The best value stocks to buy now share these qualities, but you’ll need to understand a few financial ratios if you want to find them

Savvy investors know that value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when the wider market discovers their true value.

Savvy investors also know that value stocks can offer the highest dividend yields, along with steady growth. If you want to find the best value stocks to buy now, it’s important to understand the qualities they have in common and to know which financial ratios you can use to find them.

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3 Financial ratios can help you find the best value stocks to buy now

One of the key principles of our Successful Investor approach is to buy high-quality “value stocks”—stocks that are reasonably priced, if not cheap, in relation to their sales, earnings and assets. 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.

The best value stocks to buy now should also follow our Successful Investor philosophy

To show the best long-term results, we think you should stick with our three-part TSI Network investing program (but keep in mind that this approach is a starting point to success in investing, not a step-by-step blueprint):

• Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
• 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 avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become overpriced, and this leaves them vulnerable to a sharp downturn with any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized—at least so far—as attractive investments.

The best value stocks to buy now will have hidden assets in addition to dividend payments

When researching value dividend stocks, take a close look at the company’s balance sheet. Can you spot any hidden assets?

For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. Yet the purchase price remains unchanged on the balance sheet.

You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate may even come to exceed the market value of the dividend stock.

The best value stocks to buy now will have long-term value and a history of dividends

We’ve always placed a high value on dividend stock investing, mainly because it provides a measure of safety for stocks we recommend.

After all, you can’t fake a record of dividends. It takes a lot of success and high-quality management for a company to have the cash to declare and pay a dividend every year for five or 10 years or more. High-dividend Canadian stocks are not something created on the spur of the moment.

We also recommend Canadian dividend stocks because Canadian taxpayers who hold Canadian dividend-payers are eligible for a dividend tax credit.

This tax credit—which is available for dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

The best value stocks to buy now are not necessarily the cheapest

Seemingly attractive stocks can drop for months, or even years, before a hidden flaw comes to the surface and explains their weakness.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range ….and they’ll keep on falling.

Bonus Tip: Dollar cost Averaging

Successful Investors can benefit from “dollar cost averaging.” That’s where they invest the same dollar amount on a regular basis. That way they’ll buy more shares when prices are low, and fewer when they’re high.

Using a dollar-cost-averaging strategy helps build consistent long-term investing returns. Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. Over periods of a few years or less, the return is far more variable and always uncertain. The surest way around this uncertainty is to start practicing dollar-cost averaging as early as possible, and invest regularly over the course of your working years. Then you can sell gradually in retirement.

What strategy for finding the best value stocks has disappointed you in the past?