What are we looking for?
Bargain stocks. With earnings estimates being pulled back and markets unsure of their direction, it's time to look at what's cheap.
To identify promising firms, our friend Craig McGee, senior consultant at CPMS Morningstar Canada, scoured his database for Canadian companies that look like possible value buys.
How we did it
Mr. McGee started by looking for companies that are cheap compared to their book values and their tangible book values.
Book value is the difference between a firm's assets and liabilities. Tangible book is a more restrictive gauge that excludes intangible assets, such as trademarks and goodwill.
To make the grade, firms had to be trading at low prices compared to their cash flows. To avoid quickly deteriorating stocks, Mr. McGee ruled out shares on which analysts have recently slashed estimates.
More specifically, he built a list of 17 Canadian companies that meet the following criteria:
-A market capitalization greater than $200-million;
-A price-to-book ratio in the lowest half of the CPMS database;
-A price-to-tangible-book ratio in the lowest half of the database;
-A price-to-cash-flow ratio in the lowest half of the database;
-Net cash per share at or above zero;
-A current ratio (current assets divided by current liabilities) greater than one;
-A total-debt-to-equity ratio in the lowest half of the database;
-Consensus analysts' revisions to earnings and cash flow no worse than minus 5 per cent over the past three months.
More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
What we found
Mr. McGee's list provides a good starting point for anyone searching for reasonably valued Canadian stocks. But a screen like this can't capture all the nuances of a company's position in the market. You should do your own research before buying any of the firms listed here.
Ian McGugan