What are we looking for?
As you may have heard, a certain social media stock took flight on Thursday, as investors flocked to a company built on the notion that 140 characters is the ideal length for personal communication. (A notion we would heartily recommend to politicians everywhere.)
Buyers were so enthusiastic about Twitter that they quickly bid the share price past $45 (U.S.), a level that represents more than 80 times the company's annual sales. (By comparison, other social media businesses, such as Facebook and LinkedIn, trade for price-to-sales ratios under 20.) Twitter's price-to-earnings ratio would no doubt be even more jaw-dropping – if the company had actually produced any earnings.
All of that brings up an interesting question: Will Twitter, a stock that's loftily valued by any traditional measure, manage to do better over the long haul than securities with more reasonable valuations? We thought it would be interesting to look at the anti-Twitters: Companies with low price-to-sales ratios and lots of earnings.
How we did it
For starters, we searched for Canadian stocks that are actually producing earnings. We then narrowed it down to those with price-to-sales ratios below two and price-to-earnings ratios below 12. Both readings are below market averages and suggest a company may be undervalued.
To ensure we didn't load up with small stocks that may be cheap but highly volatile, we insisted that a company must have more than $250-million in market capitalization.
To sidestep stocks that might be too risky for most investors, we focused on companies with decent histories of profitability. We required each company on our list to have a median return on equity over the past five years of at least 10 per cent.
What we found
A dozen anti-Twitters popped up on our stock screen. They're a varied bunch but they all deserve a second look if you're a value investor. None of them are growing as rapidly as Twitter, but unlike the social media superstar they each possess two things: reasonable valuations and strong earnings.