How to Start Value Investing

This is the Value Investor podcast with Tracy Rinek, All Things Value All the Time. Welcome back value investors, both new and old. So how do you start value investing? For most of us, it's not like a light switch is on.

Maybe you read a book about value investing or you were like Warren Buffett where he did, he read a book, he read the Intelligent Investor at age 19. Prior to that, he said he was trading, he was buying the chart and momentum trading because he didn't know any better. Why would he? But then the Intelligent Investor by Ben Graham came out, he read it all in one sitting, the light went on and he's been a value investor ever since.

But for the rest of us, I feel like it's kind of a slow realization that we might be a value investor. So it might be that a company like Snowflake goes IPO, it surges up to $400 a share and it's worth like $100 billion market cap. You look at it and you look at the earnings and you're like, why? Making almost nothing.

It's expected to make just $0.13 a share here in 2022. It made $0.02 last year. Share price has come way down off that $400 high now in the sell off that we're having on the gross stocks. But you might have been looking at Snowflake back in the day in 2021 thinking that's crazy, that's not what I want to do.

And that's a sign. That's when you know when you start caring about how much you are paying for a stock, not just the price of the share. So not just because snowflake was $400 a share, but how much you were paying to get either negative earnings or just two cents that it made per share last year. That's when you know that value investing may be the thing for you.

Also, I think value investors ultimately like to get a deal. We like to find things on sale. It's just part of our personality. So when you look at all the gross stocks, none of them have been on sale until last year, 2021 and now here in 2022.

But for the decade before, pretty much you weren't getting any of those at real good deals, except maybe in the pandemic sell off in 2020, if you move fast enough and got some shares then. But otherwise, most of those never really went on sale, not much dirt cheapness there. And so for those of us who do like to get things on sale in general, not just stocks, but everything, that's when value investing is the thing for us to do. So what do you do if you're new to value investing?

So you figured out, hey, I might be a value investor now. And it's okay to have been investing in gross stocks over the last two years because those were the hot things. I invested in gross stocks in 1998, 1999 because that's when I started investing really in a big way. E-trade launched.

We can invest on our computers back in the day. That was new. The price we paid for trades came way down. It was like 1999 and then it was like 999.

Then it went even cheaper than that. So we could buy and sell fairly cheaply on our computers. That was all new. But at that time, the gross stocks were what was in and I didn't know any better really.

I was a new investor. So that's what I buy. It wasn't until the dot-com bust and a lot of stocks sold off. And maybe that first four or five years of the new decade where I started reading more, I started following what Warren Buffett was doing.

I liked the philosophy of value investing. And then I basically did switch over to value investing. But then what did I do? What do you do when you decide, hey, I am a value investor.

How does it work? How do I find individual value stocks and not necessarily the ETFs? I can easily Google value ETFs and figure out what those are. But how do I find the value stocks?

Now remember, value stocks are companies that are mostly being ignored by Wall Street. So that usually means they're cheap on a valuation basis. What does that mean? That means either on earnings, sales, maybe free cash flow, maybe a price to book metric, or you can use a combination of all these fundamentals or you could just use one.

You've run basic screens on this podcast that's just price to earnings or price to sales, or even just the peg ratio. So all this may seem complicated, right? Because I know what you're thinking. If you're new, you're like, oh, the P.E., the peg, all those weird ratios.

I still don't know what to do. I want someone to just tell me. So why not run a predetermined screen for value stocks? That's what I do a lot.

And I've been doing this for a long time. So Zax has screening tools right on its site on zax.com. Go to zax.com. It's Z-A-C-K-S.

It's with a Z. So Z-A-C-K-S. And you'll see a button up at the top. It just says screening.

So go to that, click on the stock screening, and then it'll take you to a stock screen. So you're like looking at it going, now what do I do? You can create your own screens, of course, but because you're new and we're trying to stick with just the basics here, why not do one of the predefined value screens? So there is a little button at the top of our screening tool that just says predefined.

So click on that. And then it'll take you to a screen that says at the bottom, there's a button for basic or premium. So the premium, you do have to subscribe to get that. And that's zax premium.

If you're a subscriber to zax premium, you can get all of our more advanced predefined screens. Some of them are really interesting, not just in value, but in growth and momentum and whatever else is on there. And you also get the zax rank in those screens or the style scores. So both of those metrics are included on our predefined screens because those are items that only we have, right?

So if you're subscribing to it, we're giving you something that only we have. But if you click on just that basic button, that's free. Anybody can use that. So if you're new, why not just start with that free screen?

