John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it.
Most of the recent economic and stock market talk about Canada has been negative, and the main culprit for the doom and gloom is an obvious one: oil.
With oil prices having plunged in the second half of 2014 and the U.S. dollar surging, Canada's resource-reliant economy has taken some hits and is expected to take a lot more. So far, fourth-quarter earnings of oil and gas sector firms have been down sharply.
To be sure, oil has a huge impact on the Canadian economy, both for the companies that find and produce oil and gas and those firms that rely heavily on it. Because of that, many investors will avoid Canadian stocks altogether. I think they're making a mistake. For one thing, as I noted a few weeks ago, the pessimism around oil stocks has created some nice bargains in that sector. For another, if oil stocks are just too scary for you right now, there are plenty of solid Canadian businesses outside the oil arena.
When a big negative catalyst such as oil's plunge is in effect, many investors forget that they are dealing not with a monolithic "stock market," but instead with what is better described as a "market of individual stocks." Driven by fear, they paint all stocks with a broad brush rather than sticking to facts and hard data.
The reality is that in just about any climate, you can find reasonably priced shares of strong businesses. In fact, when the macroeconomic buzz turns gloomy, it can help you get those types of shares at better prices than you could if everything was rosy. Here's a trio of non-oil businesses whose shares are trading at attractive values, perhaps in part because investors have painted with too broad a brush when looking at Canada.
Magna (with a $28-billion market cap) is a global automotive supplier with manufacturing operations in 29 countries.
Magna was one of the stocks The Globe cited as having a standout recent earnings performance, and it is a favourite of my Joel Greenblatt-inspired model. Mr. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Magna's 8.7-per-cent earnings yield and 29-per-cent return on capital, which combine to make the stock one of the top 40 in Canada right now, according to the approach.
This diversified communications corporation is involved in cable distribution, data centres, fibre optic networks, radio broadcasting and display advertising.
The nearly $1-billion-market-cap stock gets high marks from my Joseph Piotroski-based model, in part because it's cheap – it has a book-to-market ratio of 1.6, which is in the market's cheapest 20 per cent. The Piotroski-based model also likes its 7.5-per-cent return on assets, and improving current ratio (a measure of liquidity that divides current assets by current liabilities), which rose to 0.45 (from minus 0.22) in the most recent year.
Cogeco also gets strong interest from my Greenblatt-based model. The approach likes its 10.3-per-cent earnings yield and 27.3-per-cent return on capital, and ranks it as the 27th-best stock in the market.
Renowned investor Jeremy Grantham has been touting the virtues of timber investing for some time now, and the strategy I base on the writings of mutual fund legend Peter Lynch likes this Vancouver-based timber company. It considers Acadian ($290-million market cap) a "fast-grower" – Mr. Lynch's favourite type of investment – thanks to its impressive 29.7-per-cent long-term earnings-per-share growth rate. (I use an average of the three-, four- and five-year EPS growth rates to determine a long-term rate.) Mr. Lynch famously used the price-to-earnings-to-growth ratio to find bargain-priced growth stocks, and when we divide Acadian's 6.7-price-to-earnings ratio by that long-term growth rate, we get a PEG of 0.23. That falls into this model's best-case category (below 0.5).
Mr. Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt-to-equity ratios less than 80 per cent. Acadian's debt-to-equity ratio is 34 per cent, another good sign. It's also worth noting that shares currently offer a 5.2-per-cent dividend yield. (As a side note, I wouldn't expect Acadian to keep growing in the 30-per-cent range. But that price-to-earnings ratio is so low that, even with very modest growth and that strong dividend, it should still be a good value.)
Disclosure: I'm long on U.S.-traded shares of Magna (MGA-NYSE).
John Reese