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What are we looking for?

Non-commodity stocks that are trading at or below their book value with a growing quarter-to-quarter top and bottom line.

The screen

This week, I use Morningstar CPMS to look for companies trading in Canada at or below their book value of equity. At present, these stocks are dominated by mining and energy companies, but for many investors these two sectors may introduce unwanted volatility to a portfolio. As such, in today’s analysis I’ve excluded these two sectors. In the remaining universe of approximately 390 stocks in the CPMS Canadian database, I’ve sorted stocks based on the following criteria:

  • Quarter-to-quarter EPS (earnings per share) and sales growth (this measures the latest reported quarterly operating earnings per share and sales per share as a percentage change from the same quarter one year ago);
  • Quarterly earnings momentum (the past four quarters of earnings compared against the same figure one quarter ago).

To qualify, companies must be trading at or below 1-times book value of equity, and must have a market cap greater than $115-million (this figure is meant to exclude the bottom third of stocks in Canada by market capitalization).

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More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1985, to May, 2018. During this process, a maximum of 10 stocks were purchased and equally weighted. Once a month, stocks were sold if their rank fell below the top half of the ranked universe. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12.8 per cent while the S&P/TSX Composite Total Return Index produced 8.2 per cent. In the trailing 12 months ending May, 2018, the strategy produced 26.1 per cent while the index produced 7.8 per cent.

Non-commodity TSX stocks trading at or below book value

RankCompanyTickerMorningstar SectorMarket Cap ($Mil)Price to BookQtr to Qtr EPS Growth (%)Qtr to Qtr Sales Growth (%)Qtrly Earns Momentum (%)Recent Price ($)Div. Yield (%)Price Chge from Month End, 12M Ago (%)
1Polaris InfrastructurePIF-TUtilities218.60.92161.14.846.313.945.6-18.4
2Reitman's (Canada) Ltd.RET.A-TCons. Cyclical264.10.7779.10.360.04.174.8-3.0
3Black Diamond Group Ltd.BDI-TIndustrials187.50.8283.62.936.53.380.022.5
4Melcor Developments Ltd.MRD-TReal Estate502.90.49469.415.517.615.063.5-2.1
5Cervus Equipment Corp.CERV-TIndustrials216.60.96149.712.010.213.812.924.8
6Algoma Central Corp.ALC-TIndustrials587.50.9130.218.018.415.252.617.7
7VersaBankVB-TFinancial Services148.10.8044.721.611.27.010.650.1
8Transat A.T. Inc.TRZ-TCons. Cyclical296.90.5155.10.517.77.930.034.4

Source: Morningstar Canada

Today, only eight stocks qualify for purchase and are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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