In a recent publication, we highlighted a list of 11 Ridiculously Cheap Stocks to Invest in, drawing attention to the intriguing position of Herbalife Ltd. (NYSE:HLF) among these options. This discussion not only serves to inform potential investors but also illustrates the broader theme of value investment in todays financial climate.

Investing in the stock market is not unlike searching for bargains in a commodity marketplace. Just as consumers compare prices, seeking out products that offer significant value for their cost, investors must similarly evaluate stock prices to identify worthwhile investments. In both scenarios, the price point is a crucial factor.

In a financial landscape often characterized by inflated stock prices, the ability to unearth hidden gems sets discerning investors apart from those who make impulsive decisions. The essence of savvy investing lies in understanding that value is not solely determined by what one buys, but rather by the price one pays for it. Investors who grasp this concept are better positioned to discover stocks that may be overlooked yet hold substantial potential.

To understand what qualifies as a cheap stock, we should delve into its two primary interpretations. The first interpretation considers a stock cheap if it carries a low share price. The secondand more common interpretationrefers to undervalued stocks, which are those trading below their intrinsic value. This intrinsic value is often assessed through various metrics, including earnings, revenue, and assets. Therefore, a stock deemed cheap in the market context is one that has not yet been recognized for its true potential, making it an appealing investment opportunity.

One effective method for identifying cheap stocks is through the forward price-to-earnings (P/E) ratio. This financial metric allows investors to evaluate how much they are paying for each dollar of a companys earnings. A low P/E ratio could indicate that a stock is undervalued in comparison to its peers, historical performance, and the general market average.

A report from Hoover Capital Management (HCM) has investigated the historical performance of value stocks compared to growth stocks using the French High Minus Low (HML) factor. The analysis, spanning an impressive 97 years from July 1926 to December 2023, strongly advocates for the merits of value investing. Findings reveal that the cumulative return of value stocks has eclipsed that of growth stocks by an astounding 3,000%. In laymans terms, this means that investing in value stocks has yielded returns 30 times greater than those obtained from growth stocks.

Further reinforcing this perspective is a study conducted by economist Victoria Galsband, which indicates that cheap stocks have consistently outperformed growth stocks across all G7 nations, including Canada, the United States, Japan, and other leading European countries, from 1975 to 2010.

Additionally, another significant report examined how the additions and removals of companies from the S&P index influence their valuations. The results indicated that companies removed from the index often exhibited undervaluation, while those added typically gained in value. Research Affiliates conducted a study revealing that stocks removed from the S&P index between 1990 and 2022 outperformed those that were newly added by over 5% annually. This compelling evidence supports our stance that undervalued stocks, which are essentially perceived as cheap stocks, have a higher likelihood of achieving substantial returns.