These nine indicators can help you unlock the value investing stocks with the greatest potential for growth, and boost your portfolio returns for years to come.
Our Successful Investor approach aims 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 value investing stocks for our newsletters, we first look to see if they meet these criteria. And a key component of our value-investing approach is our ratings system (see below). It identifies stocks with positive prospects and lower risk.
The Profits from Hidden Value
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Canadian Value Stocks:
How to Spot Undervalued Stocks
PLUS! Our Top 4 Value Stocks
Why value investing stocks are worth the investment
There are numerous reasons as to why a value stock may be 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.” Its business could have experienced temporarily lower sales than it 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.
Consider “off-the-books” goodwill when looking for value investing stocks
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 top-quality value stocks that meet our Successful Investor criteria, 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.
Our ratings system: 9 characteristics of value investing stocks to look for
A long-term record of profit.
Industry prominence, or better yet, dominance.
A long-term record of dividends.
An attractive balance sheet, with adequate equity and working capital, and manageable debt.
Ability to serve the needs of all shareholders. To merit this point, firms must be free of excess government regulation, free of too much dependence on a single supplier and free of insider abuses.
National or multinational. You may want to invest in firms that are concentrated geographically, but geographical diversification cuts risk.
Freedom from business cycles.
The offering of products or services that profit from habitual behaviour.
The ability to profit from a secular trend, or two points for the ability to profit from two or more secular trends. Secular trends (such as the global move toward economic liberalization and free trade) go far beyond mere business cycles; they reflect ongoing changes in the world.
As part of our Successful Investor value investing approach, we advise you to invest mainly in well-established companies; focus on companies that are outside the broker/public relations limelight; and spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; Utilities).
You’ll still need to make your own investment decisions, but this investing framework will temper the effects of your bad decisions and help you cash in on your good ones.
What indicators do you look for to help you find good value stocks?
Learn everything you need to know in
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FREE Special Report from The Successful Investor.
Canadian Value Stocks:
How to Spot Undervalued Stocks PLUS! Our Top 4 Value Stocks
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