Value investing involves finding companies that are worth more than their current stock price would suggest. Long-term investors like Warren Buffett, Benjamin Graham, Charlie Munger, David Dodd, Seth Klarman, and others have long used value investing to minimize risk and maximize gains.
One of the best things about value investing in the UK is that you don’t have to be a famous investor to do it. Anyone can look for value that the market, with all its ups and downs, has missed. In this guide, we’ll cover everything you need to know about value investing in the UK and show you how to get started today.
What is Value Investing?
Value investing is a style of investing that involves buying stocks that are undervalued. Typically, value investors look at a company’s intrinsic value and compare that to the market. When the intrinsic value of a stock is less than its market value – that is, the share price – then value investors swoop in to buy.
Value investing in the UK is a contrarian way to approach the stock market. Fundamentally, it relies on the idea that the stock market is bad at valuing stocks appropriately. The market may overreact to bad news, driving the price of a company below its true value for a period of time. For value investors, that overreaction is a chance to buy shares at a discount on the assumption that the share price will eventually rise to meet the intrinsic value.
Key to any value investing strategy, then, is a good understanding of exactly what a stock is worth. This intrinsic value can be calculated in a number of different ways – even famous value investors like Benjamin Graham and his student, Warren Buffett, now CEO of Berkshire Hathaway, went about calculating companies’ valuations in different ways. Some intrinsic value calculations look solely at dividend growth over time, while others consider fundamentals like earnings per share, revenue growth, and a company’s debt ratio.
Deep Value Investing
Deep value investing is another term for value investing. However, it is often used to describe a more extreme value investing strategy in which investors look specifically for companies that are beaten down. These companies often have very low stock prices relative to their historical average price and to their intrinsic value.
Deep value investing can be somewhat riskier than typical value investing. Beaten down companies may be struggling financially or may be losing their competitive edge. While this might not be reflected in intrinsic value calculations, it is important for value investors to look closely at what it will take for a company to turn around and reach its projected valuation.
Value Investing vs Growth Investing
Value investing and growth investing are two long term investment strategies based on a company’s fundamentals. However, they consider two very different aspects of a company.
Value investors look first and foremost at whether a stock is priced below its historical average and below the broader stock market. Ideal value stocks should also be priced below similar companies in their industry, at least in terms of price-to-earnings ratio.
Growth investors, on the other hand, look for companies that are rapidly growing their earnings per share year over year. Often, these companies are priced at a premium to the broader market rather than priced below competitors. Growth stocks tend to be high risk investments compared to value stocks because their valuation can fall sharply if earning growth slows down.
Benefits of Value Investing
UK value investing is widely praised by long term investors who see this strategy as relatively low risk and high reward. There are several benefits to value investing:
Value stock are, at least in theory, low risk investments. That’s because cheap stocks that are already undervalued relative to their sector and their historical average likely don’t have much further to fall. By buying low, you effectively minimize your downside risk.
Of course, this isn’t always the case. Keep in mind that some stocks are priced low for a reason, like ongoing financial troubles. There is a fine line between undervalued stocks and stocks that are poised to nosedive.
One nice thing about value investing strategies is that they don’t take much work once you’re invested. Most of the legwork comes before you buy into a stock, as you try to decide what company to invest in and set entry and exit targets. This hands-off approach means that value investing doesn’t require you to spend every day watching the stock market like you might for day trading.
If your value investing strategy is focused on dividend stocks, you can also take advantage of compounded returns. Most value investors automatically reinvest dividends, giving you an even greater position in your value investment over time. That in turn means more dividends, more reinvestment, and greater returns as the share price rises.
Types of Value Investments
Value investments can be grouped into several different categories.
The classic value investment in the UK is a well-established company that has a massive market share and complete control over its brand and pricing. For example, take Apple. Although Apple shares are expensive, they could still be considered a value stock because the company’s intrinsic value is so high. Apple could raise its prices tomorrow, and it would still sell hundreds of millions of iPhones next year.
Another type of value investment focuses on cyclical industries like oil and gas. These industries fall on hard times every 10-20 years on average, but that is almost always followed by a boom period when share prices rise. Companies like BP don’t sell any capital equipment or drilling rights during the bust, so their intrinsic value doesn’t change even if the share price drops for a few months or years.
Value investors may also be interested in companies that are known as ‘antifragile.’ These stocks, like those of utilities or bargain retailers like Walmart, tend to perform well during recessions. As a result, traders pile into them during recessions and drive up the price – resulting in a windfall for value investors who bought shares during periods of economic growth, when antifragile companies tend to lag the broader market.
Value Investing Example
To understand value investing, let’s take a look at an example. We’ll focus on McCormick & Company, a food company that manufacturers spices and condiments in the US.
To start, this company is an excellent value prospect simply because of its industry. McCormick is antifragile – demand for home cooking ingredients is likely to go up during recessions, not down. On top of that, McCormick is a brand that’s been around for over 130 years and is known to virtually every consumer in the US. McCormick is extremely durable and controls its own product.
