Investing in the top TSX companies can offer both growth and value for your holdings, especially if you target blue chip stocks in the process.

Are you interested in the top TSX companies? The TSX is the largest stock exchange in Canada and the third largest in North America. Of note is that the Toronto Stock Exchange has more oil and gas companies listed on it than any other stock exchange in the world. That’s also reflected in the S&P/TSX Composite Index.

The Toronto Exchange started on October 25, 1861. The TMX Group (symbol X on Toronto)  operates a number of stock and commodity exchanges, including the TSX.

Like most other major stock exchanges, the TSX index is highly regulated. The Toronto Stock Exchange lists common shares of companies, but also index securities like ETFs.

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We look for these characteristics to find the top TSX companies

• We insist on political stability. For example, mineral or oil exploration is risky enough without the threat of expropriation or onerous taxes.
• We look for well-financed stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
• We like to see a strong balance sheet with low debt. For junior stocks, we like to see a major partner who can finance a mine, software and so on to production.
• We want to see experienced management with proven ability to develop and finance a new business.
• We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
• We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
• We compare the market cap of the stock with the estimated value of its reserves, future product sales and so on.

Invest in top TSX companies to get these benefits of blue chip stocks

Blue chip investments should pay dividends: Review a company’s 5 to 10 year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

Good blue chips have low debt: It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.

Blue chip investments should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit themselves.

Good blue chip investments have the freedom to serve (all) shareholders: High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies. Canada-wide is good, multinationals are better. There’s extra risk in firms confined to one geographical area.

Here’s how to find top TSX companies that are undervalued

TSX value stocks are companies that are undervalued, based on a number of measures, on the Toronto Stock Exchange.

Some investors only feel safe buying stocks after prices have risen, which means that they often overlook TSX value stocks. Yet this is the opposite of the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up. When buying stocks, you’ll find this same logic applies.

The first step to finding TSX value stocks is to visit the websites of the companies you are interested in investing in. Get on their mailing lists, and read their quarterly and annual reports. Ask your broker for research reports. Read the business news every day. You’ll be less liable to get caught off guard by price fluctuations and over time you’ll begin to spot the most undervalued stocks in a lineup simply through observation.

In addition to getting to know the companies you invest in, you should also get to know the industries that stocks operate in. Some industries are more volatile than others. Don’t invest in industries you’re not familiar with, and you’ll steer clear of many overvalued stocks.

Consider earnings, dividends and other factors in making decisions. They matter far more than short-term stock-price trends.

Stock prices rise and fall. But strong stocks tend to fall less and rise faster than poor stocks. And don’t overlook top dividend stocks—these companies like to ratchet their dividends upward. Even during market downturns, the last thing a well-established company is likely to do is lower its dividend. When times are good, strong companies will raise their dividends.

Use our three-part Successful Investor approach to find top TSX 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.

Even though the TSX contains more oil and gas stocks than other exchanges, those types of resource investments can be volatile. Do you consider oil and gas to be among top TSX stocks, or do you target other investments instead?

What factors do you look for in top TSX stocks?