The Canadian stock market is packed with opportunities for those with a keen eye. In the world of value investing, this is an expanding market with immense potential if you understand what to look for. In recent years, the national market has risen rapidly and broken 15+ records, illustrating its ability to yield results.
Keeping this in mind, it's time to look at value investing in the Canadian stock market.
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
1. Understand the Fundamentals
It's the fundamentals, like the ones outlined in this article from Greedy Rates, that are essential when it comes to value investing and finding a strong company.
These fundamentals include having a strong balance sheet, a reasonable cash flow, reduced expenses, and a good pipeline of projects, depending on the industry. What it doesn't look for is today's stock price or what has happened in the past few weeks.
If the fundamentals are strong, you will want to look at the company in detail. This is where the bargains are to be had, especially if a company is poised for an upswing.
It's important to note, the Canadian stock market isn't as large as the American one, which means it's easier to dig through good companies.
2. Find High Potential Industries
It's important to find a hidden gem among the various Canadian companies, but it all starts with the industries. Whether it is the tech sector, financials, utilities, or retail, having a good grasp of the Canadian economic landscape will shed light on what's heading in the right direction.
Remember, the worst thing a value investor can do is look at momentum. The idea behind momentum is to find a stock that has decent fundamentals and appears to have gone up 10-15% in recent weeks or months.
It may seem like a good idea, but it often pushes you away from the core aspects of value investing, where the current stock price simply doesn't matter.
As a result, stick to analyzing an industry's health and how well various companies are doing in the sector. When you find a healthy, high potential sector, it becomes a lot easier to find suitable value investments.
A strong industry in the Canadian market would be something like gold and silver mining or electric power transmission.
3. Focus on the Underlying Assets and/or Projects
Value investing is not just about assessing a company's balance sheet. It's about analyzing the tangible worth of their assets and/or projects.
For example, a company may be doing well right now but could be coasting through based on its previous investments. Yes, that may look good right now, but it might not provide the level of increase needed to warrant a long-term hold.
Keeping this in mind, it's recommended to look at what is coming up in the future.
Look at what their strategies are, what is already being built (varies with each industry), and how it's going to impact their bottom line. This will shed light on which business has its finger on the pulse and which one doesn't.
4. Don't Get Hooked onto the Highest Yields
A common mistake made by investors in the Canadian stock market is to get mesmerized by the massive dividend yields. This metric helps the portfolio grow regularly, but does it offer enough to a value investor?
Good dividend yields aren't a negative, as some make it out to be, but you have to determine how focused the company is on sustainability.
It's essential to go with an undervalued company that is still serious about developing its core business and pushing forward. If a business becomes stagnant, it may start heading in the opposite direction.
Some Canadian companies start using higher dividend yields to welcome new investors even though those yields are unsustainable and unrealistic. Eventually (sometimes after 3-5 years), these dividend yields get cut, and you are left with a mediocre asset that has barely grown in value over the same period.
Your main goal with value investing is to assess other metrics before deciding. Dividend yields are simply a tool that can be used when analyzing a value pick but not the only method available in building a versatile portfolio.
It's an age-old tip that has been passed down over the years, and it still applies.
Your convictions in any type of market, including the Canadian stock market, may not be vindicated after 10-15 years. It's important to not gamble on picks even when the metrics are looking stable, and you do believe the investment will prosper.
While the Canadian market isn't as large as others, it does offer enough value choices for you to build a fleshed-out portfolio. Spread your funds out between a few value investments and watch as these companies continue to develop.
If you don't diversify, you may be left with a bad pick that simply didn't work out.
These are the tips to keep in mind for anyone hoping to dip their toes into the Canadian stock market. Use the strategies listed here and know you are heading down the right path as a modern investor.
About the Author
Chris Muller is a financial writer and digital marketer – he started a digital marketing business in 2015 that focuses on freelance writing, content marketing, and SEO - all while working full-time and playing dad to two kids.