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Number Cruncher

Going deep: A multiple screen for value stocks Add to ...

What are we looking for?
When you hear market commentators talk about stock “valuations,” often they’re using the term as shorthand for the price-to-earnings ratio, the equity market’s long-time favourite valuation measure.

But there are, in fact, numerous ratios that can be valuable in assessing whether a stock’s price reflects fair value for what you’re buying.

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The problem is, stocks that look cheap by one valuation metric might not look cheap at all by another.

To have a better sense of value, you need to look at multiple metrics.

With that in mind, we’re seeking Canadian stocks that offer the best valuations across several key measures.

Screening for value
Today’s screen comes courtesy of Craig McGee, senior consultant at CMPS Morningstar Canada.

Mr. McGee screened for the top 20 stocks on the S&P/TSX composite based on an equal weighting of four valuation measures:

  • Price to book value
  • Price to expected sales
  • Price to expected cash flow
  • Price to expected earnings

The expected figures were based on the median of analysts’ forecasts for the next year.

More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools.

It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What we found
The resulting list covers a cross-section of the Canadian market – energy, materials, technology, manufacturers and retail stocks are all prominent on the list. It would appear, though, that oil field services companies are one group overrepresented – perhaps a result of their prices having been hurt by slumping oil and gas prices in recent months.

“Many of these stocks have been beaten up year to date,” Mr. McGee said. “If company and market expectations turn around, these may also experience a significant rebound.”

It’s also notable that several stocks that make CPMS’s valuation list don’t look unusually cheap strictly on a price-to-earnings basis. (George Weston Ltd.’s P/E of 13.3, for instance, is in line with the overall average for the Canadian market.) It’s further evidence that when you’re examining valuation, it’s a good idea to look beyond P/E.

 

Canadian stocks with the best mix of low basic valuations

Company Symbol Price $ (June 29) Market cap. ($ mil.)
Petrominerales Ltd. PMG-T 11.50 1,148
Transcontinental Inc. TCL.A-T 9.29 753
Petrobank Energy & Res. PBG-T 10.81 1,114
Sherritt Int'l Inc. S-T 4.90 1,454
Martinrea Int'l Inc. MRE-T 8.00 664
Precision Drilling Corp. PD-T 6.93 1,915
Celestica Inc. CLS-T 7.40 1,406
Trinidad Drilling Ltd. TDG-T 5.81 702
Dorel Industries Inc. DII.B-T 27.00 861
Empire Company Ltd. EMP.A-T 53.66 1,808

Morningstar Canada

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Security Price Change
WN-T George Weston 86.98 0.02
0.023 %
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