What we're looking for
A stock, any stock, that remains undervalued despite the fast and furious market rally of the past two years.
With help from the Montreal-based market data firm StockPointer, we're looking for companies that have strong credentials as wealth creators for shareholders. As it happens, many of the names that StockPointer came up with have not appreciated dramatically in price over the past 12 months.
StockPointer is a specialist in a kind of analysis called economic value added, or EVA, which is a no-nonsense gauge of a company's profitability. It's tricky to directly compare the EVA of companies in different sectors, so StockPointer uses an equalizer called the economic performance indicator, or EPI. The EPI is a ratio of a stock's return on capital to its cost of capital, including debt and shares, and it's a definitive indicator of a company's EVA quality. An EPI score of 1.0 is the minimum to be considered a wealth creator.
Two more quick notes about today's screen:
- Return on capital measures how effectively a company uses the money put up by shareholders and lenders; generally, an ROC above 10 per cent is considered good.
- Price/intrinsic value shows whether a stock is over- or undervalued according to its value as determined by EVA analysis; less than 100 per cent suggests a stock is undervalued.
What we found
The first stock on the list, Just Energy, is a lead for investors to follow if they're interested in playing the spike in oil prices and want something that still offers value. All the other stocks on the list offer will be of particular interest to income-seeking investors who want to beat the yields that bonds and guaranteed investment certificates are offering. Note that there are two former income trusts in the mix here - Just Energy and Davis & Henderson - that have converted into corporations with bonus-size yields. High yields can be a sign that investors are wary of a stock, but in this case StockPointer's analysis suggests both companies are doing some things right.