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Number Cruncher

Stock screens for investment ideas from professional investors. Exclusive to subscribers of Globe Unlimited.


Number Cruncher

A recipe for the impatient value investor Add to ...

What are we looking for?

Stocks that will appeal to impatient value investors.

To be more precise, we’re looking for equities with rising prices that are also cheap on a PEG basis. The PEG ratio is the stock’s price-earnings ratio divided by the rate at which its earnings are projected to grow in the current fiscal year.

Inspiration for our search comes from financial author Jack Hough. In his book, Your Next Great Stock: How to Screen the Market for Tomorrow’s Top Performers, Mr. Hough uses an Impatient Value Screen that “combines a traditional value search with a smidgeon of price momentum.”

Mr. Hough notes that “the goal of any value investor isn’t just to find underappreciated stocks. It’s to find underappreciated stocks that will eventually win more popularity and higher share prices. In other words, the goal is to find value stocks that will eventually become price momentum stocks.”

More about today’s screen

In creating today’s offering, I filtered the Morningstar CPMS database of Canadian companies for medium sized and larger firms using Mr. Hough’s three-equally weighted criteria: PEG ratios (the lower the better); stock prices within 5 per cent of their 52-week highs, and upward earnings revisions.

To qualify for the list, firms had to have:

  • A PEG ratio above 0.2 and below 1.5
  • A stock price above $3 per share
  • Sales above $100-million per year
  • Minimum monthly trading volume of 900,000 shares
  • No negative estimate revisions in the past 30 days

What did we find?

Back testing based on up to 15 stocks from December, 1991 to June, 2012, using the Morningstar CPMS database, showed the portfolio based on Mr. Hough’s criteria significantly outperformed the S&P/TSX composite index (19.7 per cent for the portfolio versus 8.4 per cent for the S&P/TSX).

The median beta (a measure of the portfolio’s volatility) was 0.41 versus 1 for the benchmark index. I’ve never seen a strategy with such low volatility.

The median forecast P/E for the portfolio is 11 per cent above the median P/E for the S&P/TSX, – 14.5 times versus 13.1 times.The median earnings growth forecast of 27 per cent is over three times greater than the 8 per cent of the S&P/TSX. The median PEG of 0.5 times is less than half the 1.6 of the S&P/TSX.

With strong performance and low volatility it appears to pay to be an impatient value investor.

Robert McWhirter is president of Selective Asset Management Inc.


Value stocks with a strong stock price

Company Symbol Recent price $ Market cap. ($ mil.) Price/52-wk. high $ Estim. P/E Estim. EPS growth (%) P/E to growth 30-day estim. revision 5-yr. beta
Agrium Inc. AGU-T 96.26 15,211 0.98 9.4 7 1.4 6 1.67
Artis REIT AX.UN-T 17.1 1,863 0.99 9.8 48 0.2 0 1.13
Brookfield Renewable BEP.UN-T 29.69 4,334 1 76.1 212 0.4 16 0.31
CGI Group Inc. GIB.A-T 23.91 5,384 0.96 12.3 24 0.5 1 0.28
Calloway REIT CWT.UN-T 29.59 3,169 0.98 18.2 48 0.4 0 0.96
Cdn Pacific Railway Ltd. CP-T 82.3 14,093 0.98 18.6 43 0.4 1 0.78
Cdn. National Railway CNR-T 88.15 38,467 0.98 15.8 16 1 1 0.4
Com Dev International CDV-T 3 229 0.98 11.5 18 0.6 8 0.57
Element Financial Corp. EFN-T 6 498 1 50 149 0.3 0 n/a
Enbridge Inc. ENB-T 41.83 33,251 0.99 25.5 30 0.8 0 0.28

Source: Selective Asset Management Inc.


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