There are many philosophies when it comes to investing and one of them is known as Value Investing. Benjamin Graham is credited with being the father of modern day value investing. He wrote two influential books called “Security Analysis” and “The Intelligent Investor” which laid out much of his methodology. The basic premise is to buy a stock or security at less than it’s intrinsic value. By buying at a discount the investor will theoretically have less risk than if he were paying full or an overly inflated price.

Warren Buffet is the most well known value investor of our time. His philosophy is to buy great companies when they are out of favor and hold them for very long periods of time. Buying companies like Coca Cola and Wells Fargo at times of uncertainty has proven to be a very good strategy for Warren and his company Berkshire Hathaway. This type of investing takes lots of patience which very few investors have. It also requires quite a bit of research that most casual investors aren’t willing to do. That’s why there are advisory services that focus on value investing as well as stock screeners.

One free service that I’ve used over the years to look for ideas is the Magic Formula approach by Joel Greenblat @ magicformulainvesting.com. This service tends to find out of favor companies that are trading cheap relative to cash flow. Right now it’s showing a combination of Large Cap Tech like Microsoft, Dell, HP, Applied Materials, KLA Tencor, Cisco and Analog Devices to name a few. Many of these large tech stocks are trading well below their highs over a decade ago despite growing their earnings over the years. Other candidates are companies who have erosion taking place in their markets like Unisys and Deluxe. There are also several Online Colleges in the bunch as they are extremely out of favor right now. One that I find interesting is Dolby another is Forrest Labs as Carl Ihcan has been rattling the cages at this company for awhile now. Gamestop also makes the list as well as defense contractors Northrup Grumman and Raytheon which are out of favor due to pressure on government spending. There are also some chronic entries on the list such as ViroPharma which has been on this list for years!

There are ways to play value using ETFs as well, if you look at the Technology ETF space you will see that all of the large cap oriented funds contain several of these undervalued companies. Large cap tech as a whole is probably the most undervalued sector of the market.

In 2000, it was small cap value that was severely undervalued as all the focus was on Large Cap Tech and the Nasdaq 100 so its funny how times change. The Small Cap ETF – IWN focuses on value stocks and has been a superior performer the past decade as you can see by the chart below comparing it to the S&P 500 ETF.

The hard part about value investing is that you have to learn to be a contrarian and buy when others are throwing away the stock. It takes lots of discipline but can be extremely rewarding.