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NUMBER CRUNCHER

Hunting for deep value in emerging markets Add to ...

Our screen looked at emerging market stocks that have seen a 15-per-cent decline or more since the beginning of 2014

Samuel Oubadia is a senior analyst at Lorne Steinberg Wealth Management  in Montreal.

What are we looking for?

Whenever there is negative news surrounding emerging markets, whether due to U.S. Federal Reserve tapering or a conflict in Ukraine, investors often fail to discriminate between companies that are truly experiencing difficulties and those that are much more sound. In other words, it can be a case of “throwing the baby out with the bathwater,” as the expression goes. Given the recent turmoil in emerging markets, we at Steinberg Wealth Management were interested in screening for stocks that have recently seen a substantial decline in their share price, but where this drop may be unwarranted.

The screen

Using S&P Capital IQ, we developed a screen that looked at emerging markets stocks that had seen 15-per-cent decline (in U.S. dollar terms) since the beginning of 2014.

In creating this screen, we were interested in several factors. For starters, size and liquidity are of importance to us, as many emerging markets are notorious for poor liquidity. No matter how undervalued a stock might be, it is of no interest to us if trading volumes are too low to be able to accumulate a meaningful position. As such, we limited our search to companies that were of a minimum market capitalization and average trading volume.

As deep-value investors, we screened on a couple of valuation metrics, including price-to-tangible book value and the forward price/earnings ratio. Finally, we also screened for companies that yielded a minimum return on equity over the past 12 months.

What we found

The results of our screen can be seen below. Not surprisingly, almost all the companies appearing on the screen are based in the larger emerging markets. Chinese stocks were the most prominent.

While the companies listed may be a good starting point for evaluating emerging market stocks, it is necessary to bear in mind the macroeconomic and political risks associated with these markets.

These include issues that are often taken for granted in developed markets.

Of course, readers should also be aware of the company-specific risks connected to any of the stocks shown. Investors are strongly advised to do their own research before buying any of the stocks listed here.

Emerging market stocks that may be undervalued

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