What are we looking for?
Canadian-listed stocks that are profitable but trading below book value.
Given the sorrowful state of equity markets, this could be an ideal time to go bargain hunting – especially for those with strong stomachs and a long-term view. Stocks that are trading below book value – the total assets of a company minus its intangible assets and liabilities – could signal they are undervalued. But often these companies come with a big red danger sign. They can be operating under stress conditions and something could be fundamentally wrong, such as an overwhelming debt load or poor growth prospects amid a bad economy. Book value is an indication of the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.
To make our screen, stocks must have a price-to-book value below 1 but also have a strong track record of making money, with profits being reported in each of the past three years. And to increase our comfort level, these companies are also expected to post income in both the current year and next. Their common equity to total assets has to be over 50 per cent, which should give some assurance they are not about to be knocked down by too much debt. Market cap has to be greater than $500-million (U.S.).
What did we find?
Dorel Industries Inc. tops our list, with a price-to-book value of only 0.55. The stock has been sinking throughout much of the year, currently hovering just above its 52-week low of $21.46 on Sept. 23.
The company is struggling to boost sales amid depressed consumer confidence in the United States. Demand for its car seats and strollers is waning as more Americans choose to go with second-hand products. But on the bright side, its bicycle sales are doing well. Its second-quarter earnings fell to $23-million from $32.9-million a year earlier.
Weak consumer confidence is also plaguing Rona Inc., the company on our list with the second-lowest price-to-book value. Rona, which is facing stiff competition, saw its earnings in the second quarter tumble to $37-million from $66.3-million a year earlier.
A handful of base metals producers made the list as well. Prices for the commodities they produce have plunged in recent days. While each has various operating issues to be aware of, they look like interesting candidates right now for value investors betting the global economy is going to get back on track in relatively short order.
Darcy Keith