7 Guidelines For Choosing Value Stocks

Every investing strategy has its code of conduct or guidelines.  Value investing is no different, successful investors follow these rules religiously. While sometimes rules can be broken, some rules for long term investing are cast in concrete, break them at your own risk.

Here are the seven “never break”  rules for value investing success.

1. Solid Dividend Yield

A solid dividend yield that has been increasing over the last several years is key to locating stocks with long term value. Remember, this does not mean that the stock has to among the best long term dividend stocks, just that its yield is upward trending.

2. Assets Greater Than Liabilities

While this may sound obvious, it’s critical that you check the balance sheet of any investment  to make certain the company is not upside down and that assets outnumber liabilities.

3. Equity Needs To Be Greater Than Debt

This is another obvious guideline that is easily missed by value investors.  Look at the company’s debt and compare it to equity to find true value

4. Tangible Book Value Needs To Be Less Than Stock Price

A stock cannot be overpriced relative to the book value to be considered a value stock.  Avoid any stock whose stock price is higher than the tangible book value.

5. PEG Must Be Less Than One

Anytime the PEG is greater than one, it’s a warning sign that the value in the stock may not be as deep as first believed.  Utilize caution if this is the case.

6. P/E Ratios Ideally Should Be In The Lowest 10% of All Stocks

Remember P/E ratios are relative.  Always make sure any stock in your value portfolio reads in the lower 10% of the stock universe.

7. Earnings Must Be Growing By A Minimum of 7% Over The Last Decade.

Earnings growth is a critical factor in locating value stocks.  A   7% annual growth rate is the minimum you should consider when building a value portfolio.

SOURCE: http://tradingtips.com/daily/dividend-stocks/7-guidelines-choosing-value-stocks/