Value Investing in 2026: 3 Stocks for a $1,000 Portfolio

The market environment is shifting, and for patient investors, that shift often creates opportunity. The recent past, stretching from 2020 through 2024, felt a bit like walking through a casino where almost every table was paying out. In that period, more than half of S&P 500 companies delivered annualized returns above 15%, and about 90% had positive annualized returns. Simply "putting chips on the table" worked unusually well. This year has been different. As 2025 winds down, around 40% of the S&P is heading for a negative year. That shift in the odds is the core of how we're thinking about 2026. The coming year looks less like a casino and more like an investor's market. You win not by chasing every hot trade, but by sizing positions thoughtfully and focusing on high-probability outcomes.

The good news is that the central problem of recent years-the inflation storm-looks largely behind us. Shelter inflation has moderated, underlying price volatility is back in line with the stable period of the 1990s and 2000s, and market expectations for future inflation are hovering around 2.3%. This allows the focus to move to the next challenge: labor and affordability. The economy is showing signs of a slowdown in job creation outside of healthcare, and wage growth is moderating. This combination is not the backdrop for keeping policy restrictive, which could support a more stable environment for business.

Yet, even with a bull market that began in 2023, value investors hunting for a good bargain can still find some undervalued companies on sale. An undervalued stock is a publicly traded company that's trading for less than it should be, often for overblown short-term concerns. Typically, these companies are consistently profitable and have attractive long-term growth prospects. Share prices are also cheap compared to many of their peers and compared to the amount of future profit expected to be generated. Such stocks can be great options for patient buy-and-hold investors willing to wait for hidden bargains.

The key is distinguishing between a stock that is cheap for a good reason-because its business model is deteriorating or it's losing to new competitors-and one that is cheap because of a temporary setback. The latter is where the value investor's edge lies. AI is emerging as a central lever for cost management and earnings growth, which could help companies navigate the current labor and affordability headwinds. The setup is for a more disciplined market where the focus returns to intrinsic value, and where a company's ability to compound over long cycles matters more than quarterly beats.

Candidate 1: Berkshire Hathaway (BRK.B)

Berkshire Hathaway presents a classic value opportunity, not because it is a simple stock, but because its immense scale and unique business model create a durable competitive moat. The company's float-adjusted market cap of $1.1 trillion is a testament to its size, which provides a powerful advantage. This scale allows Berkshire to deploy capital with unmatched flexibility, a key element of its long-term strategy.

The intrinsic value of Berkshire is derived almost entirely from the long-term earnings power of its operating businesses, not from its stock portfolio. This is the core of the value investor's case. The company owns a diverse conglomerate of stable, cash-generating enterprises-from railroads and utilities to consumer brands-that compound value quietly over decades. These businesses, like See's Candies or Dairy Queen, are not required to grow aggressively; they simply need to produce reliable profits, which then fund further investments. This model, championed by Warren Buffett and Charlie Munger, is about building a durable economic engine, not chasing quarterly headlines.

This focus on underlying earnings power is reflected in its valuation. Despite its colossal size and earnings stream, Berkshire trades at a low price-to-earnings ratio relative to its intrinsic worth. This is partly because the market often struggles to value a holding company with such a complex mix of assets. More importantly, the company's vast cash reserves-over $340 billion as of mid-2025-represent a massive war chest for future opportunities. This dry powder, held in a value-oriented mindset, is a form of hidden value that is not fully reflected in the share price today.

For the patient investor, Berkshire is a bet on a proven management team and a capital allocation process that has compounded wealth for over fifty years. It is a stock where the market's short-term noise about its size or the transition in leadership is likely to be outweighed by the long-term compounding of its operating earnings. In a market where many large-cap stocks command premium valuations, Berkshire's low P/E and enormous cash hoard offer a rare setup for buying a dollar bill for fifty cents.

Candidate 2: Lennar (LEN)

Lennar is a prime example of a high-quality business trading at a discount, where the market's focus on cyclical headwinds may be overshadowing its operational strength. The company is the largest homebuilder in the United States, and its scale is a key part of its competitive moat. This size allows for significant economies of scale in land acquisition, construction, and financing, which helps it maintain profitability even when the housing cycle turns. Its float-adjusted market cap of $27.1 billion positions it as a major player, but not an overwhelming one, which provides a balance of stability and growth potential.

The most telling metric for Lennar's profitability is its gross margin. In a cyclical industry where costs can swing wildly, a consistent margin is a sign of pricing power and operational discipline. Lennar's gross margin of 17.91% is a critical indicator. This figure, which sits well above the industry average for many years, demonstrates the company's ability to control costs and pass on price increases to consumers. It is the engine that drives its earnings and funds its growth. For a value investor, this margin is the bedrock of intrinsic value-it shows the company is not just surviving the cycle, but earning a solid return on its capital.

