These value stock definitions will provide you with key information you need to find the best stocks for your portfolio

If you stick with the highest-quality value stock picks, we think you will achieve above-average long-term portfolio gains. The value stock definitions below provide the insight you need to find those top value stocks.

What is value investing?

Value investing is an investment approach that follows the basic model set by the pioneers of conservative investing, Benjamin Graham and David Dodd. Value investing is also the preferred investing method of Warren Buffet, who’s a prominent and successful modern day investor.

At the core of the value investing approach is the ability 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 a new when prosperity returns, as it inevitably does. At the same time, they are cheap in relation to these measures. Value investors typically have long-term mindsets when it comes to investing.

Another key point about value investing is you shouldn’t sell high-quality stocks just because their prices have dropped. Nor should you sell them just because they’ve gone out of investor favour. Well-established, but out-of-favour stocks, can provide great opportunities for patient investors.

Note that if you balance and diversify your overall portfolio as we recommend, it should include both growth and value selections. In both areas, you should avoid extremes.

Value stock definitions: What are value stocks?

One of the sweetest and most profitable pleasures of successful investing is to buy high-quality “value stocks” (or stocks that are reasonably priced, if not cheap, in relation to its sales, earnings or assets), then hold on to them as mainstream investors recognize the value and push up the share price.

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.

Value stocks have 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 price 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 a value company’s stock will eventually reach its full potential once it is 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 more innovative with its products or services.

Why are some stocks undervalued?

There are numerous reasons as to why a value stock is underappreciated and inexpensive. The company could have experienced a stagnant (or even depreciating) period, which is why they fall into the category of “value stock.” Their business could have experienced temporarily lower sales than they had in the past because of bad publicity, legal issues, or simply lagging behind competitors.

A value stock could go through a turning point where most investors ignore it, but savvy investors see that there is also a great potential for it to bounce back and make a bigger impact in the market.

Value stock definitions: Hidden assets

Hidden assets are valuable assets that investors overlook, discount or disregard altogether. They have special appeal for companies that are using takeovers to grow. They can be found in real estate, research spending and in brand names and so on.

For example, a hidden asset can come out of existing brand names that can help launch new products. They can also grow out of government obstacles to the entry of new competitors into a market.

If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price.

You should always look for hidden assets when evaluating a stock. Stocks with hidden assets are not rare, but they’re hard to find. These three financial ratios can be used as a guide to further evaluating stocks with hidden assets once you have found them: price-earnings ratios, price-to-book-value ratios, and price-cash flow ratios.

Value stock definitions: High dividend stocks

High dividend stocks are those whose dividends yields are high, meaning the amount of money a company pays out in the form of dividends each year when divided by its per share price is high.

You can use the dividend yield to quickly measure the cash earnings you’ll make from a stock’s dividend. Investing in stocks that pay dividends is a something we highly recommend at TSI Network and is one of the keys to our long term investment strategy.

When you’re looking for income-producing stocks, dividend yield is typically your most important consideration. But remember that in some cases, high dividend stocks can be misleading.

Yield, and especially a high dividend yield, can give you a false sense of security. Companies are sometimes unable to keep paying a long-standing dividend, and they sometimes spring the bad news on you with no warning.

In short, it’s risky to buy a stock solely because it’s a high dividend stock. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

While high dividend stocks may be perfect for your portfolio, here are some other factors to look at when evaluating a stock:

What to look for in value stocks for your diversified portfolio

• 5 to 10 year history of profit.
• 5 to 10 years of dividends.
• Manageable debt.
• Industry prominence if not dominance.
• Freedom from business cycles.
• Ownership of strong brand names and an impeccable reputation.

Follow our three-part Successful Investor strategy

Limit your risk with value stock investments by following 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.

Do you have any additional value stock definitions to add? Share your thoughts in the comments.