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Safety and value in stocks: A transatlantic search

What are we looking for?

At our firm we run a proprietary Canadian portfolio called the Safety and Value Portfolio. I thought it would be interesting to have a look at the top six holdings, and also to apply the same investment criteria that we use in selecting Canadian companies to European and U.S. markets.

The screen

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Eleven different indicators are used in the calibration of our model. I'll highlight two of them.

One is the price-earnings ratio, a classic tool for evaluating the relative attractiveness of a company's stock price. But there are some limitations with the P/E ratio because of inaccurate earnings estimates.

So we also look at the relationship between the free cash flow (CF) and the enterprise value (EV) of a company. A company's cash flow statement can be highly informative: It takes into account the actual cash that flows in and out of a company, and is often a better indicator of financial health than net income.

What did we find?

All companies are ranked on a score based on all the indicators that we use. We are looking for a high number.

The top ranked Canadian company is Nevsun Resources, which is a gold production company with properties in East Africa.

The top ranked company overall is Xyratex Ltd., a British company that trades on Nasdaq. It is a leading supplier of data storage services and hard disk drive equipment.

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Humana Inc. is very interesting. The free cash flow for this U.S. health care firm is more than three times the enterprise value of the company.

The screen indicates that there appears to be more value in Canada than in the U.S., or Europe.

Mr. Bowman is portfolio manager at Wickham Investment Counsel Inc.

michael@wickhaminvestments.com

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About the Author
Portfolio Manager

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. Mr. Bowman has 30 years experience as an investment adviser and financial planner serving both individual and corporate accounts. More

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