Another benefit to McCormick is that it pays out a dividend. At the current share price of $188.52, the yield is around 1.3% per year.
McCormick shares have risen rapidly in recent years, so the company now has a price-to-earnings ratio of 33.3. That’s in line with the average for the S&P 500 index fund, but slightly higher than the average for the food and beverage industry in the US.
So, value investors might want to keep an eye on McCormick. Shares aren’t selling at a value right now. But if the stock dips more than 10%, it could be an excellent value stock that will see long-term dividend payouts and steady demand.
Best Value Investments UK
Looking for the best value investments in the UK right now? Let’s take a closer look at five stocks that we think are worth considering:
Walmart is one of the biggest companies in the US stock market, but there’s still a good case to be made that it’s undervalued right now. This retailer trades at a price-to-earnings ratio of 22.9, compared to 89.6 for its rival Amazon. That’s despite the fact that Walmart still has a larger market share and has caught up to Amazon in online sales and distribution. Walmart also pays out a dividend yield of 1.50%. ]
Your capital is at risk.
Oil and gas giant BP is in a cyclical industry that’s in a severe downturn right now. The stock is trading more than 50% below the level it’s held for most of the past two decades. While it might not regain its prior glory, the oil and gas downturn isn’t likely to be permanent. Value investors can pick up BP shares now at a significant discount and watch them rise when the global economy emerges from the COVID-19 pandemic.
Your capital is at risk.
3. Philip Morris
Philip Morris, the tobacco company, is another beaten-down company that still has a lot of life left in it. The company has grown more slowly than competitors like Altria, which signals that it might be undervalued within its industry. It also sports a low price-to-earnings ratio of 14.7, down from 28.5 in 2018, and pays a whopping dividend yield of 6.8%.
Your capital is at risk.
4. CVS Health
US pharmacy chain CVS might be a surprising pick for a value stock right now. The healthcare industry is usually defensive during recessions, meaning that share prices rise during economic times like we have now. But CVS has faced reduced in-store traffic from the coronavirus pandemic, which has led investors to flee from the shares. CVS now offers an ultra-low dividend price-to-earnings ratio of 9.5 and a dividend yield of 3.4%.
Your capital is at risk.
5. NatWest Group
NatWest Group owns the Royal Bank of Scotland, which has been heavily beaten down thanks to low interest rates. Right now, the stock is down by more than 50% from the start of the year and its price-to-earnings ratio has fallen to 20.4. Low interest rates won’t last forever, though, and NatWest Group is poised to rise as soon as interest rates are allowed to increase again.
Your capital is at risk.
Value Investing Strategy
Putting together a value investing strategy relies on diligence and patience. Most of the hard work comes before you ever invest, as you need to find value stocks that offer low risk and potentially promising returns.
A good place to start is to pick an industry to focus on. Then look across that industry for stocks that have underperformed over the past year or more and that have a lower price-to-earnings ratio than their competitors. You’ll also want to take a close look at dividend payouts to determine what your potential returns are – most value investors want to be paid while waiting for the stock to turn around.
Before you invest, make sure you know exactly what you’re investing in. Study the company’s strategic plan and its revenue and earnings projections. If everything checks out, plan to hold onto the stock for several years or longer.
Best Platforms for Value Investing
In order to get started with value investing in the UK, you’ll need a high-quality stock broker. There are dozens of brokers that offer stock trading, but they differ in the number of stocks you can invest in, the fees you’ll pay, and what tools are available for finding value stocks.
To make your choice easier, we’ll highlight three of the top UK platforms for value investing:
1. eToro – Value Investing with 0% Commissions
eToro is one of the top value investing brokers in the UK. With this platform, you can trade more than 800 stocks from the UK, US, Europe, and around the world. That selection is a huge asset, since many of the best value stocks trade on exchanges that don’t get as much attention as the New York Stock Exchange or London Stock Exchange.
All trading on eToro is 100% commission-free. There are no fees to open an account or deposit money either, so you can invest in value stocks without paying a pence. Long-term investors will want to take note that eToro does charge in inactivity fee after one year, but all you need to do to avoid this is to invest in one value stock per year.
Another benefit to eToro is that it offers several ways to find and research value investments. You have access to detailed charts and fundamental data for every stock the broker offers. eToro also has a social trading network, which you can use to connect with other value investors and see what they’re saying about a particular company.
- 800+ stocks from around the world
- 100% commission-free investing
- No account fees for most investors
- Includes social network to connect with other investors
- Small inactivity fee after one year
75% of retail investors lose money trading CFDs at this site
2. Skilling – Best CFD Broker for Value Investors
Skilling is a widely used CFD broker that offers many features for value investing in the UK. With this broker, you pay no commission on trades and no account fees. You also get access to more than 700 shares from the UK, US, and Europe, including a number of high-paying dividend stocks.
