment needs for 2023.
Value Stocks Vs. Growth Stocks
Most stocks fall into one of two buckets—growth stocks or value stocks. Growth stocks are poised to appreciate faster than the market. These can be companies in younger, evolving industries, companies with clear competitive advantages in fast-growing markets, and companies with new and disruptive technologies. Growth stocks are exciting, in a “next big thing” kind of way.
By comparison, value stocks are fairly boring. They don’t have steep growth trajectories and they don’t operate in up-and-coming industries. They are often mature companies that have fallen out of favor with investors temporarily. As a result, the stock price doesn’t fully reflect the company’s value.
There are metrics and data points that can help you identify good value stocks. Favorites include low price-to-earnings (P/E) and price-to-book (P/B) ratios relative to peers and to a stock’s own trading history. Good value stocks should also have manageable debt levels. A demonstrated commitment to increasing shareholder value—via share repurchases and competitive dividends—is also a plus. Those initiatives are usually supported by a long track record of stable growth in earnings and cash flow.
The high-level goal of value investing is to buy stocks for less than they’re worth. Do this right and you’ll generate gains over time as the market realizes the stock’s true value.
Value stocks trounced growth stocks in 2022. Prior cycles of value outperformance lasted for nearly five years. Forbes’ investment team recently released the names of their top mispriced, undervalued stocks in this exclusive report, 7 Best Stocks To Buy for 2023. Click here to download it now and capture the most overlooked opportunities before it’s too late .
There’s an important caveat here, though. The repricing process can sometimes take years. Value investing as a slow-and-steady, long-term approach to wealth creation. It’s not a get-rich-quick scheme.
The table below outlines nine dividend stocks with price-to-book ratios of 1 or less. As a reminder, price-to-book ratio is the company’s market capitalization per share divided by its book value per share. Book value is total tangible assets less total debt—basically, the cash available to shareholders if the company were liquidated.
A P/B ratio below 1 means the company’s stock price is less than its net assets per share.
FNB (FNB) is a financial services company based in Philadelphia. The company operates 340 bank branches in Washington, D.C. and seven states. Lines of business include commercial banking, insurance, consumer banking and wealth management.
In the third quarter of 2022, FNB reported revenue of $380 million and record diluted eps of $0.38. The strong quarter resulted in part from year-over-year loan growth of 15% and year-over-year deposit growth of 9%.
Notably, FNB has an aggressive acquisition strategy and a track record of successful integrations. Those growth efforts should continue to benefit shareholders going forward.
Honda Motor (HMC) manufactures and distributes cars, motorcycles, power generators, lawn mowers and outboard engines around the world.
One criticism from investors is that Honda has a less complete vehicle line-up relative to competitors. Specifically, Honda doesn’t have a full-sized truck or a large SUV. This leaves Honda exposed to market share losses if consumer preferences shift more towards those larger vehicles.
Still, the automaker has other qualities that could be advantageous long term. For one, Honda has a reputation for quality, especially in fuel-efficient cars. The leadership team is also good at streamlining. The company’s current cost initiative involves reducing the trim and option choices by 66% between 2018 and 2025.
At the same time, Honda is also pursuing a long-term goal to achieve 100% global zero emission vehicle line-up by 2040. In the meantime, shareholders are somewhat protected by Honda’s very low P/B ratio and strong dividend yield.
ING Groep (ING) is a Netherlands-based bank with 38 million customers across 40 countries. Those customers include consumers, businesses and financial institutions. The bank has dominant market share in the Netherlands and Belgium plus a very profitable digital banking operation in Germany.
ING’s strength in retail deposits in these markets is a competitive advantage—one that provides low-cost capital. The bank also has a demonstrated ability to manage its credit costs better than peers, according to Morningstar.
ING is well-positioned to absorb tough circumstances without major disruption. One example is a recent moratorium on mortgages mandated by the Polish government. In the third quarter of 2022, that moratorium had a EUR 343 million revenue impact for ING. Even so, the bank reported EUR 979 billion in net income.
When ING announced those results, the company also announced a EUR 1.5 billion share buyback program. Between November and December of 2022, the bank repurchased EUR 1.2 billion of its own stock. The remaining EUR 297 million authorized will be returned to shareholders in cash in January.
Value stocks trounced growth stocks in 2022. Prior cycles of value outperformance lasted for nearly five years. Forbes’ investment team recently released the names of their top mispriced, undervalued stocks in this exclusive report, 7 Best Stocks To Buy for 2023. Click here to download it now and capture the most overlooked opportunities before it’s too late .
Jefferies Financial (JEF) is a New-York-based, diversified investment bank. The company’s core service set includes investment banking and advisory services on mergers, acquisitions and restructuring, plus merchant banking and wealth management. Jefferies also owns an online platform for foreign exchange trading, a real estate company and a vehicle finance unit among other things.
Jefferies’ stock price dropped by 14% between January, 2022 and the end of 2022. The bank is facing some headwinds due to rising interest rates and weak financial markets. Those trends generally reduce demand for Jefferies’ key services around debt financing, IPOs and mergers.
