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George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario.

My Ivey value-investing students have submitted their final stock picks for the year, although it was more difficult this year than any other year to find truly undervalued stocks.

As is usually the case, it was much easier to find Ben Graham stocks that looked as though they were undervalued than to find Warren Buffett-like quality stocks.

Here, I’ll look at the two stocks that appear be Graham-cheap stocks, and later in the week review the third, which looked more like a Buffett stock.

BMTC Group Inc. (GBT-T), a retailer that sells home furniture, floor and wall coverings as well as electronics and home appliances exclusively in Quebec, was identified as a possibly undervalued stock with a P/E ratio of 11.2 and a market cap of $542-million. The company is 60-per-cent controlled by the family of Yves de Grosseillers, the chairman, chief executive and president. Because home furnishing and electronic products are largely discretionary, sales are influenced by the strength of the overall economy. The industry is moderately attractive with low barriers to entry and high competition that is countered by low bargaining power of suppliers and buyers. As with other consumer-related industries, the furniture-retail industry does face the threat of online retailers undercutting prices. However, given the nature of the products, which are expensive enough that consumers will want to physically interact with them before purchasing, there are advantages to having a bricks-and-mortar retail presence.

The company has been very successful within the Quebec market by investing in an aggressive marketing and advertising strategy. Out-of-store advertising is augmented by strong consumer promotions inside the stores. Management is actively working to counter the online threat by both investing in an e-commerce platform and redesigning the stores so their operations are integrated with the online efforts. These efforts have enabled BTMC to get a market share of close to 30 per cent in Quebec, well ahead of Leon’s Furniture Ltd., its main competitor. Dominating the local market affords BMTC regional economies of scale that help the company achieve relatively high and stable margins. Operating margins have averaged around a very satisfactory 10 per cent over the past 10 years, but have declined in recent years from a peak of 13.3 per cent in 2008 to 6.9 per cent in 2017 as the cost of integration has weighed in on operating margins. But BMTC is well managed and conservatively financed. BMTC’s debt/total capital ratio is at 14.8 per cent with its entire debt comprised of operating leases. BMTC holds $37-million in cash and $67-million in long-term bank notes.

BMTC has an adjusted return on invested capital (ROIC) of 12.3 per cent and a cost of capital of 6.2 per cent, allowing the company to add value as it grows. Students estimated BMTC’s intrinsic value to be $23.70 and, accounting for 33-per-cent margin of safety, its entry price to be $15.80, which is above its current stock price of $15.61, making the stock a “buy”.

Acadian Timber Corp. (ADN-T) meets the Ben Graham value-investing criteria with P/E and P/B (price to book) ratios of of 10.6 and 1.19, respectively, and a market cap of $327-million. ADN has a simple business model and low analyst coverage, which further supports it being a potential value stock. Another positive for the stock is that Brookfield Asset Management owns 45 per cent of the shares outstanding and seems to support its management and strategic direction.

ADN operates in two business segments, primary forest products and management services. The company’s sales are tied to economic conditions because its products are largely used in residential construction and the number of housing starts decreases as economic conditions worsen. But ADN has managed to mitigate these risks by securing long-term contracts and by diversifying their revenue stream with management services. Fragmentation is high in this industry with the top four competitors accounting for only 30 per cent of the market.

ADN’s debt/capital ratio has averaged about 27 per cent over the past eight-years, while currently the debt ratio is about 25 per cent. Given its industry, ADN is conservatively financed. The company’s adjusted ROIC is 3.3 per cent while its cost of capital is 7.8 per cent − not a very attractive situation.

Most companies operating in this industry elect to use all of the timber in a given location and then move on to the next plot of land, but ADN has decided to follow a more sustainable strategy that allows it to continue to reuse the same land. But this results in a lower utilization rate of the land. Operating margins are greater than 20 per cent and management is focusing on its sustainable-growth strategy through acquisitions of new land. Despite high operating margins, ADN’s land-use policies and the resulting excess capacity suppresses its asset turnover leading to a low ROIC. In light of this, one has to question the company’s drive for growth.

ADN’s intrinsic value was estimated by students to be $18.50 a share with an entry price of $12.30. As ADN is currently trading at $19.94, well above the entry price, the stock was not recommended for purchase.

Ben Graham stocks are much easier to find undervalued than Buffett-like stocks and, from the students’ analysis, BMTC appears to fit the bill, but not ADN.

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