Stock market correction: an unmissable opportunity to buy value stocks!

Value stocks are well represented in my portfolio. I don’t tend to chase growth, but look for stocks that are trading at a discount to book or intrinsic value.

It is essentially a value investing strategy. As investors, we want to find stocks that are undervalued and hold on until they trade at a suitable price.

This can take time. After all, value investors such as Warren Buffett often take very long investment positions – perhaps decades.

So why invest in value stocks now? Let’s take a closer look.

Falling stock prices

A correction is a decline of at least 10% in the price of a stock, bond, commodity, or index. The market has fallen by around 7% over the past month, but some parts of the market, such as financials, have seen further declines.

Rich stocks Barclays fell as much as 21% over the course of a month after the Silicon Valley Bank fiasco. This was followed by wider concerns about the health of the financial sector and, in particular, around billions in unrealized bond losses.

Under normal circumstances, the majority of bonds held by a typical bank – and their gains or losses – are not counted against earnings and regulatory capital until the bonds are sold.

The problem is, bond prices and interest rates move in opposite directions. In the past year, central banks have raised interest rates. That led to huge unrealized losses in the bond market.

However, for me and many analysts, the fear that banks have billions in losses is overdone. After all, these are unrealized losses and big banks have more diverse holdings that SVB. In addition, the big question is about the health of bank deposits. And I don’t see much stress here – although I appreciate some analysts.

Banks in Europe are certainly in a stronger position than they were during the financial crisis. For example, in the EU, bad loans have fallen from €1tn eight years ago to below €350bn last year – just 2% of total loans.

Finding value

Investing in undervalued stocks is an integral part of a value investing strategy. However, the problem is finding these value stocks. It takes a lot of research because we’re actually looking for value that others can’t see.

I can look at simple, close metrics like the price-to-earnings (P/E) ratio, or enterprise value-to-EBITDA. That should give me a good idea of ​​relative valuation.

But there are more complex metrics, such as the discounted cash flow (DCF) model. This can be a difficult calculation because it requires us to make a forecast of our future earnings for the next 10 years.

Buffett is known to look for a margin of safety of around 30%, or even more.

So as a value investor and bearish bank stocks, I look at this sector to invest in underperforming stocks.

DCF metrics suggest Lloyds can be undervalued up to 60% and currently trades with a P/E ratio of only 6.3. That’s why I want to buy more for my portfolio.

But it should be noted that the value in the financial sector, especially in the UK, looks very good at the moment. Dividend yields are also on the rise as share prices have fallen.