Eugene Fama shared the 2013 Nobel for economics in recognition of his work supporting the notion that markets are efficient, incorporating all the available information about a stock’s outlook.JIM YOUNG/Reuters
What are we looking for?
A portfolio that a Nobel prize winner could approve.
Eugene Fama shared the Nobel for economics on Monday, in recognition of his work supporting the notion that markets are "efficient" – that they incorporate all the available information about a stock's outlook. Prof. Fama's work built a powerful case for indexing, but his later research incorporated a couple of factors that pure indexers may overlook.
You, of course, are no doubt intimately familiar with the Fama-French three-factor model, but for those who aren't, here's a simple explanation. The model suggests that investors who venture into the stock market do better over the long term than their play-it-safe counterparts who hide out in government bonds. Shareholders get an extra boost from investing in small-cap stocks, and they do even better by focusing on stocks that are trading at low prices in comparison to their book value.
How we did it
We looked for small-cap Canadian stocks that are trading for their book values or less.
More specifically, we began by examining stocks on the Toronto Stock Exchange with market capitalizations of $100-million to $300-million. (We excluded stocks below $100-million in market cap, because these typically represent very small firms that can be affected by idiosyncratic factors a screen can't detect.) We then looked for firms trading at or below their book values (their assets minus their debts).
We did add one factor that Prof. Fama didn't. To ensure that our list wasn't packed with money-losing firms, we required each stock to have reported a profit over the past year.
What we found
It's important to remember that Prof. Fama's conclusions were based on U.S. stocks. It's not certain that Canadian stocks will perform in the same way. For instance, our list contains many gold miners, which are unlikely to thrive unless the metal's price recovers.
That being said, the firms on our list deserve attention. However, because they're smaller, they're not well covered by analysts, so it's even more important than usual to do your own research. It may not win you a Nobel, but it could point the way to some promising stocks.
Ian McGugan