Topic: Value Stocks

How to add Canadian value stocks to boost your portfolio gains

finding value stocks

Use a consistent financial plan and find top Canadian value stocks to fit your portfolio

If you balance and diversify your portfolio as we recommend, it should include some value selections—but you should avoid extremes.

Canadian value stocks can test your patience by moving sluggishly for months if not years. However, they can make up for it by suddenly shooting up when you least expect.

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Canadian value stocks for growth investors

Value stocks are typically stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise when more investors discover them.

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 their sales, earnings or assets), then hold on to them as investors recognize the value and push up the share price.

How to pick top Canadian value stocks

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

High-quality value stocks like these are difficult to find, even when the markets are down. But when you know what stocks to look for, you can discover them. We employ three financial ratios as a useful guide to spotting them:

  • Price-sales ratios
  • Price-to-earnings ratios
  • Price-cash flow ratios

Financial and safety factors to analyze while looking for Canadian value stocks

  • Freedom to serve (all) shareholders. High-quality value stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.
  • Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
  • Manageable debt. When bad times hit, debt-heavy companies go broke first.
  • 5 to 10 years of dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.
  • 5 to 10 year history of profit. Companies that make money regularly are safer than chronic or even occasional money losers.
  • Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves. Minor firms, on the other hand, don’t have that power.

Bonus tip: Stick as closely as you can to the one financial plan that consistently works

Many investors, and even some investment advisors, tend to confuse investment approaches and financial plans. But the two are distinctly different.

An investment approach guides your investment decisions.

A financial plan helps you build up capital over the course of your investing career, and helps you make the most of that capital in retirement.

Our Successful Investor financial plan is the best overall plan we know of. It’s simple, but it can be hard to stick to it.

To make the most of our Successful Investor financial plan, you put yourself on an investing regimen. You start saving as early in your working career as possible. Each year, you set aside a fixed sum to invest. It’s important to continue investing the same sum (or raise it) through good years and bad.

The same sum buys more shares in “bad” years, when prices are low. It buys fewer shares in good years, when prices are high. This cuts your long-term average cost per share.

This plan lets you profit from market volatility. That’s because you’ll automatically buy more shares when prices are low, and fewer shares when prices are high.

In retirement, you reverse the process. You live off your dividends, and sell stocks mainly when you need more money. When you do that, you sell your lower-quality holdings first. That way, you upgrade the quality of your portfolio every time you sell any of your stocks.

The funny thing is that if you try to improve on this financial plan, it will hurt your results, in the long run if not the short.

Are Canadian value stocks currently part of your diversified portfolio and acting as some of your best investments? Share your experience with us in the comments.


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