Investing in so-called value shares requires patience.
These stocks tend to trade at low valuations, often because they operate in unloved sectors or face temporary challenges. That means investors have to wait for sentiment to shift and fundamentals to improve before the shares respond. But when they do, the gains can be worth it.
Value shares typically boast low price-to-earnings ratios (P/E) and high dividend yields. They rarely grab headlines, but they can offer long-term rewards for those prepared to hold steady when others walk away.
Recovery stocks
I took a punt on that idea with my own portfolio in 2023. I snapped up a range of companies trading on low valuations and offering chunky dividends. I went especially heavy on FTSE 100 financials, which looked jam-packed with potential. Some were trading on price-to-earnings ratios of just six or seven. That gave me some protection against further falls while offering scope for a strong rebound.
It was a calculated risk. Financials had been out of favour for years, along with other battered sectors such as housebuilders. I took a position in housebuilder Taylor Wimpey (LSE: TW), too, despite industry uncertainty.
Some of these calls are now paying off.
Lloyds Banking Group is up 40% over the last 12 months and 75% across two years. FTSE 250 insurer Just Group has risen 25% in a year and 70% over two. Wealth manager M&G is up 25% in the past year, and still yields a juicy 7.75%.
Taylor Wimpey struggles
Taylor Wimpey remains the weak link, down 18% over 12 months. That said, I’m still ahead, thanks to its bumper 8% trailing dividend yield.
The market remains sceptical about the housing sector, amid rising build costs and an uncertain interest rate path. That’s hit the share price, but the firm looks resilient enough to weather the slowdown. Forward sales are picking up, and it has a solid landbank.
When I bought Taylor Wimpey, the P/E was around six or seven. It’s actually climbed to just over 14 times, due to a slowdown in earnings.
The yield keeps the investment ticking over. So overall, I’m up around 10%. The dividends seem secure, although future growth may be slow. But if the share price finally lifts, I’m hoping to fly on two fronts. Time will tell. I’m happy to wait for this one.
What constitutes a value stock is always open to debate. My biggest winner of all is Costain Group,. Is that a growth stock? Maybe. But it’s also good value, trading on a price-to-earnings ratio of just 10 even after climbing 75% over one year and 222% over two.
Winners but losers
And not all my picks are winners. I’ve still got laggards like Diageo and Glencore. With time, I hope they’ll recover too. This isn’t a game of quick wins. And there are no guarantees.
Markets are on a charge right now after absorbing the US tariff shock and pushing aside Middle East concerns. But the UK economy still faces major challenges and confidence is fragile. Sentiment could turn quickly.
It takes patience and a willingness to go against the crowd. But right now, I’m happy to be finding value in value. I can see more potential bargains out there, so it’s time to do some research.
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