Stocks can be generally classified into two categories -- growth stocks and value stocks. Growth stocks are usually thought of as those that have above-average earnings growth rates, while value stocks are loosely considered to be those with below-average growth and relatively low valuations.
There is some gray area here. Some stocks are clearly value stocks -- mainly long-established companies with steady profitability and revenue growth year after year. Coca-Cola fits this description and is a good example of an obvious value stock. However, there are some that can fit into either category.
And it's important to keep in mind that just because a stock is classified as a "value stock," that doesn't necessarily mean that it's a good value. The methods of evaluating and choosing value stocks can be quite complicated if you want to find the best bargains for your own portfolio.
The 10 biggest value stocks
Here's a look at the 10 largest value stocks traded on U.S. exchanges, listed in descending order of market capitalization (the total number of a company's shares outstanding multiplied by the stock's market price):
Apple (NASDAQ: AAPL)
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)
JPMorgan Chase (NYSE: JPM)
Johnson & Johnson (NYSE: JNJ)
Walmart (NYSE: WMT)
ExxonMobil (NYSE: XOM)
Bank of America (NYSE: BAC)
Procter & Gamble (NYSE: PG)
Walt Disney (NYSE: DIS)
Cisco Systems (NASDAQ: CSCO)
Data source: CNBC. Market cap and dividend yield as of 7/24/19. Note: Berkshire Hathaway does not pay a dividend.
There is one big caveat before we move forward. As I mentioned earlier, there is undoubtedly a serious gray area when it comes to the question of whether a stock is a value or growth stock. Apple is a great example, as it has traditionally been categorized as a growth company, but in recent years has started to display more and more value stock characteristics. Microsoft is another example, and although it is certainly a mature company, it still seems to have more growth characteristics than value.
Having said that, there are some value stock index funds that include Microsoft and some that exclude Apple. The point is that this is a list of the 10 largest stocks that I would classify as value stocks. But don't be surprised if there is a little bit of variation in other lists you may find -- especially when it comes to the larger tech companies.
Here's a brief description of each of the 10 largest value stocks, some of the basic business strategies behind each one, and how to determine which might be the best values right now.
Image source: Getty Images.
Apple is a stock that has historically been classified as a growth company, and for good reason. From October 2001 (when the first iPod was released) through October 2018, Apple's revenue grew at a staggering 25% annualized rate.
However, it has recently started to develop more characteristics of a value stock. For example, management has been placing greater emphasis on stock buybacks and dividend growth in recent years, as the company simply can't effectively reinvest all of the cash it generates toward growing. Plus, its products (especially the iPhone and iPad, which sold 217 million and 43.5 million units, respectively, in the 2018 fiscal year) have reached much of their addressable markets, so growth potential is somewhat limited.
Image source: Apple.
2. Berkshire Hathaway
Berkshire Hathaway is a conglomerate that's run by one of the greatest value investors of all time, Warren Buffett. In the 55 years since Buffett took control of the company, it has evolved from a struggling textile manufacturer to a collection of more than 60 subsidiary businesses that include large operations in insurance (GEICO, General Re), consumer goods (Duracell, Fruit of the Loom), and more.
In addition, the company also owns a stock portfolio worth more than $200 billion, much of which was hand-selected by Buffett himself using his time-tested value investing principles. Large stock holdings include Apple, Bank of America, Wells Fargo, Coca-Cola, and American Express, to name just a few.
Berkshire Hathaway is a value stock whose CEO is one of the greatest value investors of all time. Image source: The Motley Fool.
Berkshire's investment strategy in a nutshell is to buy good businesses (or shares of businesses) for less than their intrinsic value. One major component of Berkshire's model is to keep substantial amounts of cash on the sidelines -- currently there is about $114 billion on Berkshire's balance sheet -- in order to take advantage of opportunities. This type of financial flexibility has allowed Buffett to make some lucrative investments during market crashes and corrections -- in fact, Berkshire's Bank of America stake originated as a $5 billion financial crisis-era investment, and is now worth roughly four times what Buffett originally paid.
3. JPMorgan Chase
The big banks are excellent examples of value stocks, and there is no bigger bank (by market capitalization) in the United States than JPMorgan Chase.
JPMorgan Chase is known as a "universal" bank, meaning that it has commercial banking as well as investment banking operations. The bank has operations in all sorts of consumer and business lending, including large home loan and credit card businesses, and has done a great job in recent years of introducing new and innovative credit card products.
JPMorgan Chase has become the largest U.S. bank by market capitalization. Image source: Chase.
