Make Value Stocks Work for Your Portfolio

In the midst of this volatile market, value stocks are garnering more interest. With rising commodity costs and the tightening financial markets leading to decelerating growth rates across the globe, investors are no longer as willing to bid up the highest earnings growers to exorbitant price-to-earnings levels.

That's where a strategy of value investing can really pay off. Using traditional valuation metrics like P/E, price-to-book value and enterprise value-to-EBITDA, investors should focus on names that are less expensive than their peers.

Growth can also be part of the equation, but only when a stock is trading at a reasonable price. In this manner, investors can still play hot sectors such as energy, infrastructure and mining with less volatility than the faster-growing, higher-priced names carry.

Along these lines, I've been able to score wins with multiple discounted names in the natural gas space, as well as Norfolk Southern (NSC Quote - Cramer on NSC - Stock Picks) as the rails have motored higher in recent quarters.

Of course, as with any stock one buys, the company has to have potential catalysts for the investment to work out. Without a meaningful catalyst, a stock that looks inexpensive may remain underpriced for some time. With that in mind, patience is an important virtue of value investing, as these stocks or sectors can sometimes take several quarters to catch up with peers and reach their true full valuation.

Add in a healthy dividend yield, and yet get an extra headstart in a down market. That's why in both my Value Investor and Dividend Stock Advisor newsletters, I focus on companies that also return cash to shareholders through consistent dividend payments.

And that could be important, as I believe that weak consumer spending will continue to weigh on domestic earnings growth, driven by a prolonged downturn in the housing market and continued weakness in the job market.

For more information and investment picks on value stocks, check out my Value Investor newsletter. The model portfolio is currently up 12.11% year-to-date, including dividends, through June 5, or 15.6 percentage points ahead of the benchmark S&P 500.