It'll give you some idea of what types of things are included in a value screen and how many value stocks are coming up in it, what those stocks are. And again, it's free. So why not use it? So there's only one free value screen on it when you click that basic button.

There's some other ones on there. And it's definitely worth looking at all the ones that are on that free screening button on the basics. So just click on that. You get all the free ones, not just value, but there is only one free value screen on there.

So that's the basic value with growth. Now, remember, this does not include this X rank because that's in the premium screens, but it's still this particular screen still does have an earnings component to it without actually having the rank. So it says it screens for stocks with attractive valuations, including PE, PEG and price to sales while having positive earnings growth history and future expected growth. So I like both those things.

Positive earnings growth history means it's been growing its earnings for the past couple of years. And then it's also going to look at future earnings growth. And I like that aspect too, because I want to buy a company that's continuing to grow, even if it's cheap, right? That's what I've said is in the PEG ratio, it's always a powerful combination, both value with the growth.

So this screen does include PEGs. So that's why we're going to get future expected growth, combining with that PEG ratio too. So this sounds pretty good, right? So even if you don't know anything of what I just said, if you have no clue what PE, PEG, price to sales, any of that stuff means even earnings growth, you don't know, you're confused, you can still go and run this basic screen.

And it is going to give you value stacks. So I press the screen button, it has run screen. So it also has load screen by the way too. If you load the screen, it actually tells you kind of what's in it.

So you can do that and just look at it, what's in it, and then you can also run the screen from there, or you can just press the run screen button because who cares what's in it? I know this is value, so let's just see what's in it. So running the screen, it did give me 41 stacks, which I was like, wow, that's a lot, even without this X rank, I still felt 41 stocks was a lot. So what are the metrics in this?

So it has a little bit wider metrics than some of the screens I've run in the past for the podcast, including price to sales here is at 1.5. So I usually screen for one or under because remember price to sales means if it's one or under, it means you're getting the sales on sale. So if your price to sales ratio is 0.7, that means we are paying $0.70 for every dollar of the sales. So if it's 1.3, it means we're paying $1.30 for every dollar of sales.

That's not bad. It's not a bad ratio to be just above the one, but it's not as cheap. I'm not getting them on sale the same way as if it's under one. They're trying to be more inclusive here.

So they're giving us a little bit wider parameters. Also the PE is under 20 in the screen, but most of the stocks actually were much, much cheaper. So that's supposed to give us a wider parameter too, but right now there's plenty of stocks with the low PEs. So that didn't even really help much.

The peg is under one and it also screens for price to book, which wasn't really listed in that description on the page, but it does have price to book here too, also under two, which is actually a little tighter. I usually screen for under three, but this one was under two. So that's also included. I'm not really going to mention the price to book.

I'm going to mention the other factors because I feel like those are more key here than the price to book for this particular podcast. So we got the 41 stocks and then what do we do? Well, now it's up to you to look through that list and 41 is pretty big, right? So I did pull out five stocks that just want to talk about why they're cheap, why they're on this list and what the shares are doing this year.

Some of them are ones we've talked about in the past. I tried to include a couple that maybe we haven't really talked about, but a lot of our old friends are on this list still, even though it does not have the rank because that cheap ness factor is still there even without the rank. So keep that in mind. And these are in a lot of different industries, no banks and probably because the peg or price to sale, something else is not to get banks on here.

So keep that in mind too, when you're running these particular screens, it may exclude a certain sector for various reasons. And in this case, it did look like mostly the banks were excluded here. So let's dive right in and see what some of these stocks are on this very basic value screen with the growth. So the first one out of the gate, no one should be surprised, is energy.

There were a couple of energy names, not a lot on this list, but there were a couple. So I chose BP on this list because we haven't talked about that much. It used to be called British Petroleum, but now just BP. ticker is BP.

And they are dirt cheap here. PE is just 4.8. Peg ratio is 0.9. Price to sales is 0.6.

Year to date, these shares are up 22.8%. That's pricing. Almost all the energy stacks are up year to date. They're all in the green.

This is the only sector that's doing well here in 2022. Well, almost the only sector. A few other commodities also doing okay. It's BP up 22.8%, still paying a very good dividend.

The screen did not screen for that, but it is paying a dividend yielding 4%. So BP is big oil. They are global, global big oil. And so if you don't like any of the oils or that side of energy, then you can just ignore this one.

