Topic: Value Stocks

Learn how to value invest for long-term investing success

Learn how to value invest so you can maximize your long-term portfolio returns—and minimize risk

Value investing focuses on stocks that trade lower than their financial fundamentals suggest. They are perceived as undervalued by most investors and have the potential to rise.

You need an eye for value to succeed as an investor. But do you know how to value invest for maximum portfolio returns? Here’s how:


The Profits from Hidden Value

Learn everything you need to know in this FREE Special Report from The Successful Investor.
Canadian Value Stocks: How to Spot Undervalued Stocks Plus Our Top 4 Value Stock Picks and more.





Use these fundamental measures for success as you research how to value invest

High-quality “value stocks” are reasonably-priced stocks, if not cheap, in relation to its 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. We employ three financial ratios as a useful guide to spotting them:

  • Low price-to-earnings ratio—a sign 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.

Conservative investing is a good starting point when figuring out how to value invest

Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of blue-chip stocks and other lower-risk investments—including value stocks. A conservative investing approach also means building a well-balanced portfolio gradually, over time. The number of stocks in your portfolio will depend on where you are in your investing career.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meager profits or losses.

Look to minimize risk when you are learning how to value invest

Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions. You can get our advice on investment issues, plus buy/sell/hold advice on stocks you may be considering buying in our Successful Investor newsletter.

Overall, lower-risk investments equate to safer investments. For conservative investing, focus on investing in high-quality stocks that offer hidden value.

These assets include long-time real estate holdings that are worth much more than their balance-sheet value (usually original cost minus depreciation). Under-used brand names are another good example. When they are developed in-house, they won’t show any balance-sheet value. Another key hidden asset—one of our favourites is research spending. Companies write off their research outlays in the year in which they spend the money, but benefits such as new or better products may only materialize years in the future.

How to value invest more successfully? Start by avoiding momentum stocks

Momentum-based investing ignores value investing principles because it involves buying stocks that are going up, particularly in response to earnings reports that beat forecasts. These kinds of criteria are easy to track electronically, so momentum favourites tend to get overpriced quickly. When a momentum favourite reports an unexpected earnings downturn or warning, however, it can drop 25% to 50% instantly.

The best investment plans or systems use a variation of our value investing approach. That is, they revolve around choosing high-quality investments and diversifying your holdings. Our three-pronged value investing program takes that general description a little further.

Use our three-part Successful Investor approach to profit—including with value stocks

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

Some investment analysts believe value investing has passed its prime. What are your thoughts on this?

What steps do you take to identify and invest in value stocks?

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