Skip to main content

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Building sandcastles on the shore brings back fond childhood memories.

The challenge was to get them set up before the waves came in. But it was only a matter of time before the monuments to impermanence were washed away and then rebuilt again the next sunny day.

The markets have a similar ebb and flow. Some companies grow skyward while others topple over. But many firms that are down today survive and go on to thrive again.

The tide has been coming in on the Canadian stock market in recent months, and the waves have already washed over a few proud names. The S&P/TSX 60 index, which tracks the largest stocks in the land, has fallen by 5 per cent over the last 12 months, not including dividends.

Most of the 60 stocks it follows have lost ground over the period and the downturn in the resource sector has been particularly acute.

Business is so bad that some firms have decided to reduce – or even eliminate – their dividends in an effort to conserve cash. Dividend reductions provoke strong reactions from income investors who often flee and thereby further depress share prices.

Over the last two years, 10 stocks in the S&P/TSX 60 have reduced their dividends and all of them are down by more than 20 per cent over the last year. Some have seen their shares fall by more than 50 per cent.

The reducers are Agnico Eagle Mines (AEM), Bombardier (BBD.B), Canadian Oil Sands (COS), Eldorado Gold (ELD), Encana (ECA), First Quantum Minerals (FM), Silver Wheaton (SLW), Teck Resources (TCK.B), TransAlta (TA) and Yamana Gold (YRI).

Big price declines naturally attract the interest of bargain hunters.

But just because a stock has fallen a great deal doesn't necessarily mean it's a bargain.

To get a better gauge of a stock's value potential it's useful to measure it against four classic value ratios. The price-to-earnings ratio is the most well known of them and bargain hunters are attracted to stocks with lots of earnings that sell at relatively low prices.

Similarly, value investors like stocks with low price-to-cash-flow, price-to-sales and price-to-book-value ratios.

In this case, I ranked each stock in the index based on each ratio and combined the ranks to form a composite value score. The five dividend reducers with the best value scores are Teck Resources, Encana, TransAlta, First Quantum and Canadian Oil Sands.

Teck Resources, a diversified mining company based in Vancouver, currently provides the best value of the bunch. It has mines in Canada, the United States, Chile and Peru. It also runs a large smelting and refining complex in British Columbia and explores for copper, zinc and gold in a slew of countries worldwide. Most of its profits in 2014 came from its copper, coal and zinc operations.

Teck's shareholders have been on a wild ride since the turn of the century. The stock changed hands at about $6 per share in the early years, adjusted for splits. It then shot up to near $53 per share before the crash of 2008, when it plunged below $4 per share. The shares bounced back and moved on to new highs near $65 in early 2011. But they've fallen in more recent times.

Last Thursday the company reported second-quarter profits of 11 cents a share, which slightly exceeded analyst estimates. But the market wasn't pleased with the results and sent the stock down 48 cents a share on the day to close at $9.93. That's 63 per cent below its 52-week high and 85 per cent below its 2011 high. With tax-loss selling season fast approaching, the stock might dip back into mid-single-digit territory (the stock closed Monday at $8.82, down 44¢).

On the other hand, Teck currently trades at 30 per cent of book value, remains profitable and appears to have a good deal of staying power.

As a result, it's fairly easy to envision a time – perhaps a few years in the future – when commodity prices perk up and take the stock with them. Aggressive investors might want to nibble on its shares and look to take a bigger bite, at lower prices, over the next few months.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe