Gluskin Sheff chief economist David RosenbergDeborah Baic/The Globe and Mail
Earlier this week we noted how David Rosenberg is getting a bit nervous over the growing strength of the U.S. bull market. Much less of a bear these days than he used to be, the chief economist with Gluskin Sheff + Associates nonetheless thinks U.S. equities are starting to look "just a tad frothy" after three years of being the world's stock market darling.
So where does that leave the TSX, which has only risen about 8 per cent year-to-date versus the remarkable 25 per cent return of the S&P 500?
In a very enviable position, argues Mr. Rosenberg.
"The Canadian stock market is hugely undervalued relative to the U.S., as the last three years of woeful underperformance has opened a nice opportunity for value investors that truly focus in deep value," Mr. Rosenberg said in a note to clients today.
"On a PEG (price-to-earnings growth) ratio basis, looking at forward and trailing valuations and earnings growth and estimates, a blend of three years back and three years forward for completeness sake, we find the TSX just barely over unity (fair value) and the S&P 500 now at 1.38 times.
"In other words, the local market, in terms of what you pay for past and future earnings growth, is more than 20 per cent 'cheaper' in Canada than in the case in the United States," he said.
The PEG ratio - popularized by legendary U.S. fund manager Peter Lynch - is calculated by dividing the price-to-earnings ratio by earnings growth rates over a specified period of time. The lower the PEG ratio, the more a security or market may be undervalued given its earnings performance. Generally, a PEG ratio with a PEG of one or less should signal a potential buy for investors.
Mr. Rosenberg has been upbeat on Canada for a while and has warned that those betting against this country's fortunes are making a mistake - pointing to such positives as a strong fiscal situation and recent economic outperformance versus the U.S. He has also dismissed any suggestions of a housing collapse in Canada.
Darcy Keith