At Lorne Steinberg Wealth Management, we use a deep value philosophy to try to pinpoint unique and disregarded equities that trade well below their true value. Buying that which is undervalued provides both downside protection and the potential for healthy gains as prices revert toward their fundamental values.
Taking this approach means having a discerning eye, which is helped by a combination of applying selection criteria and using robust tools. For starters, I look for value-based criteria and metrics using the power and breadth of S&P Capital IQ, allowing me to filter out a universe of more than 16,000 North American-listed stocks (including some trading as American depositary receipts or on the pink sheets) to find those that may be selling at prices below their intrinsic value.
To ensure reliability and consistency, I screen for companies with at least 10 years of operating history and stability in both earnings and revenue. Within that group, I whittle down the list to remove companies with excessive debt loads or that do not demonstrate a strong track record of generating positive free cash flow – I am looking specifically for companies that generate more cash from their operations than what they need to maintain their business.
I then like to apply certain metrics, most notably low forward price-earnings multiples, while looking for companies that have dropped at least 30 per cent from their five-year highs. These in turn help me to find the most compellingly cheap prices for equities that are least likely to have their value reflected in market prices today.
What we found
The accompanying chart shows the top-20 companies sorted in order of their lowest forward earnings multiple.
A list such as this is a good starting point for uncovering a cheap treasure. However, judgment and thorough research always have to be used over and above the tool of stock screening. After all, when shopping at a discount store, one must be mindful that many things are cheap for good reason. Investors are strongly advised to do their own research before buying any of the stocks listed here.
* Scored out of 10 (10 being the most stable). Source: S&P Capital IQ