You now have another reason to read the VectorVest Views every Friday in our Canadian database. Canadian Consultant Stan Heller has started writing a weekly essay on topics of special interest to Canadian investors. Mr. Heller’s first essay about the effects of Canada’s strengthening dollar ran on Sept 15. His second essay Sept 22 was a reminder to Heed the Color Guard while encouraging investors to take advantage of the Confirmed Up Call signaled September 21. That was pretty good guidance. The TSX is up about 1.58% from there, rising 5 out of 7 trading days led by financials and energy. Below is Mr. Heller’s essay from Friday, Sept 22.
RULE 1: FAVOUR UNDERVALUED STOCKS.
The brother-in-law is always looking for a deal, whether it’s vehicles, farm equipment or just about anything. He’ll spend weeks scouring the ads and driving to dealers and auctions before buying something most people would decide on in a day. It drives me crazy.
Time is money I tell him. Yes he says, but it’s worth it to me. “I need to know the going rate because I don’t plan to own these things forever. If I can pick it up for less, I know I’ll make good money when I sell it later to someone like you. Someone who acts fast and doesn’t have a clue what the thing is really worth. I win twice. Once on the buy and again on the sell.”
Okay. I get the point. Although stated in his typical smug and annoying way, it’s exactly the investing lesson I’ve been taught since becoming a VectorVest subscriber. It took me a while, but I’ve learned to favour undervalued stocks. Thankfully, there’s no need to spend hours and hours of research to find them when you have VectorVest.
In Chapter 2 of his classic investment book, “Stocks, Strategies & Common Sense,” VectorVest Founder Dr. Bart DiLiddo writes, “There are some simple, common sense rules that can improve anyone’s stock picking skills regardless of the system they use.”
“Rule 1: Favour Undervalued Stocks. The only way to know if a stock is undervalued, is to know what a stock is really worth. I answer this question by calculating a stock’s value from its earnings growth rate, profitability and other fundamentals. My formulas are described in Chapter 3, “How to Value Stocks.” If a stock’s Value is more than its Price, the stock is undervalued. It’s a candidate for selection.”
Dr. DiLiddo goes on to say that “Undervalued stocks offer a higher probability of achieving gains, the potential for very large gains and lower downside risk. In other words, undervalued stocks increase the odds of winning, increase the rewards for winning, and decrease the risk of losing, compared to overvalued stocks. So, favour undervalued stocks.”
Test it out yourself. Open VectorVest to the Viewers tab, click on Stock Viewer. At the time of writing, Wednesday, Sept 27th, 7 of the top 10 VST-sorted stocks are undervalued. Highlight them and graph ’em. Go to Add Parameter. Under Capital Appreciation, select Value and EPS and add them to your graph. First up is West Fraser Timber (WFT). Undervalued since August 2016, WFT has rising EPS to boot. It’s up 51% YTD. Next are CFP and OSB. Same Wood Products Industry as WFT and the graphs look the same, both up over 50%. Next is Air Canada (AC). Who would have guessed? Also undervalued the entire year and price up a little over 93% for crying out loud. Next, IFP, a dog in Wood Products, up only 32%. FIH.U is what VectorVest calls a ruler stock, both for its Value and Price. Up more than 51%. Finally, Encana (ECA) only became undervalued in May. It’s down a little more than 6% YTD, but price is now rising up toward Value.
Open your copy of Dr. DiLiddo’s book in PDF format, updated in 2016, by going to the Views tab. Look for Special Reports in the column on the far left. Under Special Reports you’ll find the title, “Stocks, Strategies & Common Sense.” Double click on it to open and save it to your computer. Study all Dr. DiLiddo’s common sense rules for stock picking and refer to them when analyzing stocks in the Stock Viewer, including stocks you own. You’ll learn to love Rule 1: Favour Undervalued Stocks.