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What are we looking for?

Undervalued Canadian companies producing positive shareholder wealth.

The screen

We screened the S&P/TSX composite index with only three simple but powerful criteria:

  • An economic performance index, or EPI (return on capital divided by cost of capital) greater than one. An EPI ratio of one or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
  • A return on capital greater than 10 per cent;
  • A negative future-growth-value-to-enterprise-value ratio (FGV to EV) – This represents, in percentage, the portion of the enterprise value that exceeds the company’s current operating value. The higher the number, the higher the baked-in premium for expected growth, and the higher the risk. A negative figure reflects a discount.

The price-to-earnings ratio, beta, dividend yield and four-year annualized dividend growth rate are displayed for informational purposes. (Note that a stock with beta of less than one has historically moved less than the index to which it belongs.)

More about StockPointer

StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 7,500 companies (Canadian stocks, U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.

What did we find?

Using only these three criteria, more than 96 per cent of the index got excluded, and only nine companies came up in the results. The most restrictive criterion in the list is, by far, the negative FGV to EV. The enterprise value (market cap plus debt minus cash) is composed of two things – what the company is worth today, and the value of future growth expectations. In some cases, EV is even smaller than the current operating value, which translates into a discount – hence, negative FGV. This can either mean the market anticipates a decline in operating profits, or the stock is mispriced and represents a good investment opportunity. For example, Transcontinental Inc. is the most discounted stock in our list, with an FGV of minus 55 per cent. The discount certainly reflects the pessimism surrounding the printing industry and the uncertainty regarding the company's ability to successfully shift its core operations from printing to digital media products. Even though these risks are very real, such an important discount could appeal to deep-value investors.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

Jean-Didier Lapointe is a financial analyst at Inovestor Inc.

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Select Canadian stocks offering value

CompanyTickerEPIR/CFGV to EVP/EBetaDividend Yield4Yr Div. Growth Rate 
Macdonald DettwilerMDA-T1.911.2%-42.3%22.80.332.26%3.30%
BCE Inc.BCE-T1.810.3%-4.6%
Power Financial Corp.PWF-T1.818.3%-37.7%
Thomson Reuters Corp.TRI-T1.711.4%-26.9%31.20.463.08%8.49%
Sun Life Financial Inc.SLF-T1.512.2%-15.7%12.10.633.44%2.99%
Magna International Inc.MG-T1.514.6%-15.5%
Transcontinental Inc.TCL.A-T1.511.4%-55.2%12.60.853.25%6.28%
Western Forest ProductsWEF-T1.210.4%-12.6%9.20.873.69%0.00%

Source: StockPointer