What are we looking for?
Stocks that Bay Street analysts like. These pros are expected to identify promising stocks and, while they're far from perfect at the job, they do at least provide a good starting point for the rest of us to consider in our search for undervalued equities.
We thought it would be particularly interesting to look at cases where analysts like a stock, but the stock is still trading at moderate valuations or below. In cases like this, analysts are implicitly suggesting that the market is missing a potential bargain – and the possibility of snapping up a deal always intrigues us.
How we did it
We looked for stocks traded on the Toronto Stock Exchange that are covered by at least five analysts – an indicator that a company is big enough or promising enough to warrant attention.
We then narrowed our search to companies that have a consensus recommendation from analysts of at least four on a five-point scale that ranges from 1 (for "sell") to 5 (for "buy").
On top of that, we required each stock to have a share-price-to-earnings ratio of 14 or less and an enterprise-value-to-EBITDA ratio of less than seven. (Enterprise value is the total value of a company's stock and net debt, while EBITDA is earnings before interest, taxes, depreciation and amortization.) Both these ratios are classic indicators of value.
What we found
Twenty-two stocks passed our screen, ranging in size from pipsqueaks like Strongco Corp. ($51-million market cap) to behemoths like Suncor Energy Inc. ($54-billion market cap). Many of these stocks operate in the resource and energy sectors; their reasonable prices are no big surprise given the thumping that both sectors have recently endured.
The obvious danger with stocks like this is that demand for resources and energy will remain subdued and these stocks will underperform. But if you believe these sectors will rebound, these stocks are definitely worth further research. Just say that the analysts sent you.