What are we looking for?
Companies that have positive cash flow, yet their share prices have declined by more than 15 per cent in the past six months.
My colleague Rob Belanger and I started with TSX-listed companies that have a market capitalization of more than $250-million.
Investors who wish to employ one of the best fundamental indicators should add the free cash flow (FCF) yield to their repertoire of financial measures. (Free cash flow yield is calculated by dividing FCF per share by the current market price.)
When FCF yield is positive it indicates the company is generating more cash than is needed to run the business. A negative free cash flow shows the company may not able to generate enough cash to keep the business afloat. All of these companies have positive FCF yields.
The price-to-book ratio (P/B) compares the company’s current stock price to the net asset value per share. A low P/B ratio can offer investors an excellent opportunity to capitalize on an undervalued company, yet this ratio should never be used as a standalone measure to pinpoint undervalued companies.
We are showing the current price-to-earnings ratio, and the analyst’s consensus P/E estimates for the next 12 months. Ideally, we want the forward price-earnings lower than the current P/E.
A debt-to-equity ratio of less than one means the company is financed mostly with equity, which is preferable.
What did we find?
Quebec based Uni-Select is Canada’s leading distributor of replacement automobile parts. The company has the highest free cash flow yield on the screen, and a P/B ratio of less than one.
Petrominerales is a Canadian oil company focusing on exploration and production in Latin America. It also has a P/B of less than one, a forward P/E less than the current, and a high dividend yield.
TransGlobe Energy is down over 30 per cent over the past six months, yet the company has very little debt, a respectable FCF yield and P/B. This international company owns oil-producing properties in Egypt and Yemen.
A company with a strong FCF yield has the ability to build its business through new products, different marketing initiatives, paying off debt, making acquisitions, or paying or increasing its dividend. However, as with any indicator, you should not depend on just one measure.
Firms with positive cash flow and recent share price declines
|HNZ Group Inc.||HNZ.A-T||13.17||2.5|
|Alamos Gold Inc.||AGI-T||9.57||2.28|
Source: Bloomberg; Wickham Investment Counsel Inc.
|HNZ Group Inc.||HNZ.A-T||13.17||2.5||278.8||6.77||7||4.91||0.24||-16.63|
|Alamos Gold Inc.||AGI-T||9.57||2.28||1,637.80||13||14.26||1.6||0||-35.83|
|Twin Butte Energy||TBE-T||3.68||1.31||591.5||2.05||47.25||5.67||0.35||-15.25|
|Pan Amer. Silver||PAA-T||1.73||0.84||2,333.40||13.37||10.63||1.16||0.03||-26.82|
|Rio Alto Mining||RIO-T||0.92||3.42||782.7||8.05||7.05||0||0.01||-22.13|