Value Stocks

What are value stocks?

One of the sweetest and most profitable pleasures of successful investing is to buy high-quality “value stocks” (or stocks that are reasonably priced, if not cheap, in relation to its sales, earnings or assets), then hold on to them as mainstream investors recognize the value and push up the share price.

Value stocks are stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many new tech stocks, for instance, start out as growth stocks and transition into value stocks.

They have a low price-to-earnings and price-to-book ratios—which is why they’re less expensive than growth stocks. Due to this fundamental distinction, a value stock is often traded at a more affordable rate than a growth stock.

To investors, they see companies that fall into this category as undervalued. These investors are less likely to invest in a growth stock because they feel that value company’s stock will eventually reach their full potential once they are recognized by the market.

Generally speaking, the climb is steady for value stocks. The only other way for it to emerge into the market like a growth stock is for it to be a bit more innovative with its products or services.

Pat McKeough is an expert at delving into a company’s financial statements and identifying undervalued securities and value stocks. That’s because value stocks are the foundation of any long term investment strategy, at TSI Network we also recommend our three-part Successful Investor strategy:

  1. Invest mainly in well-established companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.
Linamar Corp

The car-parts maker has increased its dividend on stronger earnings and a brighter outlook based on an auto industry trend.

LINAMAR CORP. (Toronto symbol LNR; www.linamar.com) makes a variety of automotive parts, including cylinder heads, cylinder blocks, camshafts, crankshafts and connecting rods. This business provides about 90% of the company’s revenue and 85% of its earnings.

The remaining 10% of revenue and 15% of earnings comes from self-propelled, scissor-type elevating work platforms. Linamar sells them, and other machinery such as wind turbines, under the Skyjack name.

New car sales and acquisition fuel growth

Thanks partly to rising demand for new cars, Linamar’s revenue jumped 86.4%, from $3.2 billion in 2012 to $6.0 billion in 2016. Earnings soared 257.4%, from $146.1 million to $522.1 million; per-share earnings rose 252.0%, from $2.25 to $7.92, on more shares outstanding.

The company has also benefitted from its February 2016 acquisition of Montupet, a French maker of aluminum car parts, with global operations. It paid $1.2 billion for Montupet’s shares, and assumed $97.5 million of its debt.

The purchase added $0.78 a share to Linamar’s 2016 earnings. Montupet’s contribution should continue to rise as automakers use more aluminum to make cars lighter and boost fuel efficiency.

Linamar also plans to spur its long-term growth with a new plant in North Carolina to make lightweight components for powertrains and other automotive systems. The company owns 50% of this facility through a joint venture with Georg Fischer AG; it’s a Switzerland-based maker of automotive and industrial products.


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Value Stocks: Linamar to spend $100 million on new plant

The new plant will begin operating in mid-2017. Linamar’s share of the cost is $100 million.

The company can comfortably afford to keep investing in its operations. As of December 31, 2016, it held cash of $405.0 million, or $6.20 a share. Due to the Montupet purchase, its long-term debt more than doubled to $1.2 billion. That’s still a manageable 32% of its market cap.

Linamar will probably earn $8.11 a share in 2017, and the stock trades at 6.9 times that forecast. That low p/e is partly due to President Donald Trump’s plan to impose new tariffs on imports. However, the U.S. will likely focus on China and Mexico over allegations of unfair trade practices. That is likely to shield the bulk of Linamar’s exports to the U.S.

Meantime, the company should benefit from several long-term trends. For example, it’s likely that carmakers will continue to outsource more of their production to other firms; right now they perform, on average, 70% of this work. The company is also developing new parts for electric vehicles.

Linamar is so confident in its prospects that it just raised its quarterly dividend by 20.0%, to $0.12 a share from $0.10. The new annual rate of $0.48 yields 0.9%.

Recommendation in The Successful Investor: BUY

For our advice on uncovering the best value stocks for your portfolio, read How to add Canadian value stocks to boost your portfolio gains

For our recent report on another U.S. value stock we rate as a buy, read American Express adds 10 million new accounts.

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