This way of picking value stocks has actually worked — and Berkshire Hathaway screens the best

“As rate hikes remain the key driver of markets this year, we expect value to continue to outperform in 2022 with growth stocks underperforming shortly before and in reaction to rate hikes and then recovering lost ground afterwards,” says Joachim Klement, a strategist at the U.K. broker Liberum.

But what’s the best way to pick value stocks? Using price-to-earnings hasn’t worked over the last 20 years in the U.S., and particularly not in the last decade. And since 2000, buying the highest-yielding stocks each month has generated virtually no outperformance over the lowest yielding stocks, says Klement.

Price-to-book, however, hasn’t done as badly. Value stocks picked using price-to-book criteria have underperformed by less than value stocks based on price-to-earnings, during the financial crisis and again in the COVID-19 crisis. And since the vaccine news in November 2020, low price-to-book stocks have been outperforming, particularly in December and January.

Company	Ticker	FY2 cash flow yield	FY2 P/E	FY2 dividend yield	Historic price-to-book
Berkshire Hathaway	BRK	0.0%	24.3	0.0%	0.0
Lincoln National	LNC	18.5%	6.3	2.6	0.6
Citigroup	C	0.0%	7.8	3.5%	0.7
Viatris	VTRS	21.4%	3.9	3.7%	0.8
Molson Coors Beverage	TAP	13.7%	11.8	3.2%	0.8
Kraft Heinz	KHC	8.5%	13.8	4.5%	0.9
Invesco	IVZ	18.9%	6.7	3.5%	1
Loews	L	0.0%	n/a	0.0%	1
American International Group	AIG	21.8%	10.5	2.5%	1
Carnival	CCL	23.7%	10.1	0.0%	1
Data: Datastream

The cheapest S&P 500 stock by historical price-to-book (other than those with negative numbers) is none other than Berkshire Hathaway
BRK,
the Nebraska conglomerate run by legendary investor Warren Buffett, though that’s really a technicality as the B shares don’t carry rights to the underlying equity capital. The A shares have a still healthy price-to-book of 1.49.

The insurer Lincoln National
LNC
and banking giant Citigroup
C
screen well on price-to-book, as does Kraft Heinz
KHC,
which perhaps not surprisingly is the fifth-largest holding by Berkshire Hathaway.

The buzz

U.S. jobs numbers completely surprised economists. The U.S. added 467,000 nonfarm positions in January, when some feared negative numbers, while the unemployment rate ticked higher to 4%. Average hourly earnings have climbed nearly 6% over the last 12 months.

Amazon.com
AMZN
is set to bounce higher by some 12%, after crushing earnings estimates and announcing it will increase the subscription cost of its Prime service.

Amazon “once again showed why they are the best game in town by a wide margin, topping consensus’ operating income projections,” said Daniel Kurnos, an analyst at Benchmark Research, who said e-commerce was underwhelming but not the huge miss many feared, while revenue at cloud provider AWS surprisingly accelerated, and the company broke out advertising revenue for the first time. 

By one estimate, founder Jeff Bezos is set to see his personal wealth rise by some $20 billion as a result.

Social-media companies Snap
SNAP
and Pinterest
PINS
are set to rally after results dispelled worries over their outlook following the downbeat forecast of Facebook parent Meta Platforms
FB.
Ford Motor Co.
F,
however, lagged behind earnings expectations.

The markets

Stock futures lost luster after the surprising strength in jobs numbers. The Nasdaq-100
NQ00
contract was set to gain slightly, while the S&P 500
ES00
futures dropped.

The yield on the 10-year Treasury
BX:TMUBMUSD10Y
was 1.82%.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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