Value investing is one of the most popular (and most successful) strategies for long term investors to adopt. Clearly, it involves buying shares in companies when they offer good value for money and then holding on to them for the long run, by which point the price discrepancy at the time of purchase should (in theory) have been eroded.
However, exactly what is a good value share? Some may argue that it is all about the price at which you buy, with cheaper stocks naturally offering better value for money. However, other investors will rightly point out that sometimes stocks can be cheap for a good reason; their futures are somewhat bleak.
As such, a sensible way to define good value is perhaps to focus on the quality of a business, its future potential and judge whether its current valuation is too high or too low based on these two areas. And, with that in mind, here are three stocks that appear to fulfil all of this criteria, thereby making them companies that could boost your portfolio returns.
Wesfarmers Ltd
One of the major attractions of Wesfarmers Ltd (ASX: WES) is its defensive attributes. For example, its performance tends to be relatively resilient even when the wider economy is enduring a challenging period and, with the future of the ASX and economy being uncertain at the present time, this could improve investor sentiment in Wesfarmers.
In addition, Wesfarmers trades on a beta of just 0.64 and this indicates that its shares should be less volatile than the ASX moving forward. Furthermore, it has a price to sales (P/S) ratio of just 0.84, which is considerably less than the ASX's P/S ratio of 1.64, even though Wesfarmers is forecast to increase its bottom line at an annualised rate of 9.6% during the next two years.
Ramsay Health Care Limited
For some investors, the current price to earnings (P/E) ratio of Ramsay Health Care Limited (ASX: RHC) will indicate that it offers poor value for money. After all, it is almost twice that of the ASX at 32 versus 16.8 for the wider index.
However, Ramsay's rating does not paint the full picture. That's because it is a highly defensive business that is likely to perform relatively well no matter what the prevailing economic conditions are. Furthermore, it has a sound strategy of expanding outside of Australia so as to spread its geographic risk, which is likely to bode well for its growth profile.
Furthermore, Ramsay is expected to grow its bottom line by around 43% during the next two years, which puts it on a lower and more appealing price to earnings growth (PEG) ratio than the ASX of 1.63 versus 2.38.
Insurance Australia Group Ltd
While a number of stocks in the insurance sector trade at a premium to the ASX, Insurance Australia Group Ltd (ASX: IAG) is not one of them. For example, it has a P/E ratio of 13.2 versus 19.8 for the wider insurance index and, with it having an excellent track record of bottom line growth, this appears to be far too low.
In fact, IAG has increased its bottom line by 43.3% per annum during the last five years, which has been translated into improved investor sentiment that has helped it to post total shareholder returns of 14.7% per year during the same period. And, while IAG's net profit is due to fall in the current year by 27.5%, it is expected to bounce back strongly next year with growth of 9.4%.
Of course, finding the best stocks for the long term is a tough ask – especially when work and other commitments limit the amount of time you can spend trawling through the index for them.
