It's a dream come true for value investors.
After climbing 250 per cent over six years, the S&P 500 plunged 10 per cent this summer as concern mounted over the wavering Chinese economy. Global markets have yet to find their footing, but the volatility has the masters of value investing shopping for bargains.
Irwin Michael, president and portfolio manager, ABC Funds, Toronto
"We are selectively buying and upgrading," Mr. Michael says. "It's a very challenging and difficult market because all investors are looking for greater clarity."
He says he's sifting through the carnage across sector and geographic lines for good companies that were taken down in the broader market decline. "We're looking for dividend-paying stocks, free cash flowing, that are trading at a big discount to replacement cost."
One stock in his shopping cart is mortgage provider Equitable Group Inc. Fears of a housing bubble in Canada going back to July took the stock down by 24 per cent. He says it's that fear that is making Equitable Group a good value. "We don't think the Canadian mortgage market is anything like the U.S. We think a lot of negativity is already baked into this price."
Mr. Michael is also buying into Canadian auto parts supplier Exco Technologies Ltd., which is benefiting from the low Canadian dollar. Its stock fell more than 20 per cent from its August high. "Most of their costs are Canadian. Almost all of their revenues are U.S.," he says.
David Baskin, president, Baskin Wealth Management, Toronto
Mr. Baskin is also taking the selloff as a green light to start buying. "If everybody else is stupid enough to sell these things, then you should be smart enough to buy them at bargain prices," he says.
Mr. Baskin's creed is to pick up good stocks when they are down, and be patient. "We're very long-term thinkers. We tell our clients that it's a marathon and not a sprint."
He's buying into Morguard Corp. after the commercial and residential real estate company's stock tumbled by more than 13 per cent over the summer. The stock is trading around $135, but he says the company's financial statements show it's worth much more. "We think the value of their holdings is probably $200 a share."
Next on his list is Intertape Polymer Group Inc. Shares in the industrial tape maker plunged by nearly 30 per cent in the August panic. The selloff was compounded by a poor earnings release that Mr. Baskin considers a "temporary logistical issue."
"People sometimes sell these companies on solvable short-term issues, and that's when you can get a bargain," he says.
Finally, the August selloff has created a rare opportunity to buy the big Canadian banks at a discount, Mr. Baskin says. "If China hiccups and all the Canadian banks sell off, in our view that's a good reason to buy the Canadian banks."
He says the most compelling buy in the sector is Quebec-based National Bank of Canada. "National Bank does not have the international exposure that you get with the Bank of Nova Scotia, it doesn't have the U.S. exposure you get with BMO [Bank of Montreal] or TD [Toronto-Dominion Bank]. It's trading at a discount to the other banks because of that," he says.
Kash Pashootan, senior vice-president and portfolio manager, First Avenue Advisory of Raymond James Ltd., Ottawa
Mr. Pashootan is also buying, but he's preparing for more volatile markets. After six years of rising equity values fueled by cheap money and government stimulus, he says the easy money has already been made. "It's been easy to find stocks at good prices, bargains or trading at a discount. It's much more challenging to identify a company that is trading at a discount to its intrinsic value because not much is really undervalued," he says.
He says value investors run a bigger risk of falling into what is called a value trap. "When you're in a market that's fully valued the risk in value investing is value traps. … Athough the stock is cheap, it just becomes cheaper and cheaper. It's trading at a discount not because it's an opportunity, but because there are structural or medium to long term challenges with the business."
One of his top value plays right now is Transcontinental Inc., which is transitioning from a paper product manufacturer to packaging. "There's still a risk because they are going through a transition, but we feel they are deep enough in that transition that we have evidence it's heading in the right direction," Mr. Pashootan says.
After falling 12 per cent in August, Transcontinental gained 40 per cent in early September. Mr. Pashootan says it's still a good value.
He is also buying GameStop Corp., the largest video game retailer in the world. The stock lost 13 per cent of its value in August but had been on a long term rise as it transitions away from video games to cellular communications in response to pent-up demand for new consoles from Microsoft and Sony.
"They are selling everything from iPads and iPhones through their Apple operations and generating considerable revenue on the mobile side as a whole. They diversified," Mr. Pashootan says.
In the technology space he's also buying Apple Inc. Its 14-per-cent decline in August hardly registers against its 1,000-per-cent rise since 2009, but he says it's still a bargain.
"Because their earnings have kept up, the price-to-earnings [ratio] is still trading in line with what a value stock would be."