Buffett Indicator Signals Caution: 5 Top Value Stocks to Buy

The S&P 500 and the Nasdaq gained for the fifth month in a row in July, and small-cap stocks bounced back on some upbeat economic indicators and cues of cooling inflation. Yet, worries of a market crash have not dispersed.

Warren Buffett’s Warning Signals

Warren Buffett, the legendary investor and a proponent of value investing, has long relied on a market indicator to assess the valuation of U.S. stocks. The Buffett Indicator, as it is called, compares the total market capitalization of all actively traded U.S. stocks to the latest estimate of quarterly GDP, has surged to a worrying 171% as of the latest data, per Business Insider, quoted on Yahoo Finance.

In the past, Buffett suggested that a reading of 100% would signify fair valuations, while levels around 200% would be as good as dancing on edge. Since the current reading is way above 100%, investors should be cautious about the potential of a market crash.

Top-ranked value stocks like North American Construction Group NOA, Owens Corning OC, Urban Outfitters URBN, Boise Cascade BCC and M.D.C MDC appear to be good picks now as value investing aligns with Warren Buffett’s own investment philosophy.

Is Market Entering an AI Bubble?

Investors are increasingly betting on factors like the AI boom, a less-hawkish Fed and a soft landing for the economy. While these factors have contributed to the market’s bullish run, Buffett’s preferred indicator points toward caution. The indicator had shown its merit in the past, notably during the dot-com bubble when it acted as a strong warning of a likely crash.

Fitch Slashes U.S. Credit Rating to AA+

Rating agency Fitch downgraded the United States to AA+ from AAA this week, expecting fiscal deterioration over the next three years and repeated last-minute debt ceiling negotiations that can pressurize the government’s ability to pay its bills.

Fitch initially raised concerns about a potential downgrade in May and continued to support that stance in June after the resolution of the debt ceiling crisis. The agency, however, stated its intention to conclude the review in the third quarter of the current year, per Reuters, quoted on Yahoo Finance.

Why Go for Value Investing?

Given the current market conditions and Buffett’s warning signals, investors may consider adopting a value-oriented approach to their investments. Value investing offers a prudent strategy to navigate stock market volatility.

The style focuses on companies with strong fundamentals that are trading at discounted prices compared to their intrinsic value. By selecting stocks based on their actual worth rather than market speculation, investors can potentially shield their portfolios from overvalued and high-risk stocks.

Agreed, there are some bottlenecks in the Buffett Indicator, for insntance, the gauge takes GDP measurements excluding overseas income, whereas the market capitalizations of U.S. companies consider both domestic and foreign operations.Still, the indicator offers valuable insights into the relative valuation of stocks.

Our Picks

Against this unstable backdrop, we highlight a few value stocks that could be intriguing picks right now. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy).

These stocks also possess the best Value Score of A and have a forward P/E ratio less than the S&P 500 (i.e. 17.86X). These stocks have gained more than 5% in the past week.

North American Construction Group – P/E: 12.39X; Up 30.43% Past Week

The Zacks Rank #2 North American Construction Groupprovides heavy construction and mining services primarily in Canada. NOA offers services to large oil, natural gas and resource companies.

Owens Corning– P/E: 11.10X; Up 7.96% Past Week

The Zacks Rank #1 Owens Corning is a world leader in building materials systems and composite solutions. Since its inception in 1938, OC has evolved as a market-leading innovator of glass fiber technology.

Urban Outfitters– P/E: 13.11X; Up 7.74% Past Week

The Zacks Rank #2 lifestyle specialty retailer offers fashion apparel and accessories, footwear, home décor and gifts products. Urban Outfitters’ merchandises are generally sold directly to consumers through stores, catalogs, call centers and e-commerce platforms.

Boise Cascade– P/E: 11.96X; Up 8.27% Past Week

The Zacks Rank #1 Boise Cascade operates as a wood products manufacturer and building materials distributor. BCC manufactures engineered wood products, plywood, lumber and particleboard and distributes wood products, such as decking, EWP, lumber, panel, particleboard, and MDF products.

M.D.C. – P/E: 13.15X; Up 6.92% Past Week

The Zacks Rank #1 company is engaged in homebuilding and financial services in the United States. Its revenues are generated from Homebuilding (accounting for 97.7% of 2022 total revenues) and Financial Services (2.3%) operations.

Urban Outfitters, Inc. (URBN): Free Stock Analysis Report

M.D.C. Holdings, Inc. (MDC): Free Stock Analysis Report

Owens Corning Inc (OC): Free Stock Analysis Report

Boise Cascade, L.L.C. (BCC): Free Stock Analysis Report

North American Construction Group Ltd. (NOA): Free Stock Analysis Report

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