But for those of you who are still looking around for cheap energy stocks, BP is definitely one of them. And watch those earnings because they are still on the rise here with both crude and natural gas still rallying here in 2022. So that's BP ticker BP. The second one is one of the home builders.

So a lot of the home builders made this list. We shouldn't be surprised by this either. We know they've been dirt cheap for months now. So the one that I picked out was just DR Horton, DHI.

Is the ticker there? We've talked about it year to date. These shares are down 31%. So they're cheaper than ever.

They were down nearly 40% right before we had this little mini rally in May here in May of 2022. So they're up a little bit off that, but still down 31%. They're all cheap. PES 4.3, PEGAS 0.5, price of sales is 0.9.

It does pay dividend yielding 1.2% now. So why are all the home builders cheap? Because the street believes this is peak earnings that with those rates still expected to continue to rise, that home builders will see a slowing in sales, that they will see a decline in margins. They will not be able to keep raising prices.

And we've already heard that from toll brothers. Toll brothers just said that they are only able to raise on about 15% of their communities now. And the others, they're not raising. They're not offering much incentives yet either.

But if the underlying costs remain elevated or continue to rise, then that's when their margins are going to start to be squeezed because they can no longer raise the prices to cover that. So everyone on the street believes home builders got a ways to go down still. And those PES, the earnings are going to go down and the PES ratio will rise. So that makes a little bit of a value trap scenario.

But will it be? We don't know. Home sales have slowed with the rising rates already. And the home builders that have talked about it are seeing some slowing.

They're claiming it's seasonal because people have weddings now, graduations, things like that. And they don't have time to go out and buy a house basically because they're doing other stuff. They're going to go on their summer vacations. They're going to go up to the lake and all that.

And they don't want to be bothered with buying a house. And that may be true. We'll see. But or that could be a result of the higher mortgage rates, which are already being baked into the system as well.

But housing was red hot. The strongest we've seen in 15 years, it's not surprising it's going to slow, but keep that in mind. If you're a new value investor, there is a reason sometimes some of the value stocks are trading with PES under five. So make sure you look at those earnings estimates.

This year, home builders are holding up because they've already got the orders. All they have to do is complete. And so far, the buyers are closing on these properties. But going forward is where the real uncertainty lies.

So keep that in mind with any of the home builders. But this one is DR Horton ticker DHI. Then we've talked many times about the auto retailers. This is another group very similar to the home builders in that the street believes that they've had peak earnings.

I mean, I've said this many times. How many cars do people need? How many are buying the used cars? Are there any to buy out there?

Are there any new cars to buy? So all that should be depressing sales, except it's not. As we know, all these auto retailers had record first quarters. And the one that I picked out of this list was group one auto.

Group one auto ticker GPI. And they're in 17 states. That's where they have their new and used dealerships. And then they are in 35 towns in the UK.

So they have 147 dealerships in the US and 55 in the UK. And they also operate 46 collision centers as well. So they do do the parts. They have the collision centers, new and used automobiles, cross all makes and models, and they had record first quarter.

Now year to date, these shares are down 8.4%. So not as badly as the home builders. But still a little weak here. But of course, just like home builders dirt cheap.

So group one PE is 4.2. Its peg is 0.3. Price to sales ratio is just 0.2. All of these things, like so low.

But the street believes that last year was the best it could be. And this year is nowhere to go but down. But does it? I don't know.

We'll see. They also group one announced a stock repurchase program. They already had one, but now this is raising it. So it's going to be 250 million on the stock repurchase.

They did raise their dividend by a penny or 2.8%. It's yielding 0.8% right now. So not quite 1% on the dividend with them. But I like the auto retailers here.

But I wish they would sell off some more. If the street really doesn't believe, they will fall more. Or they will fall on the first quarter where some of them start to say, hey, we're really seeing things slow dramatically. But will they?

There's a shortage of cars. So we're all kind of waiting to buy one on the sidelines. And the job market is good. There is no recession right now in June of 2022.

So those are all good conditions for auto purchases. So we'll see with any of these auto retailers. But this one, Group 1, auto, GPI. Then let's talk about Patrick Industries.

I haven't talked about them in a while. I had a look up as a reminder of what they do. I have mentioned them in the past. So the ticker is P as in Paul, A, T as in Tom, and K, P-A-T-K.

Patrick Industries. And on the website, they say they're a component solutions provider of products and building materials for RVs, marine, manufactured housing, and various industrial markets. So it's flipping off a light bulb if you've listened to these podcasts for a while. So they provide the components for the RV industry.

