For investors interested in value stocks there’s no better figure to follow than Benjamin Graham. He is the so-called father of value investing and is directly connected to today’s most notable value investing proponent, Warren Buffett.
Graham taught Buffett as a professor at Columbia Business School. The book Graham authored, The Intelligent Investor, is likely the first the future Oracle of Omaha would recommend to any investor seeking to increase their value-picking skills.
In his preface to the fourth edition of the seminal text, Buffett wrote: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
The seven principles that Graham laid out for picking value stocks are the ones this list ascribes to. A given stock on this list doesn’t tick all seven of those boxes, but several do tick multiple boxes at once.
|GM||General Motors Company||$34.18|
|KGC||Kinross Gold Corporation||$4.13|
|META||Meta Platforms, Inc.||$169.35|
|CTRA||Coterra Energy Inc.||$30.67|
|SKX||Skechers U.S.A., Inc.||$37.92|
General Motors (GM)
Price-to-earnings (P/E) ratio: 5.68
Benjamin Graham recommends finding companies with price-to-earnings ratios of less than 9.0. This is a bit of a broad definition since P/E ratios can vary widely by industry and sector. So, it’s always good to check the P/E ratio against industry comparables as well.
The argument for investing in GM stock hinges on the car maker’s transition to electric vehicles as a legacy manufacturer of internal combustion engine-powered vehicles. The argument goes that GM should be able to leverage its significant resource base to take advantage of the progress early EV pioneers have made. They paved the way and proved the business model. GM can take the learnings from that progress, leverage its resources, and make its own EVs.
The other point is that EV stocks tend to garner massive valuations. That implies that GM stock could witness its P/E ratio rise drastically as it evolves its fleet of EVs and releases and delivers more of them.
Kinross Gold (KGC)
Price-to-Book (P/B) ratio: 0.88
What that means is that Kinross Gold is trading below the price that models suggest it should. Note that Graham’s 1.2 multiple suggests investing in companies that are no more than 20% higher than their book value. Kinross Gold is almost 20% below its book value.
But there’s plenty of reason to believe that it could increase in price, especially in this current environment. For one, Kinross’ business is underpinned by steady expected gold production through at least 2024. The company anticipates that it will mine at least 2 million ounces of gold through the next two years.
The bull thesis is that the U.S. is facing a real risk of recession in 2023 and gold could therefore be a better store of value than fiat U.S. dollars. KGC stock also comes with a dividend-yielding approximately 2.7%, another of the seven value criteria lauded by Graham.
Meta Platforms (META)
P/E ratio: 14.52
It’s unlikely that Meta Platforms, Inc. (NASDAQ:META) immediately springs to mind when the topic of value stock investing arises. And by many value metrics, it simply doesn’t fit the bill. For example, its P/B ratio of 4.22 is well above Benjamin Graham’s 1.2 threshold. But he wasn’t alive when tech companies began to predominate so he didn’t have to factor in their trickier valuation due to their asset-light models.
Anyway, I digress because Graham would appreciate Meta Platforms for its current P/E ratio of 14.57. It isn’t below his general guideline of 9, but it is near a 10-year low and better than 62% of sector comparables. Those factors make it attractive right now.
Meta issued a warning in February that revenues would be lower, as well as rising expenses, and disappointing growth. This is analogous to what happened in the middle of 2018. It bounced back then and if you believe its metaverse spending will pan out it’s a great time to invest.
Coterra Energy (CTRA)
P/B ratio: 2.11
Coterra Energy Inc. (NYSE:CTRA) stock ticks multiple boxes among the seven value criteria we’re adhering to for this article.
Its 45-cent dividend yielding 1.76% makes it a valuable stock to consider. It is a very reliable dividend as well, having last been reduced all the way back in 1997. And the 0.18 payout ratio is very low-risk.
The company’s P/E ratio and current ratio suggest value as well. But without going on about those, let’s understand why Coterra Energy’s business is otherwise attractive.
One primary reason to invest in CTRA stock is that the company is focused on U.S.-based assets. The company has six rigs running in the Permian Basin and two in the Anadarko Basin. The company has allocated between $1.4 billion to $1.5 billion of capital toward its assets and expects to produce a daily average of up to 625 million barrels of oil equivalent per day (MBoepd) in Q2.
In other words, if U.S. energy production comes back online, which would help ease the burden at the pumps, Coterra will rise.
P/E ratio: 5.57
Investing in Huntsman Corporation (NYSE:HUN) means investing in a stock underpinned by polyurethanes, polymers, dyes, resins, and other checmical products with wide utility across multiple markets. The company’s P/E ratio sits at 5.57 which is low no matter how you define it.
That implies that it is simply undervalued massively. In fact, 88% of its competitors have a higher P/E ratio. A word of caution here: Sometimes companies with the lowest P/E ratios simply cannot escape the factors that keep them so undervalued. These kinds of stocks are often referred to as value traps.
However, Huntsman doesn’t seem to be one, given that it boasts low leverage ratios and is targeting free cash flows of 40% or greater this year. If it can reach that goal, that suggests investors should come around to the ‘uninteresting’ company and its business.
Current ratio: 1.88
Back to Benjamin Graham and his value criteria. He’d likely be a fan of Corning Incorporated (NYSE:GLW) stock given its current ratio and dividend. Corning’s 1.88 current ratio, which measures current assets relative to current liabilities, exceeds the 1.5 ratio Graham sought. In essence, this indicates a company is liquid and capable of paying its short-term liabilities.
That might not be a terribly exciting way of thinking about a firm at first blush. But if you think about it more deeply, that means such companies’ assets produce enough money to more than pay the bills. And at the end of the day, that’s what business is all about.
The specialty glass and ceramics manufacturer also pays a reasonably strong 2.98% dividend that has been growing at 12.2% over the past 5 years.
P/E ratio: 7.79
Yes, Skechers U.S.A., Inc. (NYSE:SKX) stock does look to have inherent value based on metrics concerning its business. But before diving into those, please note that there’s massive upside priced into current shares based on analyst consensus target prices.
SKX stock trades at $40 currently. That means its average target price of $59.25 implies upside of nearly 50%. The idea that it is undervalued is also evidenced by the firm’s 7.79 P/E ratio.
The company is also simply strong from a fundamental business perspective. Like Corning, Skechers’ strong current ratio implies that its assets produce more than sufficient cash to cover its liabilities.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.