Skip to main content

The Globe and Mail

In search of the cheapest Canadian stocks

Getty Images/iStockphoto

What are we looking for?

Stocks that may be oversold.

The last month has been a generally dismal time for markets as worries grow over the impending U.S. fiscal cliff, slowing corporate earnings and a euro zone recession. With the help of Craig McGee, senior consultant at Morningstar Canada, we set out to find stocks where pessimism may be outrunning reality.

Story continues below advertisement

How we did it

Mr. McGee delved into the Morningstar CPMS database to find the 20 Canadian stocks that are the cheapest on four classic measures of value – price-to-earnings, price-to-cash-flow, price-to-book and price-to-sales multiples – and that are also rising in analysts' estimation.

To qualify, stocks must have had a positive change in analysts' consensus earnings estimates over the past 90 days; they must also have average trading volume in the top third of the database. No more than five stocks per sector were allowed.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia.

Its investment 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.

Story continues below advertisement

What we found

This strategy is the basis for the Morningstar Canadian Value Index, which tracks 30 names instead of the 20 here. To find out how a 20-stock approach would have fared, Mr. McGee performed a backward-looking test.

He assumed a hypothetical investor had picked 20 stocks according to the principles above on Dec. 31, 1993, and refreshed his portfolio every three months to Sept. 30, 2012. The investor sold whenever a stock in the portfolio fell outside of the top 40 per cent of the CPMS Canadian database based on the criteria above.

This hypothetical investor would have generated an annualized return of 17.6 per cent, far ahead of the S&P/TSX Composite Total Return Index, which had an 8.1 per cent return over the same period.

Those are tempting numbers. Just remember that strategies don't always perform in the future the way they have in the past. Do your own research before buying any of the stocks listed here.

Report an error Licensing Options
About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