They are in Elkhart, Indiana, the headquarters of the RV industry. They're all down there. And this is another story of Wall Street saying, meh, the RVs are done now. Everybody bought one.

Baby Boomers, millennials, people were buying them to escape during the pandemic. They couldn't keep up with demand. They put a lot of inventory at the dealers now. But suddenly, sales are going to slow.

We're going to go in a recession. Nobody buys an RV in a recession. Gas prices are way up. We're not buying that either.

If gas prices are up, we're not buying the new boat. If it's on the marine side, none of this stuff. So we got to get out of this. And you to date, these shares are down 26%.

So they too are dirt cheap, PE of 4.7, peg of 0.7, price to sales of 0.3. And honestly, I did not go into this picking any out with any preconceived notions on PEs. And let me look for a second. I think all of these, oh my gosh, all the ones the first four are under five times on the PE.

And these were not unusual on this list of 41. So that's what I meant by that there's plenty of cheap stocks out there. Some of these may be value traps. Because once you get a PE level that low, the street is signaling something else is going on there.

Because everybody can see these, right? Everybody can screen for this. Why wouldn't I buy this with the PE of 4.7? Well, because they think it's going to slow down, they think that E is going to go down.

And this isn't really a deal here. But I don't know. We'll see. There's been a lot of the death of the RV stories over the years.

And baby boomers still retiring 10,000 a day for many more years still to come. And they have assets. They have a house that's gone up a lot in value. They have a stock portfolio that maybe has pulled back a little bit here, but should still be pretty good over all those years.

And so they do have buying power. And we'll see kind of what happens in the RV-ish industry. Patrick pays the dividends. So at least we're getting something to hang out, yielding 2.2%.

But this is one you might want to put on your watch list, because if it goes down even further, in a further sell off on the stock market, then we start to get those dividend yields up a bit. And it starts to become really cheap, where, yes, it makes sense to dive in. That's true of any of these, actually. So keep that in mind.

And then I'm going to wrap it up with a technology stack. I've mentioned this one, but it's been a while since I've talked about it. V-Shay Inter Technologies, yes, it's a tech stack. The SH, V is in Victor.

SS and SAM, H is in Harry, is the ticker. I used to own it in the ZACS Value Investor Profolio, but we did have to sell it when the semiconductors were sold off. So they are global manufacturer of semiconductors and passive electronic components. They are across all industries, but one of their big industries is automotive.

I like them a lot, because they're not out in California. They are in Pennsylvania. And so they're a little bit out of the loop as far as what the street perceives, who knows the company, the gossip, all that stuff. So that's why I've always liked them.

Year to date, down 6.9%. So they had been down almost as much as 20% in the bigger sell off, but they bounced off those lows now. So you might be able to get them even cheaper if you wait on the sidelines a little longer again. But now down 6.9 for the year.

But PE is 7.6, PEG is 0.3, price to sales is 0.9. They do pay a dividend, which is now yielding almost 2%. 1.96%. So that's not too bad to get a 2% dividend yield here with this kind of company like a semiconductor manufacturer.

So that's VCHA, inner technologies. I just call them VCHA, because it's easier, right? VCHVSH is the ticker. So like I said, all of these companies aren't very diverse industries.

So the cheapness of the stocks aren't necessarily just relegated to the home builders or the auto retailers. They're in a lot of different places, where mostly the street believes that peak earnings are over. But they believed it last year, too, especially with the auto retailers. And it turned out not to be true, because we had those record first quarters again with the auto retailers.

So will the street get it wrong all this year? We don't know. But this is what happens when you are a value investor. There's a lot of uncertainty.

You have to make bets that the street is making an opposite bet against you on. You kind of have to be a contrarian investor, because again, everyone can do these screens. Everyone knows how cheap these stocks are, at least in a PE and price to sales basis. And yet they're still staying mostly out of them with the exception of energy, because BP was up almost 23% this year.

But other than that, everybody else is selling most of these cheap stocks instead of buying. So as a value investor, remember to do a few things. So here's some tips. So you need to do your research.

I just gave you five stacks. You can run the screen for free on sex.com on the screening tool. And you can get 41 stacks. You can see what I just talked about.

But that doesn't really help you in your investing. It's just a starting point. So once you get the list of some stacks, then you need to do your research. So value investors aren't traders.

They are owners, and you own this business. So listen in on the conference calls, read the press releases, and the investor presentations. Basically anything you can get your hands on. And I hate to say this, but yes, even join StockTwits.