The question for investors is whether the stock's valuation reflects a temporary cyclical dip or a deeper, structural issue. The evidence suggests the latter is not the case. Lennar's financial health is robust, supported by its scale and disciplined capital allocation. The company has consistently delivered strong cash flow, which it uses to pay down debt and return capital to shareholders. Its dividend yield of 1.88% is a tangible return for patient investors, signaling management's confidence in the business's durability.

The market's pricing of Lennar likely discounts near-term housing affordability pressures and a potential slowdown in sales. Yet, the company's wide moat-built on scale, brand recognition, and a proven ability to generate a healthy gross margin-provides a durable foundation. This is the classic value setup: a business with a clear competitive advantage, trading at a price that seems to ignore its long-term earning power. For the investor focused on intrinsic value, Lennar represents a bet on a well-run company navigating a cyclical trough, where the margin of safety is provided by its operational strength and financial discipline.

Candidate 3: British American Tobacco (BTI)

British American Tobacco presents a classic defensive investment, where a high and reliable dividend yield is the centerpiece of its appeal for patient capital. The stock offers a dividend yield of 5.73%, a tangible income stream that is characteristic of mature, cash-generative businesses. This yield is not a gimmick; it is supported by a long history of consistent payouts and a business model built for stability. For the value investor, this is a form of hidden value-a predictable return on capital that compounds over time, providing a cushion against market volatility.

The underlying business model is the foundation of that stability. British American Tobacco operates in a mature industry, but its scale and global reach create a durable competitive advantage. Its gross margin of 64.78% is exceptionally high, reflecting powerful pricing power and operational efficiency. This margin is the engine that funds the dividend and provides ample cash for reinvestment or debt reduction. It is the hallmark of a business that has successfully navigated regulatory and competitive pressures for decades, maintaining profitability even as the industry landscape evolves.

The question for investors is whether the stock's valuation is depressed by overblown regulatory concerns. The company faces a complex and costly global regulatory environment, which can create uncertainty and pressure on future growth. Yet, its global brand portfolio and entrenched market share act as a formidable moat. These assets allow it to maintain pricing power and defend its customer base, mitigating the risk of a sharp decline in earnings. The high dividend yield, in this light, may represent a margin of safety-a discount that compensates for the perceived regulatory overhang, while the company's operational strength continues to generate cash.

For the disciplined investor, British American Tobacco is a bet on a proven business navigating a challenging but predictable cycle. It is not a growth story, but a cash-generating machine with a wide moat. The setup is one where the market's focus on near-term regulatory friction may be overshadowing the long-term durability of its earnings and its ability to return substantial capital to shareholders. In a market where many high-quality companies command premium valuations, BTI offers a rare combination of a high, sustainable yield and a business with a fortress-like competitive position.

Implementation and Watchpoints

For an investor starting with a $1,000 portfolio, the goal is to build a foundation for long-term compounding. The key is diversification. While we've highlighted three specific stocks, a prudent approach would be to spread that capital across 3 to 5 high-quality value holdings. This simple step manages risk by reducing exposure to any single company's misfortune. Value stocks, by their nature, are often well-established companies with stable earnings, which provides a buffer against the volatility of more speculative plays. The strategy is to buy a dollar bill for fifty cents, but to do so across a basket of companies to ensure that the margin of safety is broad, not narrow.

The primary watchpoint for any value investment is the trajectory of earnings per share (EPS) growth and the price-to-earnings (P/E) ratio relative to historical norms. This is the core of the value investor's discipline. For example, consider a stock like Delta Air Lines, which trades at a P/E of 8.18. That figure is a stark discount to its ten-year average of 19.76. The investor must monitor whether the company's underlying earnings are holding up or improving, which would justify a re-rating of that P/E. If EPS growth is steady or accelerating while the P/E remains depressed, the intrinsic value is being realized. Conversely, if earnings falter, the discount may widen, signaling a deeper problem.

Catalysts for these holdings are often the successful execution of management's strategic plans and a return to macroeconomic stability. For a company like Lennar, a catalyst could be a stabilization in housing affordability that allows its strong gross margin to translate into higher sales volumes. For a global player like British American Tobacco, a resolution of regulatory overhangs could boost investor confidence. The broader economic backdrop is critical; as we noted, the era of easy inflation-driven growth is over, and the economy is showing signs of a slowdown in job creation outside of healthcare. A period of stable labor markets and manageable inflation would support the earnings power of these value businesses.

The main risks are a resurgence of severe industry competition and a broader economic downturn. For a company like Berkshire, the risk is not a cyclical dip but a failure in capital allocation during a prolonged downturn. For a cyclical business like Lennar, a deep recession could crush housing demand and pressure its margins. For a dividend stock like BTI, a sharp economic contraction could force a dividend cut. The value investor's edge is in sizing positions so that even if one company faces a setback, the portfolio's overall compounding engine remains intact. The watch is on earnings and valuation, but the patience is for the long game.