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.

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, +0.76%, 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, +7.31% and banking giant Citigroup C, +2.65% screen well on price-to-book, as does Kraft Heinz KHC, -2.89%, 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, +15.65% 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, +63.08% and Pinterest PINS, +11.24% are set to rally after results dispelled worries over their outlook following the downbeat forecast of Facebook parent Meta Platforms FB, +0.60%. Ford Motor Co. F, -9.18%, however, lagged behind earnings expectations.

The markets

Stock futures lost luster after the surprising strength in jobs numbers. The Nasdaq-100 NQ00, +2.00% contract was set to gain slightly, while the S&P 500 ES00, +1.23% futures dropped.

The yield on the 10-year Treasury TMUBMUSD10Y, 1.929% was 1.82%.

Top tickers

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

Random reads

Inflation isn’t quite everywhere — there are negative prices for supertankers to ship crude oil.

This parrot pilfered a GoPro and filmed its airborne escape.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.