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Berkshire Hathaway Chairman and CEO Warren Buffett (Seth Wenig/AP)
Berkshire Hathaway Chairman and CEO Warren Buffett (Seth Wenig/AP)

NUMBER CRUNCHER

Buying on the cheap, the Buffett way Add to ...

What are we looking for?

Stocks that might appeal to Warren Buffett – or to anyone looking for a bargain.

How we did it

The Oracle of Omaha is known for preferring companies with high returns on equity (ROE). A strong ROE is a sign that companies are able to convert the money contributed by equity investors into profit – and that’s a fundamentally attractive characteristic for any business.

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Mr. Buffett is also renowned for buying things on the cheap. One sign of a bargain stock is a low price-to-earnings (P/E) ratio.

We looked for stocks on the Toronto exchange with ROEs above 20 per cent along with a single-digit P/E. These stocks have a demonstrated ability to produce profits while also being considerably cheaper than the market norm.

To avoid microcap stocks that might involve too much risk for most investors, we insisted each stock had to have at least $200-million in market capitalization.

What we found

Twenty-one stocks met our criteria. Each deserves a further look, but remember that stocks are usually cheap for a reason.

In nearly every case, these companies come with a blemish, which can range from simple skepticism over their growth prospects to more complicated company-specific issues. Note, too, that many of these stocks have sustained losses so far this year, which means that momentum may not be in your favour.

One guide to what the market thinks of these firms is provided by analysts’ opinion. Our chart shows the consensus recommendation from analysts for each stock on a scale that ranges from 1 (sell) to 5 (buy).

Do your own research before buying any of these names. Some apparent bargains may be value traps that look cheap but really aren’t. Only a detailed look at each firm can reveal if it truly belongs in a Buffett-inspired portfolio.

Follow on Twitter: @IanMcGugan

 

Stocks with high returns on equity, low price-to-earnings ratios

Company Symbol ROE % P/E
Morguard N. Amer. REIT MRG.UN-T 76.1 1.6
Chorus Aviation CHR.B-T 66.5 3.8
Mandalay Resources MND-T 50.7 4.8
Rio Alto Mining RIO-T 38.8 7.0
Calloway REIT CWT.UN-T 35.5 3.7
Timmins Gold Corp. TMM-T 33.3 8.3
InterRent REIT IIP.UN-T 31.0 3.0
Bird Construction BDT-T 30.7 9.2
Retrocom Mid-Mkt REIT RMM-T 28.4 3.6
Wajax Corp. WJX-T 25.1 9.0

Source: Bloomberg

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