Follow your companies that are interested in and see what everybody's talking about on StockTwits. Some of the information is crazy and speculative. That's on there. But some will not be.

Some experts in industries follow certain companies on StockTwits and provide very sound information. Other people link to good information. I link to earnings charts a lot of times on there, or the price to consensus charts that show what earnings is looking at. So it's just another place to get some information.

And so I really think you need to get as much as you can on these companies. Now, the larger the company, the more likely that there will be information out there, including analysts reports and things even that you can get for free many times. But the smaller companies are less followed. So that's where it's even going to come more important for you as an investor to really do your homework.

So when Warren Buffett started investing, he used to order the annual reports directly from the companies. And he had a whole huge stack of them in his garage, apparently, because he never wanted to get rid of them, I think it was. And that was before computers. And the only way to get information on these companies was to order the annual reports or to actually attend the annual meeting, if you were a shareholder.

But now we have so much more information at our fingertips, including the conference calls. You can listen to them live or they're recorded. And you can just go on the websites of these companies and listen to them on the websites. That's a great source of information to see what is going on.

Here are the analyst questions. Here how management is managing the business. Because remember, again, you are an owner once you buy the stock. So get familiar with your industries.

Try to buy value stocks in areas that you do have an interest, that you do find interesting. So nobody says you have to buy an insurance company. If you think that's as boring as all heck, then don't buy one. Because right now, there's plenty of value stocks where you can pick and choose whatever you want in an industry that you like.

So there's a lot that you can do as a new value investor. But if all of that seems too complicated, there's nothing wrong with just buying the value ETFs. I'm not going to talk about them on this podcast because I have in the past. But I should probably do another podcast about the value ETFs.

Those are always available. It's easy to buy a basket. You once you figure out which ones you want to buy, it's easy to just go into your brokerage account and buy those. You don't have to listen in on any conference calls or do anything.

But if you want to buy the individual stocks, then you have to do more homework. But that can be fun too, right? Because again, you are an owner. You have something at stake in these companies.

There's lots of cheap stocks out there. You're going to have to be patient on some of these. As we've seen just on the five I've talked about here today, a lot of them four out of the five are down for the year. You might have bought thinking, oh, this is cheap.

It's at six times earnings and now it's down another 20% and it's down at trading at four times earnings. That's key to value investing is to be patient, have a strong stomach, and wait it out and maybe just dollar cost average while you're waiting. There's nothing wrong with dollar cost averaging. I do it and it's fun.

There's plenty of options out there for value investors right now. It is a good time to start being a value investor because growth is still somewhat struggling here. Value is leading several of the categories, including in energy. Keep that in mind and you have to start.

You just have to start somewhere. Go out, go out and run those screens. Other websites also have screens. It's not just SACs.com.

You can probably Google free value stock screens and see what comes up and get out there and take a look at what companies are on sale right now. Let's recap the stock tickers for this episode. We had BP, that's the energy company ticker BP. We had DR Horton, that's a home builder, DHI.

We had Group 1 Automotive, GPI. We had Patrick Industries in the RV area, P-A-T-K. Then in semiconductors, we had V-Shay, V as in Victor, S as in Sam, H as in Harry, V-S-H. As always, I'm going to be bringing you value stocks every week because it is fun right now and there's plenty of value out there.

I'm going to be covering some more tips on how to be a value investor, how to do the screens, what fundamentals you should be following. I have a couple books around here that are new out for value investors that I'm diving into over the summer. There's going to be a lot going on over the summer. Be sure to tune in.

You can get us on Apple Podcast. You can get us on Spotify. You can get us on Amazon Music. Be sure to get my other podcast, The Zacks Market Edge, where we talk about value sometimes over there and we also talk about a lot of stocks and ETFs, actually, too.

So if you want even more stock picks, get The Zacks Market Edge, I usually also have guests on those shows from Zacks. So the Zacks experts are over there, but be sure to get one of us somewhere, one of these shows on one of the platforms. And as always, I'll see you again next week with some more value stocks. This material is being provided for informational purposes only and nothing herein constitutes investment, legal accounting, or tax advice or a recommendation to buy, sell or hold a security.

Do not act or rely upon the information and advice given in this podcast without seeking the services of competent and professional legal tax or accounting counsel. Publication and distribution of this podcast is not intended to create and the information contained herein does not constitute an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investment in securities, companies, sectors, and markets identified and described were or will be profitable.

All information is current as of the date herein and is subject to change without notice. Any views or opinions expressed may not reflect those of Zacks and Desmond researchers a whole.