Topic: Value Stocks

The best value stocks are available at a bargain price. Many also have hidden value.

Value stocks can test your patience by moving sluggishly for months, if not years. But the best value stocks can make up for it by rising sharply when investors discover their true value.

A big part of finding undervalued stocks is about finding hidden value or assets in a company. That hidden value can take the form of real estate, research spending or customer loyalty.

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Seek out hidden assets early

If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price.

The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But you need patience to profit from them, because they can stay hidden for a long time after you buy.

Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot, since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.

A few basic ratios for finding the best value stocks

One of the key principles of successful investing is to buy high-quality “value stocks”—stocks that are reasonably priced, if not cheap, in relation to their sales, earnings and assets. Typically, value stocks trade at prices lower than their financial fundamentals would suggest.

When we look for value stocks to buy, we usually start by looking at these ratios:

  • Low price-to-earnings and price-to-sales ratios—signs of a cheap or undervalued investment.
  • Low price-to-book-value ratio—another sign that the stock is cheap in relation to other stocks on the market.
  • High dividend yield—the stock’s annual dividend divided by the share price. A high dividend yield could indicate a cheap stock that is set to rise.

How to pick the best value stocks

Finding top value stocks is among the most profitable strategies of successful investing.

High-quality “value stocks” are reasonably-priced stocks, if not cheap, in relation to their sales, earnings or assets. Investors hold onto them because they expect that other investors will recognize their value and push up the share price.

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.

The best value stocks include these financial factors

  • 5 to 10 year history of profit. Companies that make money regularly are safer than chronic or even occasional money losers.
  • 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.
  • Manageable debt. When bad times hit, debt-heavy companies go broke first.

Keep an eye out for hidden problems with value stocks

If a stock seems like an exceptional bargain in relation to earnings or asset values, it may suffer from hidden risks. The stock can plunge when those problems begin to take their toll.

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

Do you search for the best value stocks? Have you found any before? If so, what strategies did you use to do so? Share your experience with us in the comments.


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