Warren Buffett made his millions following the rules of value investing. Value investing is the art of buying stocks for less than their intrinsic value.
Businesses that have low cyclically adjusted P/Es are potential buys, and once P/Es rise those stocks get sold off.
"We fish in particular ponds of cheap stocks. Businesses often are cheap for a reason, but is that a good reason? As value investors, we frequently find it's not," says value investor Nick Kirrage, fund manager at Schroders. "By investing in those businesses, when they're very out of favor, you can make significant returns for clients."
Disciplined value investors may wish to consider the fate of these UK stocks that have a one of two-star Morningstar rating, meaning they are overvalued.
BT Group (BT.A)
BT Group, formerly known as British Telecom, is the incumbent phone operator and largest supplier of fixed-line phone services in Britain with about 42% market share. BT's external sales are split between global services (39%), retail (37%), wholesale (14%), and Openreach and other (10%). BT is the largest supplier of high-speed Internet lines, including lines it wholesales.
Prudential (PRU)
Founded more than 150 years ago in London, Prudential PLC is the largest life insurer in the U.K. The company began doing business in Asia in the 1920s; today the region accounts for 40% of total sales. The Asian business is geographically diversified with attractive margins, whereas the U.K. and U.S. operations are built around narrow product mixes, but with growing distribution power. In addition to insurance products, Prudential PLC also provides asset management services in a range of markets including the U.S., Asia, and Europe.
Rolls-Royce (RR.)
Rolls-Royce is one of the world's leading suppliers of jet engines to civil, defense, marine, and energy applications. In 2012, the firm generated £12 billion in revenue.
Sainsburys (SBRY)
Sainsbury is one of the largest grocery store operators in the United Kingdom, with more than 550 supermarkets and 500 convenience stores. A vast majority of Sainsbury’s revenue comes from the sale of food products, although the firm also sells gasoline and general merchandise in multiple channels. Convenience stores represent a little more than 5% of Sainsbury’s total square footage, while traditional supermarkets represent the remainder.
United Utilities (UU.)
United Utilities Group is primarily a holding company for United Utilities Water, the country's largest regulated water and wastewater utility serving nearly seven million customers in northwest England, including Manchester and Liverpool.