Want to know the best stocks to own in 2025?
Yeah, me too.
I was doing a search for some articles to look into the recent data of growth stocks vs value stocks and the first result was:
"3 Top Value Stocks for 2024" The Motley Fool
Intrigued, I went to look at how well the last year went for their predictions. Coca-Cola was their first pick, with a calendar year return in 2024 of 11.6%. Not bad. Next up was Johnson Controls International with a return of 51.1%! Wow, that's a great return for the year. Lastly was Brookfield Infrastructure Partners with a return of 6.39%.
If we compare that to the large company market index (S&P 500) for 2024, which returned about 25%, Johnson Controls was the only one that did remotely well, with the other two stocks well below the index.
What's funny is that many people consider "value" companies to be stocks that have low price to earnings ratios compared to an index or the underlying industry. Now there are many different ratios and metrics to determine whether or not a company's stock is undervalued, however we'll use the Price-to-Earnings ratio as our guide for this article. When you look up the PE ratios on the stocks mentioned above, all of them have Price-to-Earnings ratios higher than the S&P 500 (Coca-Cola 30.02, JCI 29.24, and BIP 391.26 vs the S&P 500 of 25.64). That doesn't necessarily sound like "value" to me, especially in the case of Brookfield Infrastructure which is priced at 391x their earnings. Insane!
So where is there value currently?
According to general industry wide PE ratios, financials, utilities, energy, communication services, consumer staples, industrials, and materials all have ratios less than the current S&P 500 PE ratio. So do you run out and just buy all of the companies in that sector? Of course not. If you went out and bought the entire energy index for example, you may be buying 110 companies, however the top 10 companies make up 2/3rds of the portfolio. So are you really buying an "index", or are you just buying those 10 companies?
And of the top 10 companies, 5 of those holdings have PE ratios higher than the underlying index itself. So you're getting a top heavy index with a lot of overvalued securities in an undervalued sector compared to the overall market. Read that again, slowly...
Of course, there is a lot more nuance with valuation metrics and strategy to building out a portfolio, however there's a lot to be derived from here.
One, stock picking articles, pundits, talking heads, etc. are not to be taken seriously. They don't know, and if they did know, they wouldn't tell you (no offense) because if they did tell you, they'd be insider trading and eventually in prison. They may get lucky, you may read the article at the right time, but no one knows. Even Warren Buffet is starting to lose his edge over the last 22 years, barely keeping up with market returns. After all, he still does interviews talking about buying houses for $20,000...If that's true, I'll take 10 of them Uncle Warren...
Two, looking for value in markets is difficult. There's dozens of different metrics and ratios to determine what sectors, and companies, are actually undervalued compared to the market or their industry. Just blindly buying an index because one ratio says it's undervalued isn't a smart thing to do. You may think you're buying an entire sector, when in reality you're buying a small fraction of it and that small fraction of it may actually be overvalued.
Three, having a plan, and having discipline to execute that plan, is critical. The value metric is something that has been used for years, at least since Benjamin Graham's Intelligent Investor book which was published back in 1949. It's just one of many ways to understand a company's stock price and value in the market, and it's not going to outperform every year. Nothing outperforms every year. The stock market isn't a lottery ticket. It's not a get-rich-quick scheme. It rewards those who remain disciplined and those who take emotion out of their decision-making.
https://www.ifa.com/charts/62h
https://www.multpl.com/s-p-500-pe-ratio
https://www.fool.com/investing/2024/01/09/3-top-value-stocks-for-2024/
https://finviz.com/groups.ashx?g=sector&v=120&o=pe
https://www.morningstar.com/etfs/arcx/feny/quote
https://www.fool.com/investing/stock-market/types-of-stocks/value-stocks/
https://www.dimensional.com/us-en/insights/market-review-2022-after-a-down-year-looking-to-the-past-as-a-guide