Value Stocks
Value stocks are stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many new tech stocks, for instance, start out as growth stocks and transition into value stocks.
They have a low price-to-earnings and price-to-book ratios—which is why they’re less expensive than growth stocks. Due to this fundamental distinction, a value stock is often traded at a more affordable rate than a growth stock.
To investors, they see companies that fall into this category as undervalued. These investors are less likely to invest in a growth stock because they feel that value company’s stock will eventually reach their full potential once they are recognized by the market.
Generally speaking, the climb is steady for value stocks. The only other way for it to emerge into the market like a growth stock is for it to be a bit more innovative with its products or services.
Pat McKeough is an expert at delving into a company’s financial statements and identifying undervalued securities and value stocks. That’s because value stocks are the foundation of any long term investment strategy, at TSI Network we also recommend our three-part Successful Investor strategy:
- Invest mainly in well-established companies;
- Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
- Downplay or avoid stocks in the broker/media limelight.
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When analyzing any new investment, including value stock picks, one key question we ask early on is, “What can this cost us if something goes wrong?” (You can learn more about our value-investing approach to selecting stocks in our new free report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.”) There is no simple rule for calculating cost-if-something-goes-wrong. It takes common sense and guesswork. For instance, to determine the cost of a warm winter to a ski-hill operator, we need to see how many ski centres it operates, and if they are in the same or different weather systems. In fact, geographical diversification plays a prime role in most calculations of the cost-if-something-goes-wrong. [ofie_ad]...
One of the most common investment platitudes you’ll ever hear is that investors should “have a plan (or system) and stick to it.” This is good advice if your alternative is to invest without any sort of plan. However, unlike the time-tested value investing approach, many of today’s investment plans are not worth sticking with.
Value investing: Look beyond financial indicators
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Some investment observations are so basic and indisputable that in my opinion they deserve to be referred to as “laws”. One good example is what I call “McKeough’s Law on New Issue Timing,” which is this: New issues come to market when it’s a good time for the company and/or its insiders to sell, but that’s not necessarily a good time for you to buy.
Underperforming stocks, not undervalued stocks
We hardly ever recommend buying new issues when they are first sold to the public. For that matter, we generally stay away from new issues for months, if not years, after they first come to market. As a group, new issues underperform the market over long periods. In addition, their results are far more variable than those of well-established stocks, and they expose you to greater risk of major loss....
The Successful Investor value investing approach follows the basic model set by the old-fashioned Graham/Dodd approach. Basically, it tries to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.
When we recommend a stock as a buy, we first look to see if it meets these value-investing criteria. And a key component of our value-investing system is our ratings system, which identifies stocks with positive prospects and lower risk.
We have six Successful Investor ratings. The top rating is Highest Quality; next is Above Average; next is Average; below that, Extra Risk; below that, Speculative; and, at the bottom of the scale, our riskiest, lowest-quality rating of Start-Up.
We base our Successful Investor ratings on a system we’ve developed over the years. We use it to assign “quality points” based on nine key factors that successful investors use in value investing to determine a company’s ability to survive a business setback and go on to greater success when conditions improve.
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When we recommend a stock as a buy, we first look to see if it meets these value-investing criteria. And a key component of our value-investing system is our ratings system, which identifies stocks with positive prospects and lower risk.
We have six Successful Investor ratings. The top rating is Highest Quality; next is Above Average; next is Average; below that, Extra Risk; below that, Speculative; and, at the bottom of the scale, our riskiest, lowest-quality rating of Start-Up.
We base our Successful Investor ratings on a system we’ve developed over the years. We use it to assign “quality points” based on nine key factors that successful investors use in value investing to determine a company’s ability to survive a business setback and go on to greater success when conditions improve.
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Among other bargain stocks, we’ve discovered a diversified Canadian food processing company whose brands have a lot of enduring value, and whose core business, meat processing, represents 70 percent of total sales. We figure that no matter what the economy does, people will always need to eat. So, we doubt that consumer spending on groceries will decline very much. The key for smart, conservative investors is to be in food company bargain stocks that have sound fundamentals. ----------...
WYNDHAM WORLDWIDE $19.91 (New York symbol WYN; SI Rating: Extra risk) (973-753-6000; www.wyndhamworldwide.com; Shares outstanding: 177.0 million; Market cap: $3.5 billion) is one of the world’s largest hospitality companies. Wyndham Hotel Group has almost 6,540 franchised hotels and almost 550,600 hotel rooms worldwide. Wyndham’s RCI Global Vacation Network has 3.6 million members who have exchange access to over 67,000 vacation properties located in approximately 100 countries. Wyndham Vacation Ownership develops, markets and sells vacation ownership interests and provides consumer financing to owners through its network of approximately 145 vacation ownership resorts serving over 800,000 owners in North America, the Caribbean and the South Pacific. The company keeps reporting increased revenues and earnings, despite higher fuel prices and lower consumer confidence in the wake of the housing market slowdown. In the three months ended December 31, 2007, revenues rose 6.4%, to $1.03 billion from $970 million a year earlier. Earnings rose 13%, to $104 million from $92 million. Earnings per share rose 22.9%, to $0.59 from $0.48, on 7.8%fewer shares outstanding....
LOJACK CORP. $12.51 (Nasdaq symbol LOJN; SI Rating: Speculative) (www.lojack.com; 1-781-326 4700; Shares outstanding: 18.5 million; Market cap: $231.8 million) sells vehicle theft recovery systems. The company has two main products: the LoJack Vehicle Recovery System and the LoJack Early Warning System. LoJack operates in the U.S. and 30 other countries around the world. In Canada, the company operates through its subsidiary, Boomerang Tracking. LoJack’s recovery systems use radio frequency technology to track stolen vehicles. Once a customer realizes a vehicle is stolen, they contact police. Local police cruisers and aircraft equipped with LoJack technology (supplied at no cost by LoJack to law enforcement agencies) are led to the tracking device. In the three months ended December 31, 2007, Lo- Jack’s sales rose 8.2%, to $55.3 million from $51.1 million. Earnings excluding one-time items 2.3%, to $4.5 million or $0.24 a share, from $4.4 million or...
ENCANA CORP. $48 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 772.0 million; Market cap: $37.1 billion; WSSF Rating: Average) is a leading Canadian energy company. Natural gas accounts for 80% of its production, while oil supplies the remaining 20%. In the three months ended December 31, 2006, lower gas prices cut EnCana’s profit 42.5%, to $0.84 a share from $1.46 a year earlier. These figures exclude unusual items such as gains on the sale of assets and hedging gains. Cash flow per share fell 24.3%, to $2.18 from $2.88, while revenue fell 37.3%, to $3.7 billion from $5.9 billion. In the past few years, EnCana has sold its overseas assets to focus on unconventional properties in North America, such as early-stage gas fields and the oil sands in Alberta....
H.J. HEINZ COMPANY $40 (New York symbol HNZ; WSSF Rating: Above average) has sold its New Zealand poultry-processing business for $165 million, which is about 24% more than the $133.2 million or $0.39 a share that the company earned from continuing operations in its third fiscal quarter ended January 31, 2006. This is one of several sales of overseas assets that the company has carried out since last year. It wants to focus on the three businesses where it has a leading market position: ketchup and sauces; meals and snack foods; and infant foods. Heinz still has several smaller operations it wants to sell, but it has now completed most of its planned asset sales. It has also cut its manufacturing facilities by 15%, and shrunk the number of products it makes....