Topic: Value Stocks

Discover top Canadian companies offering strong value by following these key tips

Finding top Canadian companies that offer investing value is an important part of a successful investment portfolio. Learn the qualities of value stocks to look for now

Value investors aim to zero in on financial statistics and ratios as an indicator of what to buy. They like to buy stocks with low ratios of stock price to per-share earnings, cash flow, sales and book value. They assume that if you get enough value in your stock buys of top Canadian companies, indicated by low numbers in these ratios, your profit is virtually assured, in the long run if not in the short. Of course, however, there are no guarantees.

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. In fact, a low p/e and other low readings in value-investor ratios may simply mean that well-informed investors are selling the stock and pushing down the “p” or stock price. If so, it probably means they see flaws in the company’s situation or outlook that investors are generally missing.

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Six key factors of top Canadian companies for safety, survival, and growth

Safety factors: 

  • 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.
  • Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
  • 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.

Survival/growth factors:

  • Freedom from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with cyclical resource firms and manufacturers.
  • Ability to profit from secular trends. These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Rising environmentalism and socially conscious investing are just two examples of secular trends.
  • Ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.

Don’t look for top Canadian companies offering value by dividend yield alone 

Value stocks typically offer high dividend yields. That means their dividend payouts are high in relation to their individual stock price.

We’ve always placed a high value on dividend stock investing at TSI Network, mainly because it provides something of a measure of safety for stocks we recommend. After all, you can’t fake a record of dividends.

However, you should avoid the temptation to reach for yield. That is, choosing investments solely because they offer a high dividend yield.

A high dividend yield may signal danger rather than a bargain, if it reflects widespread investor skepticism that a company can keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

For a true measure of stability, focus on high dividend paying companies that have maintained or raised their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

Keep in mind that when you are buying stock in top Canadian companies, you should not expect to pay lower than market prices

For many investors, buying stocks involves a two-part decision. First, they decide which ones to buy, then they decide what price they want to pay. Most want to buy, say, 5% to 10% below current prices.

These investors often explain that they are simply looking to buy stocks like a smart consumer buys a car. However, the stock market is more efficient than the car market, as an economist would put it. To get a lower price on a stock, you have to wait for its price to come down.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range….and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. They’ll always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

Use our three-part Successful Investor approach to select shares of the top Canadian companies 

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight. 

Do you ever “bargain shop” for good stocks? Have you found any winners that way?

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