Topic: Value Stocks

Use a value stock investing strategy like ours to find high-quality investments for your portfolio

Following a sound value stock investing strategy is how conservative investors find top lower-risk investments for maximum portfolio gains

A value stock investing strategy is among the most profitable strategies of successful investing.

High-quality value stocks are stocks that are reasonably-priced, 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. 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.

Use these basic ratios to spot potential buys as part of your value stock investing strategy

The Profits from Hidden Value

Learn everything you need to know in 7 Pro Secrets to Value Investing for a FREE special report for you.

Canadian Value Stocks:
How to Spot Undervalued Stocks
PLUS! Our Top 4 Value Stocks

As mentioned, one of the key principles of successful investing is to buy high-quality “value stocks.” 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.

Look to minimize risk with a sound and balanced value stock investing strategy

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.

Use these tools and measures from four key areas to pick stocks to go in your portfolio

  • The investment-quality markers we use to award our TSINetwork investment-quality ratings;
  • Valuation factors, including the P/E and other financial ratios;
  • Extra value factors—hidden value and other hidden or overlooked pluses—that help create outsized returns;
  • Reasons for wariness. These are potential trouble spots that could hinder long-term performance or lead to significant long-term risk. We take these factors into account, but we sometimes accept one or more of them in a stock that has hidden value or other merits to offset the negatives;

Focusing on investment quality is the key to finding bargain stocks with gains ahead for your value stock investing strategy

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.

Meanwhile, there’s no easy answer to the buy-now-or-wait dilemma. At times it may pay to hold off—for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.

In the end, if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it puts on its next 5% to 10% setback, after all, it may first go up 50% to 100%.

Goodwill writeoffs can have big consequences for value stock investing

Goodwill acquired in an unwise acquisition can lose value overnight. When that happens, the company has to write it off against earnings. At worst, the company might have to write off most, if not all, of its goodwill.

If that writeoff wipes out most of the company’s shareholders’ equity, and/or most of a year’s earnings, it can devastate the value stock pick’s share price.

Use our three-part Successful Investor approach to guide your value stock investing strategy and profit over time

  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.

Some investors believe that there is no place for value investing anymore. Do you agree with this sentiment?


Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.