What are we looking for?
Stocks that have been unjustifiably tossed aside in the recent downturn.
Given the recent sell-off in equity markets, and stocks trading at significantly lower prices since the start of the year, some value investors may find themselves behaving like kids in a candy store. Our approach to investing in stocks at Lorne Steinberg Wealth Management has always been to look for deep value. While value is important, we also look for companies that are financially sound, generating positive free cash flow, and at the same time, leaders in their respective industries.
The screen
Using S&P Capital IQ, we screened for companies in North America and Europe (developed markets) with a market capitalization of $1-billion (U.S.) and higher. We were interested in companies that have seen their share price fall more than 25 per cent over the past year.
Companies had to be generating positive free cash flow over the past 12 months and have a net debt/EBITDA ratio of less than 2.0. Net debt/EBITDA is a measurement of leverage – or how much debt a company has in relation to its earnings before interest, taxes, depreciation and amortization.
To screen for valuation, the trailing price/book ratio and the forward P/E had to be less than 1.5 and 12.0 respectively. Finally, we eliminated companies in the energy and materials sectors.
What we found
We found 27 stocks that met our criteria but have limited our table to the top 15 in terms of market cap.
Our list of stocks includes companies operating in a broad range of industries. While most are based in the United States, there are several European companies as well. At the top of our list is the Danish company A.P. Moller-Maersk AS. Maersk has seen sales in container shipping services tumble in recent years. While shipping is the company's primary business, what has made matters worse is that Maersk is also active in oil and gas production. It comes as no surprise that this unit has also been struggling.
Moving to an entirely different sector, Framingham, Mass.-based Staples Inc. has seen its share price slashed by almost one-half over the past year. The retailer of office supplies and business technology products recently suffered a huge blow when its proposed merger with Office Depot came under opposition from U.S. antitrust regulators. Staples is fighting the Federal Trade Commission in court over the matter. The two companies have now extended the date for closing the transaction to May 16, in the hopes that legal proceedings will be settled in Staples' favour by then.
As always, investors are advised to do their own research before purchasing any of the stocks listed here.
Samuel Oubadia is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.