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What are we looking for?

It's that time of year to go looking for bargains at retailers. So, in keeping with the spirit of the season, let's screen for the most undervalued retail stocks in Canada.

We'll do this by using multiple valuations: Price-to-earnings, price-to-cash flow, and enterprise value-to-trailing 12-month earnings before interest, taxes, depreciation and amortization.

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To make our list, each stock has to be below the average in their specific sector on all three metrics. Comparing these stocks to their peers, rather than the overall market, should give us a more accurate view of the best deals that are out there.

These may not be the most prosperous of times for retailers given continuing economic uncertainties. But the industry is expecting modest growth in spending this holiday season, which should be supportive for these stocks.

What we found

We arranged this chart by starting with the retailers with the lowest price-to-earnings relative to their sector. (While we screened for general retailers, companies are compared here to average valuations in specific sectors in which they directly compete, such as home improvement or apparel.)

There are a lot of familiar names here, including big retailers such as Canadian Tire and Rona. Shareholders in Canadian Tire have already done very well this fall, with the stock up about 25 per cent since late August, aided in part by a strong third quarter that saw profits jump 36 per cent. Our screen suggests there may be some more upside left.

Rona's stock has been going in the opposite direction over the past year, with the company plagued by weak consumer confidence and stiff competition.

Based on price-to-earnings, Danier Leather appears to be the cheapest, trading at only a third of the average industry price-to-earnings ratio. But beware: It's a lightly traded stock that could be subject to pretty wide price swings. Danier didn't give investors much to cheer about in October when it reported a 6-per-cent slide in same-store sales for its fiscal first quarter, which it blamed on weak consumer confidence.

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