Value investing has created more billionaires than any other investment strategy. Legendary investors like Warren Buffett, Benjamin Graham, and Peter Lynch built their fortunes by finding undervalued stocks. Value stock screens help you identify these hidden gems by filtering for stocks trading below their intrinsic worth.
What is Value Investing?
Value investing means buying stocks for less than they are worth. The idea is simple: find good companies that the market has temporarily mispriced, buy them at a discount, and wait for the market to recognize their true value. Value screens help automate the search for these bargains.
Warren Buffett's principle: "Price is what you pay. Value is what you get." Value screens help you find stocks where you get more value than the price you pay.
Essential Value Metrics for Screening
1. Price-to-Earnings (P/E) Ratio
The P/E ratio compares stock price to earnings per share. Lower P/E stocks are generally considered more affordable. However, a very low P/E might indicate problems, so context matters.
P/E Screening Guidelines
- Deep value: P/E below 10
- Moderate value: P/E between 10 and 15
- Fair value: P/E between 15 and 20
- Compare to sector: P/E below sector average
2. Price-to-Book (P/B) Ratio
P/B compares stock price to book value (assets minus liabilities). A P/B below 1.0 means you are buying the company for less than its asset value. Benjamin Graham famously looked for stocks with P/B below 1.5.
3. Price-to-Sales (P/S) Ratio
P/S is useful for companies with inconsistent earnings. It compares stock price to revenue. Lower P/S ratios may indicate undervaluation, especially when combined with improving profit margins.
4. Enterprise Value to EBITDA (EV/EBITDA)
This metric accounts for debt and is favored by professional investors. An EV/EBITDA below 10 is often considered cheap, though this varies by industry.
5. Free Cash Flow Yield
Free cash flow yield (FCF/market cap) shows how much cash a company generates relative to its price. A high FCF yield (above 5-8%) often indicates value, especially if cash flows are stable.
Classic Value Screening Strategies
Benjamin Graham's Defensive Investor Screen
From "The Intelligent Investor," this conservative screen looks for financially strong companies at reasonable prices:
- Market cap above $2 billion (large company safety)
- Current ratio above 2.0 (strong liquidity)
- Positive earnings for each of the past 10 years
- 20-year dividend payment history
- Earnings growth of at least 33% over 10 years
- P/E ratio below 15
- P/B ratio below 1.5
- P/E times P/B below 22.5
Graham's Bargain Screen (Net-Net)
Graham's most aggressive value approach:
- Price below 66% of net current asset value
- Net current asset value = Current assets - Total liabilities
- Positive earnings (not required but preferred)
These "net-net" stocks are rare but can offer significant upside when found.
Buffett-Style Quality Value Screen
Warren Buffett evolved beyond Graham to focus on quality businesses at fair prices:
- ROE above 15% for 10 consecutive years
- Debt-to-equity below 0.5
- Consistent earnings growth
- Strong free cash flow generation
- P/E below 20
- Wide competitive moat (qualitative assessment needed)
Deep Value Contrarian Screen
For investors willing to buy out-of-favor stocks:
- 52-week low (or within 10% of low)
- P/E below 10
- P/B below 1.0
- Positive book value
- No losses in last 12 months
The Margin of Safety Concept
The margin of safety is the difference between a stock's price and its intrinsic value. Value investors demand this buffer to protect against errors in their analysis and unexpected problems.
How to screen for margin of safety:
- Compare to historical valuation: Is the current P/E below its 5-year average?
- Compare to peers: Is it cheaper than similar companies?
- Analyst price targets: Is it trading significantly below average target?
- Asset-based valuation: Is price below liquidation or replacement value?
Value Traps: What to Avoid
Not every cheap stock is a value opportunity. Value traps are stocks that appear cheap but deserve their low valuations. Screen for quality alongside value:
- Declining revenue: Avoid stocks with shrinking sales unless there is a clear turnaround
- Deteriorating margins: Falling profit margins often justify lower valuations
- Heavy debt: High debt can overwhelm otherwise cheap stocks
- Industry disruption: Cheap stocks in dying industries may never recover
- Management issues: Poor capital allocation or excessive compensation are red flags
Combining Value with Quality
Modern value investors often add quality filters to avoid traps:
- Profitability: ROE or ROIC above industry average
- Balance sheet strength: Low debt, high current ratio
- Earnings quality: Cash flow matches or exceeds net income
- Stability: Low earnings volatility over time
- Dividend history: Consistent or growing dividends indicate shareholder focus
Track Your Value Investments
Pro Trader Dashboard helps you monitor your value stock portfolio and track performance over time. See which screens lead to your best investments.
Patience: The Value Investor's Edge
Value investing requires patience. Undervalued stocks can stay undervalued for months or years before the market recognizes their worth. This psychological challenge is why value investing works. Most investors lack the patience to wait.
Tips for staying patient:
- Focus on the business, not the stock price
- Collect dividends while you wait
- Reconfirm your thesis periodically
- Diversify across multiple value stocks
Summary
Value stock screens help you systematically find undervalued stocks using metrics like P/E, P/B, and free cash flow yield. By following proven strategies from legendary investors and adding quality filters to avoid value traps, you can build a disciplined approach to finding bargains. Remember that value investing requires patience and conviction to succeed.
Continue building your screening toolkit with our guides on dividend stock screens for income-focused value or growth stock screens for a different investment approach.