Adding the best undervalued stocks to buy now to your diversified portfolio can lead to big gains in the future, especially if there is hidden value involved.
A big part of finding the best undervalued stocks to buy now is about finding hidden value or assets in a company. That hidden value can take many forms, including real estate, research spending or customer loyalty.
There are two basic steps to finding undervalued companies to invest in: first, develop a rough list of stocks that meet your basic criteria and that you can investigate further; second, do more in-depth analysis of these stocks by examining their financial data for signs of value.
Once we’ve found a company that appears attractive on a value basis, we look to see if it is a solid operating business, with rising sales, earnings and cash flow in an expanding industry.
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
When we look for the best undervalued stocks to buy now, we usually start by looking at a few basic ratios. For example:
Low price-to-earnings ratio—a sign 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 its share price. A high dividend yield could indicate a cheap stock that is set to rise.
Take a broad view when looking for the best undervalued stocks to buy now
When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective.
But things are never quite so simple, even with low-risk investments. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put the funds it borrowed to immediate profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.
In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.
Our goal is to put the information in a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap. In the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook.
Add the best undervalued stocks to buy now with some growth stocks
Most successful investors hold some growth stock picks and some value stocks at any given time, depending on where they discover the best opportunities.
Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Some technology stocks, for instance, start out as growth stocks and transition into value stocks.
Together, growth stocks and value stocks can form a winning combination. A growth stock can be a top performer while the company is expanding. However, a single quarter of bad earnings can send it into a deep, though often temporary, slide. 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 investors discover their true value.
Take a look at goodwill when analyzing undervalued companies to invest in
In analyzing a company’s financial statements, a key concern, and a potential pitfall for investors, is the amount of goodwill that it carries as an asset on its balance sheet. Goodwill is an accounting entry that reflects the price that the company paid for its acquisitions, minus the value of the tangible assets, like land and equipment, that it received as part of the acquisition. The term means “value as a going concern.”
In the right circumstances, goodwill can be extremely important to value stock picks, especially if it is “off-the-books” goodwill—that is, goodwill that a company developed through its own efforts, which does not appear on the balance sheet. Examples include the value of the company’s brand, or the reputation and relationship that it has built up with customers over the years.
On the other hand, if a big acquisition sours, a significant writedown of goodwill or intangibles could hurt the acquirer’s earnings and share price.
Use our three-part Successful Investor strategy to add the best undervalued stocks to buy now to your portfolio
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; Consumer; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Do you consider the value of brand recognition, research and development, or real estate ownership when you look for undervalued stocks?
What kinds of hidden value do you look for in an investment?
Learn everything you need to know in
'7 Pro Secrets to Value Investing'
FREE Special Report from The Successful Investor.
Canadian Value Stocks:
How to Spot Undervalued Stocks PLUS! Our Top 4 Value Stocks
Get Your FREE Report Now:
7 Pro Secrets to Value Investing
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