Even so, billionaire value investor Warren Buffett bought roughly 430,000 shares of Jefferies in the third quarter of 2022. Buffett is known for seeing long-term potential where others do not. He may like the longevity of the company’s leadership team, led by longtime CEO Richard Handler.
Jefferies’ low P/B ratio and strong dividend yield are also positives for any value-minded investor.
KB Home (KBH) builds and sells homes throughout the U.S. The company also sells insurance and provides title services.
Demand for new homes remain strong in the long run.
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2022 was a challenging year for homebuilders. Rising mortgage rates, higher construction costs and supply chain constraints limited overall homebuilding activity. Still, KB Home increased its third quarter revenues 26% and its diluted earnings per share 79% vs. the prior year.
While KB’s backlog grew 9% to $5.26 billion in the third quarter, net orders and net order value declined significantly vs. the prior-year quarter—reflecting temporarily soft demand for new homes.
KB Home has scale, access to capital and a healthy balance sheet to manage through difficult markets (and thrive in better times). Going forward, shareholders should benefit from ongoing share buybacks and a good dividend yield.
Owl Rock Capital (ORCC) is a finance company that provides debt financing to private, mid-sized U.S. companies. Notably, the company’s loan portfolio consists primarily of senior, secured loans with floating interest rates. The portfolio is well-diversified by industry and geography.
The quality of Owl Rock’s loan portfolio is almost as attractive as the company’s habit of returning value to shareholders. In the third quarter of 2022, Owl Rock raised its regular quarterly dividend by $0.02, announced a supplemental dividend of $0.03 per share and announced a $150 million stock repurchase program.
The company also continues to grow its loan portfolio through mergers and acquisitions.
Radian Group (RDN) provides private mortgage insurance and other credit-related services to mortgage originators, banks and credit unions.
In the third quarter of 2022, Radian reported a 36% net income increase and a 44% increase in diluted net income per share. The company also grew its primary mortgage in force portfolio by 7% year-over-year. This is Radian’s main revenue driver.
The company also has a history of consensus-beating profitability. MarketBeat reports that Radian announced earnings per share beat analysts’ estimates in eight of the last nine quarters—despite challenging conditions in the mortgage industry.
Radian maintains excellent liquidity, which supports share buybacks and shareholder dividends. In the third quarter, the company repurchased 19.5 million shares or 11.1% of total shares outstanding. Radian also pays a quarterly dividend yielding 4.2%.
Starwood Property (STWD) is a mortgage REIT that operates through four business segments. The commercial lending group funds first mortgages, bridge loans, mezzanine loans, subordinate debt, preferred equity and conduit first mortgage loans. The property group invests in real estate. Infrastructure finance originates, underwrites and syndicates financing for the power, energy and infrastructure sectors. And the investing and servicing segment underwrites, acquires and services commercial debt and invests in non-performing real estate loans.
Starwood has a large, diversified portfolio, lots of liquidity and $1.6 billion in unrealized gains on owned property. The company historically has shown discipline with respect to capital costs and structure. A conservative balance sheet alongside the diverse business operations gives Starwood a flexibility other REITs may not have.
Wells Fargo (WFC) is a California-based bank that offers banking, lending and wealth management services to consumers, businesses, governments and institutions.
The headline for Wells Fargo right now is the bank’s ongoing resolution of regulatory issues related to past bad behavior. Amid a series of consumer abuses and compliance violations, the Federal Reserve imposed an asset cap. That cap, which limits the bank’s ability to grow its loan portfolio, will remain in place until Wells proves it has appropriate internal compliance processes in place.
Wells has also been negotiating with the Consumer Financial Protection Bureau (CFPB) to settle complaints against its consumer bank. In December 2022, Wells agreed to pay $1.7 billion in penalties plus $2 billion customer restitution. Wells had reserves in place for a CFPB settlement, but not this much.
There is good news here, however. The settlement marks progress on Wells Fargo’s extensive regulatory issues. It also shows leadership’s commitment to closing out the remaining issues. Most importantly, the bank has the resources to fund these payouts without affecting its shareholder dividend.
If Wells Fargo can temper its compliance-related spending in 2023 and beyond, that creates room for profitability going forward.
Good Companies Prevail
Promising value stocks tend to be hampered by temporary issues—which is why they’re undervalued. Fortunately, good companies can resolve temporary problems, even big ones. But it takes a disciplined leadership team, predictable and growing cash flow and a strong balance sheet.
Seek out those qualities for your portfolio, have patience for the turnaround and you’re on your way to becoming a successful value investor.
7 Best Stocks to Buy For 2023
Many investors don’t realize it but value stocks beat growth stocks by 4% on average since 1927. They’re not flashy and don’t grab headlines, but they can be the silent drivers of real wealth-building portfolios.
If you’re looking to add mispriced, undervalued stocks to your investments, the Forbes’ investment team recently released the names of their top selections in this exclusive report, 7 Best Stocks To Buy for 2023. Click here to download it now and capture the most overlooked opportunities before it’s too late .
