In this article, we will take a look at some of the best value stocks according to Warren Buffett.
Many experienced economists and investors today take inspiration from Warren Buffett’s strategies. His focus on value investing played a key role in building his fortune. This investment philosophy involves purchasing undervalued stocks or businesses when market sentiment drives prices lower and holding them for the long term. Buffett has made some of his most successful investments by capitalizing on opportunities when others were selling out of fear.
Value investing remains one of the most widely used investment strategies, having generated substantial returns over time. A report from Bank of America highlighted its long-term success, showing that since 1926 through 2023, value stocks have delivered a total return of 1,344,600%, significantly outperforming growth stocks, which have returned 626,000% over the same period.
Also read: 8 Unstoppable Dividend Stocks to Invest in
Lowell Miller’s book, Single Best Investment, highlighted the insights of Fama and French on value investing, referencing their published works in the Journal of Finance. Here are some remarks by Nobel laureates:
“Firms that the market judges to have poor prospects, signaled by low stock prices and low price/book ratios, have higher expected stock returns . . . than firms with strong prospects.”
The book highlighted that when a growth stock does not live up to investors’ high expectations, they come to realize that its price was inflated, often resulting in a sharp decline. In contrast, value stocks, which generally have lower expectations, can exceed predictions, leading to a positive reassessment of their price. However, the book also stresses the importance of diversification, as relying too heavily on a single investment can be risky. Historically, maintaining a diversified portfolio has been a prudent approach for investors.
According to a report by BlackRock, value stocks can serve as a buffer in a shifting market environment. A recent example was the broad market downturn in 2022, where steep declines in growth stocks were somewhat balanced by smaller losses in value stocks. By definition, value stocks trade at lower prices compared to growth stocks, though the extent of this discount has varied over time.
An analysis of the broader market’s growth and value stocks suggests that valuations would need to climb by more than 40% to bring value stocks back to their long-term median levels. This indicates significant upside potential if value stocks begin to recover, particularly as high valuations in growth stocks may encourage investors to shift toward value as the market expands its focus beyond mega-cap companies. While past performance does not guarantee future results, history offers some perspective. The last time the valuation gap between the Russell Growth and Russell Value indexes was as wide as it is today—back in December 2000—value stocks went on to outperform growth stocks over the following one-, three-, and five-year periods, the BlackRock report further highlighted.
In addition to focusing on value stocks, Buffett allocates a significant portion of his investments to dividend-paying companies. By the end of the third quarter of 2024, the majority of companies in his portfolio not only distributed dividends to shareholders but also had a consistent history of maintaining and growing those payouts. In this article, we will take a look at some of the best value dividend stocks according to Warren Buffett.
Our Methodology:
For this article, we analyzed Berkshire Hathaway’s 13F portfolio as of the third quarter of 2024 and picked dividend stocks. From that list, we selected stocks that have forward price-to-earnings (P/E) ratios below 21 as of January 28. A low P/E ratio indicates that a stock or an investment is relatively undervalued in the market. The stocks are ranked in ascending order of their forward P/E ratios as of January 28. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
8. American Express Company (NYSE:AXP)
Forward P/E Ratio: 20.83
American Express Company (NYSE:AXP) is an American bank holding company that mainly specializes in payment cards. The company stands out in the financial services industry as it not only issues credit cards and offers credit to borrowers but also operates a payment network and a banking division that provides savings accounts and loans. This diversification creates multiple revenue streams and offers various avenues for growth. In the past 12 months, the stock has surged by nearly 58%, significantly outperforming the market.
In the fourth quarter of 2024, American Express Company (NYSE:AXP) reported revenue of over $17 billion, which showed a 9% growth from the same period last year. The company’s net income for the quarter came in at over $2.1 billion, which grew by 12% on a YoY basis. It achieved record highs in annual Card Member spending, net card fee revenues, and new card acquisitions, adding 13 million new cards over the year. In addition, the company continued expanding its global network by onboarding millions of new merchant locations. By the end of the year, it saw increased momentum, with billings growth accelerating to 8% in the fourth quarter, supported by stronger consumer and commercial spending during the holiday season.
On January 24, American Express Company (NYSE:AXP) declared a 17.1% hike in its quarterly dividend to $0.82 per share. This marked the company’s sixth dividend hike in the past three years. The stock has a dividend yield of 0.88%, as of January 28. With a forward P/E ratio of 20.83, AXP is one of the best value stocks according to Warren Buffett.
At the end of Q3 2024, 62 hedge funds tracked by Insider Monkey held stakes in American Express Company (NYSE:AXP), compared with 68 in the previous quarter. The consolidated value of these stakes is over $45 billion. In addition to Warren Buffett, Ken Fisher’s Fisher Asset Management was one of the company’s leading stakeholders in Q3.
7. Occidental Petroleum Corporation (NYSE:OXY)
Forward P/E Ratio: 13.68
Occidental Petroleum Corporation (NYSE:OXY) is a Texas-based company that is engaged in the exploration of hydrocarbons and chemical manufacturing. The company has distinguished itself as a forward-looking energy industry leader through significant carbon capture technology investments, aligning with global energy transition objectives. Although an immediate rebound in oil prices may not be expected, the company’s strong cash flow, prudent management, and strategic approach position it well for future growth. For long-term investors, OXY presents an appealing balance of risk and reward at current valuations, offering a promising opportunity despite market fluctuations.
Occidental Petroleum Corporation (NYSE:OXY)’s stock declined by over 17% in 2024, despite Warren Buffett’s Berkshire Hathaway steadily increasing its stake in the company throughout the year. Investor sentiment remained cautious as Occidental’s debt levels grew while crude oil prices dropped. The stock faced its sharpest decline in the second half of 2024, coinciding with the company’s $12 billion acquisition of CrownRock in August. This deal included $1.2 billion of CrownRock’s existing debt, with Occidental financing nearly $9 billion through new debt.
The acquisition significantly increased Occidental Petroleum Corporation (NYSE:OXY)’s debt burden, and the drop in crude oil prices during the latter part of the year raised concerns among investors. Many anticipated that falling oil prices would negatively impact the company’s earnings and cash flow, while its rising interest expenses added to their worries.
That said, Occidental Petroleum Corporation (NYSE:OXY) has been grabbing investor attention because of its strong dividend policy. The company has never missed a dividend in the past 45 years. Currently, it pays a quarterly dividend of $0.22 per share and has a dividend yield of 1.80%, as of January 28.
The number of hedge funds tracked by Insider Monkey owning stakes in Occidental Petroleum Corporation (NYSE:OXY) jumped to 71 in Q3 2024, from 62 in the previous quarter. These stakes are collectively valued at over $15.3 billion.