What are we looking for?
Stocks that could weather a market downturn.
Two weeks ago, the markets weren't looking so great. Tech stocks led the losses, as the Nasdaq composite index came within a hair of the 10-per-cent decline needed for an official correction. The S&P 500 ended that week with a 3-per-cent drop over two trading days.
Then, last week, the bulls reasserted control of the stock market, nearly making back all of the prior week's losses on the S&P 500. The resilience of this bull market, now at more than five years and counting, will have more investors than ever convinced that a correction is coming. So we went looking for stocks that have a cushion in the event of a crash.
How we did it
A low price-to-tangible-book-value-per-share ratio is one possible indication that a stock is underpriced. The ratio excludes intangible assets and goodwill, factoring in only those assets with real retail value. This measure of book value is an indication of what a company might be worth in a worst-case scenario if, say, the firm was forced to liquidate its assets in the event of a market crash.
We screened for North American stocks using the following criteria:
- a current price-to-tangible-book-value per share of one or less, indicating that the stock is trading at a discount to its underlying value;
- market capitalization of at least $200-million;
- positive trailing 12 months earnings per share;
- a five-year average return on equity greater than 10 per cent.
What we found
The resulting list of securities is dominated by U.S. and Canadian financials stocks. And since they all trade at share prices below tangible book value, these stocks might be considered bargains. It's important to caution, however, that financial firms in particular are difficult to value.
Be sure to do further research before investing in any of the stocks shown here.