In addition to its commercial banking operations, JPMorgan Chase has a massive investment banking division. In fact, JPMorgan has the No. 1 market share in global investment banking fees through the first half of 2019, as well as one of the largest fixed-income and equities trading desks on Wall Street. Plus, JPMorgan Chase has about $3 trillion of client assets in its wealth management division. In a nutshell, this is a big bank.
Since this is a discussion about value stocks, it's worth mentioning that JPMorgan Chase is one of the most "expensive" big banks in the market by some valuation metrics. For example, as of July 25, 2019, JPMorgan Chase trades for 2.1 times its book value -- compared with 1.42 and 1.29 times book for rivals Wells Fargo and Bank of America, respectively. This is a metric that shows the current stock price relative to the value of the underlying assets each share represents, and all things being equal, it's better to pay less of a premium. However, it's important for value investors to keep in mind that this doesn't necessarily mean JPMorgan Chase (or any other "expensive" stock for that matter) is a bad value. The bank is also the most profitable of these three in terms of return on equity by a wide margin and has a great track record of smart risk management. In other words, it's pricey but you get what you pay for.
4. Johnson & Johnson
The largest healthcare company by market capitalization, Johnson & Johnson has a wide variety of mature businesses.
Johnson & Johnson is best known for its consumer healthcare products, including brands such as Band-Aid, Listerine, and the Johnson's baby care product line, just to name a few. However, these make up less than 20% of the company's sales. About half of Johnson & Johnson's revenue comes from pharmaceutical sales, and about one-third comes from sales of medical devices.
The company operates all over the world and spends aggressively on research and development (especially when it comes to pharmaceuticals). It has also made several value-adding acquisitions in order to maintain its massive market share.
Despite the massive and effective spending, Johnson & Johnson has historically been a great dividend stock for investors. The company has increased its dividend every year for the past 56 years (making it a Dividend King) and has generally paid higher-than-average yields to its investors.
Aside from Amazon.com, Walmart is the largest retailer by market cap. However, it is the largest retailer in the world in terms of sales volume.
Walmart operates more than 11,000 retail stores in the U.S. and abroad, including its Sam's Club warehouse club brand, and they combined for a staggering $514 billion in sales during the 2019 fiscal year. Over half of Walmart's sales volume comes from groceries, and the company has a massive 33% share on the U.S. supermarket industry as of 2019.
Despite the fact that it is clearly a value stock, Walmart could still have significant growth potential, especially when it comes to e-commerce. The company has made it clear that it isn't afraid to take on Amazon, and offers competitive free shipping and store pickup options that are catching on. In Walmart's 2019 fiscal year (ending Jan. 31, 2019), less than 5% of total sales came from e-commerce, but this could rise dramatically going forward.
Walmart is another great example of a dividend growth stock, having raised its payout every year since 1975 (making it a Dividend Aristocrat). And with a payout ratio that's consistently below 50%, there's no reason to think this will change, even if the economy takes a dive. Because of the discount-oriented nature of its business and the fact that it primarily sells essential goods, Walmart actually tends to do better in difficult economies -- in fact, it was one of the few major U.S. companies whose revenue increased during the Great Recession.
ExxonMobil has been around since 1870 and has evolved into the largest publicly traded integrated oil company in the world (by market cap). At one point in the not-too-distant past, ExxonMobil was the largest publicly traded company in the United States, but the rise of certain tech giants combined with lower oil prices has dropped it considerably down the list.
The company has large operations in all aspects of the oil business. ExxonMobil has massive refining operations totaling about 4.3 million barrels per day in 2018, exploration and production activities that generate the majority of the company's profits, and operations in chemicals, marketing, power generation, and more.
ExxonMobil has proven oil and gas reserves of 24.3 billion barrel-equivalent as of the end of 2018. To put this into perspective, worldwide total oil production is roughly 81 million barrels per day in 2019.
Although dividend yields certainly will fluctuate over time, ExxonMobil has historically been a high-yielding stock, especially relative to most other names on the list. This is especially true in recent years, as the company's dividend increases combined with stock price pressure due to oil prices has pushed ExxonMobil's yield to the point where it pays more than double the S&P 500's average yield.
7. Bank of America
While it's significantly smaller than JPMorgan Chase in terms of market capitalization, Bank of America is the largest U.S. bank in terms of consumer deposits.
Like its larger counterpart, Bank of America is also a universal bank, with commercial and investment banking operations. As I mentioned, Bank of America has the top deposit market share in the U.S. It is also the No. 1 small-business lender in the U.S. and is the top home equity loan originator.
Image source: Bank of America.
