What are we looking for?
Potential bargains. More specifically, stocks that still look cheap despite the market’s big gains over the past couple of years.
How did we do it?
We looked for stocks on the Toronto and New York exchanges that can pass multiple tests of value and stability.
For starters, we limited ourselves to companies with market capitalization of at least $500-million on the theory that larger companies tend to have a greater ability to weather shocks.
We then insisted that each company on our list have an enterprise value (that is, combined market value of stock and net debt) less than eight times its earnings before interest, taxes, depreciation and amortization (EBITDA) – or to put that into English, we looked for companies that appear cheap in relation to the amount of cash they generate.
We also wanted companies that have shown a consistent ability to attract customers and generate profits. To make our list, a business must have a median return on equity of at least 10 per cent over the past five years. It also must have grown its annual sales by a median 10 per cent or more over that same period.
Of course, any business can run into unexpected troubles. But companies that don’t owe a lot of money tend to be able to shrug off transitory problems. To ensure our picks couldn’t be sunk by a sudden squall, we looked for businesses with debt that is no more than half the value of their equity.
What we found
We found 18 companies that for one reason or another appear unloved and potentially attractive to value hunters.
In some cases, such as handgun maker Sturm Ruger & Co. Inc., the reasons for investors’ distaste are obvious. In other instances, such as Magna International Inc. and Linamar Corp., stock prices appear to reflect skepticism about the outlook for Canada’s auto parts sector.
In each case, though, these companies have solid balance sheets and a proven ability to produce profit. Investors searching for value in an expensive market may want to give them a closer look.
Stocks showing value and stability
|Debt/equity||Market cap ($)||Median of yearly ROE |
over 5 yrs
|Median growth of |
yearly rev over
|Alaska Air Group||ALK-N||5.22||39.81||6,781,143,040||22.93||10.72|
|Sturm Ruger & Co.||RGR-N||5.36||0.00||1,125,127,680||32.96||39.94|
|Nu Skin Enterpr.||NUS-N||6.55||22.92||4,113,576,192||30.73||15.49|
|Ensign Energy Serv.||ESI-T||6.76||33.42||2,642,207,232||10.14||16.24|
|Usana Health Sciences||USNA-N||7.67||0.00||1,099,611,648||39.12||11.48|
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