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

Amazon.com’s earnings surprise is the story of the day, pushing even the jobs report into second billing. More on that in a second.

But the broader story of the markets is unchanged. Interest rates are climbing, not just in the U.S. but globally, as seen in the Bank of England’s second rate increase in as many decisions and the hawkish language coming from European Central Bank President Christine Lagarde on Thursday. That’s going to be a difficult environment for growth stocks that thrived in the easy money, low interest-rate era.

“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.B, -1.37%
0.0%
24.3
0.0%
0.0
Lincoln National
LNC, -6.27%
18.5%
6.3
2.6
0.6
Citigroup
C, -1.48%
0.0%
7.8
3.5%
0.7
Viatris
VTRS, -1.11%
21.4%
3.9
3.7%
0.8
Molson Coors Beverage
TAP, +0.64%
13.7%
11.8
3.2%
0.8
Kraft Heinz
KHC, -1.48%
8.5%
13.8
4.5%
0.9
Invesco
IVZ, +0.04%
18.9%
6.7
3.5%
1
Loews
L, -0.47%
0.0%
n/a
0.0%
1
American International Group
AIG, -1.26%
21.8%
10.5
2.5%
1
Carnival
CCL, -2.45%
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.B, -1.37%, the Nebraska conglomerate run by legendary investor Warren Buffett. The insurer Lincoln National LNC, -6.27% and banking giant Citigroup C, -1.48% also screen well on price-to-book, as does Kraft Heinz KHC, -1.48%, which perhaps not surprisingly is the fifth-largest holding by Berkshire Hathaway.

The buzz

Amazon.com AMZN, -7.81% 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, -23.60% and Pinterest PINS, -10.32% are set to rally after results dispelled worries over their outlook following the downbeat forecast of Facebook parent Meta Platforms FB, -26.39%. Ford Motor Co. F, -3.59%, however, lagged behind earnings expectations.

Expectations aren’t great for the nonfarm payrolls report, with economists expecting 150,000 jobs added, though a negative number wouldn’t be a shock, particularly as the White House has been busy playing down the report all week. The unemployment rate is seen staying at 3.9%.

The markets

The Nasdaq-100 NQ00, +0.57% contract was set to gain after the Amazon showing, while the S&P 500 ES00, +0.01% futures turned slightly lower.

The yield on the 10-year Treasury TMUBMUSD10Y, 1.824% was 1.80%.

Top tickers

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

Ticker
Security name
AMZN, -7.81%
Amazon.com
FB, -26.39%
Meta Platforms
TSLA, -1.60%
Tesla
GME, -0.81%
GameStop
AMC, -3.57%
AMC Entertainment
SNAP, -23.60%
Snap
NIO, -2.65%
NIO
AAPL, -1.67%
Apple
AMD, -2.18%
Advanced Micro Devices
XELA, -0.77%
Exela Technologies

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