Bank of America isn't quite as profitable as JPMorgan Chase in terms of generating returns on equity (ROE), but it's important to note that the bank has improved its operations tremendously in recent years. The bank was one of the hardest hit by the financial crisis, but CEO Brian Moynihan and the rest of the bank's management team have done a fantastic job of improving asset quality, boosting profitability, and operating more efficiently by investing in technology and streamlining its operations.
In fact, during the four-year period from the first quarter of 2015 through the first quarter of 2019, Bank of America has improved its efficiency ratio from 70% to 57%, has increased its net income at a 17% annualized pace and has more than doubled its earnings per share.
Bank of America's investment banking operation isn't quite as large as JPMorgan Chase, but its wealth management division is huge. The bank has the top share when it comes to client assets and deposits, and is the top choice among high-net-worth clients.
8. Procter & Gamble
One of the largest and oldest (founded in 1837) consumer products companies in the world, Procter & Gamble has a vast portfolio of well-known brand names and sells its products in 180 different countries around the world. Not surprisingly, the company's largest market is the United States, but the majority of its sales come from international markets.
Procter & Gamble's brand names include Tide, Bounty, Pampers, Charmin, Cascade, Mr. Clean, Crest, Oral-B, Old Spice, Gillette, and Pantene, just to name a few. In all, Procter & Gamble focuses on 65 brands across 10 different categories of consumer products. And these brands result in a rather diverse mix of sales.
With 129 consecutive years of dividend payments and 62 consecutive years of increases (another Dividend King), Procter & Gamble has one of the best dividend growth track records in the market. And in terms of total returns, it's handily outperformed the S&P 500 over the past couple decades.
9. Walt Disney
There's a lot more to Disney these days than its well-known theme parks and its movies. The company has evolved into a well-diversified media conglomerate with some of the best assets in the entertainment business.
That's not to say that theme parks aren't a big piece of the puzzle. Disney's theme parks and other resort properties -- including Disney's Cruise Line -- account for about 30% of the company's revenues.
However, it's the media networks and studio entertainment parts of the business that generate most of the company's revenue and profits. Disney's media assets include the ABC network, ESPN (Disney owns 80%), The Disney Channel, ABC Family, the recently acquired Fox television assets, and more. On the studio side, The Walt Disney brand is obviously a large part of the business, but so are the Pixar, Marvel, Touchstone, and Miramax brands, which the company also owns. Also recently, Disney announced a deal with Comcast that gives it full control of the Hulu streaming service -- plus its own Disney streaming service is gearing up for launch.
Also don't forget Disney's consumer products business. This includes things like video games, merchandise licensing, and the company's more than 200 retail stores.
The point is that if you invest in Disney, you might be getting a piece of more than you realize. This is a media and entertainment empire that has made some big moves to keep up with changing consumer preferences. This is why Disney is a consistently profitable company that has done a great job of steadily growing its revenue over time.
10. Cisco Systems
Despite being a part of the technology sector, Cisco has clearly evolved into a value stock. The company pays a high dividend, and its revenue has been between $47 billion and $50 billion in every year since 2015.
Cisco is the market leader in computer networking systems. In fact, I'm connected to the internet through Cisco hardware as I write this. Just to give one example, Cisco has more than half of the entire market for Ethernet switches as of 2019. It produces hardware such as switches, routers, and products for data centers, and also produces software related to networking and security.
The company's products are sold all around the world, with about 60% of sales coming from the Americas and large presences in Europe and Asia as well. Unlike many of the most popular technology stocks, Cisco is profitable and has steady, predictable revenue, and trades for a relatively low valuation relative to most its tech peers.
Which of these stocks are the best value?
The short answer is to determine which of these stocks look cheap relative to their peers and to their own intrinsic value. However, that's easier said than done. And it's important to keep in mind that as stock prices fluctuate over time, the relative "value" offered by each of these can change.
The best course of action if you want to find the best bargains is to learn the basics of value investing, such as some of the key metrics you can use to determine if a stock is cheap or expensive, methods to estimate the intrinsic value of a company, and more. Keep in mind that there's not just one method of evaluating value stocks, and that just like any other type of stock market investing, there's considerable risk when buying value stocks (although they tend to be less volatile than their high-growth counterparts).
There's no way for me to tell you how to thoroughly analyze value stocks in a few paragraphs or even in a few pages, so I'll encourage you to read some great books on value investing, such as Benjamin Graham's The Intelligent Investor, if you're serious about choosing your own value stocks.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of American Express, Apple, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Amazon, Apple, Berkshire Hathaway (B shares), Microsoft, and Walt Disney. The Motley Fool is short shares of Procter & Gamble and has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), long January 2021 $85 calls on Microsoft, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Comcast and Johnson & Johnson. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com