Since you invest in CFDs through Skilling, this broker enables you to apply leverage of up to 5:1 to your stock investments. Skilling charges low overnight fees for leverage, making it more cost-effective to leverage medium-term value investments for up to weeks at a time.
Skilling is particularly good for first-time value investors because it offers a number of simple tools. The charting and investing interface is easy to understand and customize. In addition, it includes a trade assistant module that walks you through the process of investing in shares. There isn’t as much analyst research as some value investors might like, but we appreciated that Skilling lets you place orders on the go with a user-friendly mobile investing app.
- No account fees and no commissions
- 700+ shares to invest in
- Leverage up to 5:1 for stock CFDs
- Trade assistant helps you invest
- Relatively little stock analysis
Your capital is at risk
3. Fineco Bank – Advanced Platform with Portfolio Management
Fineco Bank is a highly trusted brokerage platform geared towards long term investors. This platform doesn’t charge trade commissions or spreads when you buy shares, and there’s no inactivity fee to worry about. Instead, you pay an annual fee of 0.25% of your total account value. Depending on how frequently you invest in shares and how much money you have in your account, this can work out to be more or less expensive than fee-free brokers.
One of the things that’s nice about investing with Fineco Bank is that you get access to a set of portfolio management tools. These can help you decide whether you’re overexposed to a single industry and help you achieve diversification of your value stocks portfolio across the market. It’s also easy to track the performance of your investments over time and to reinvest dividends for compound growth.
The only downside to Fineco Bank is that it doesn’t have a huge selection of stocks. However, you’ll still find several hundred potential investments from across the UK, US, and Europe, including a wide of investment funds and mutual funds managed by expert fund managers. Fineco Bank also offers a fair amount of investment research from its expert advisors, which makes it easier to make investment decisions.
- No commissions or inactivity fees
- Includes portfolio management tools
- Excellent fundamental analysis and commentary
- Simple system for tracking investment performance
- 25% annual management fee
Your capital is at risk
How to Buy Value Investments on eToro
Ready to start investing in value stocks in the UK? We’ll show you how to buy your first shares with eToro, which offers 0% commissions and over 800 global shares.
To get started, head to eToro’s homepage and click the ‘Join Now’ button. Enter a username and password for your new brokerage account, then fill in details like your name, email, and address. To comply with government regulations, eToro requires that you verify your identity. Simply upload a copy of your passport or driver’s license along with a copy of a recent utility bill or financial statement.
Next, you need to fund your eToro account. eToro requires a minimum deposit of £140 and accepts a wide variety of payment methods, including:
- Credit card
- Debit card
- UK bank transfer
- Wire transfer (extra charge applies)
Now you’re ready to invest in value shares on eToro. If you want to buy Walmart shares, type ‘Walmart’ in the search bar at the top of the page and click ‘Trade’ when it appears in the drop-down menu. In the order form, enter how much money you want to invest in Walmart stock. You can also set a stop loss for your trade in case you want to limit your downside risk.
Once your order is ready, click ‘Open Position’ to complete your first UK value investment.
Value investing is a popular investing strategy espoused by well-known investors like Ben Graham, the father of value investing, and Warren Buffett. This investment style limits your investing risk and enables you to benefit from the stock market’s overreactions, without having to follow the day-to-day volatility of the market. At any given time, there are dozens of potential value stocks on the market – it’s up to you to do the work needed to find them.
Ready to get started with value investing in the UK? Sign up for an eToro account today to buy shares!
eToro – Best UK Value Investing Platform with 0% Commission
75% of retail investor accounts lose money when trading CFDs with this provider.
What is the best value investing book?
Benjamin Graham’s 1949 book, ‘The Intelligent Investor,’ is the foundational text and best known book for value investing and a must-read for value investors today. Warren Buffett also recommends that value investors read ‘Common Stocks and Uncommon Profits,’ by Philip Fisher and ‘Business Adventures: Twelve Classic Tales from the World of Wall Street,’ by John Brooks.
What is Value Investing World?
Value Investing World is an online newsletter by Jon Koster. It focuses on the ins and outs of value investing and highlights current stock opportunities for value investors. The newsletter has been around for over 13 years and is now housed on Substack.
How do I use P/E ratio for value investing?
The price-to-earnings (P/E) ratio of a stock is a metric that value investors frequently look at. P/E ratio is essentially a measure of how expensive a stock is relative to the company’s profitability. When consider P/E, compare a stock’s P/E ratio both to that of competitors in its industry and to the stock market as a whole.
What is intrinsic value?
The intrinsic value of a company is its worth based on fundamental metrics like revenue, earnings, future dividend growth, brand value, and capital equipment. Intrinsic value is also known as book value, and it is the valuation that value investors target when choosing stocks.
How do I find value investments?
There’s no one-stop-shop for finding value investments. You can use stock newsletters or research sites to find leads, or you can create your own custom database of stocks and valuations. Ultimately, it’s up to you to fully vet a company to determine its intrinsic value.