Cheap Canadian Sector Stocks

Here are names that are under valued relative to sector peers  

Ian Tam, CFA 7 April, 2021 | 1:39AM
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Today, we look at a few core valuation metrics for Canadian-listed companies to find companies that that are under-valued relative to sector peers. Value-oriented investors have a few tools at their disposal when seeking investments:

  1. Price multiples of a stock against its own history: For example, if a stock is trading at 15.0x earnings today, and it was trading at 20.0x earnings a year ago, one might conclude that it is undervalued when compared to a year ago.
  2. Fair value estimate: Fair value estimates are typically derived by projecting out a company’s cashflows into the future and then applying a discount rate to determine the present value of those cashflows. The result is an estimation of what an analyst believes a company is worth today. Morningstar’s equity analysts take this one step further by comparing our own estimate to the current price of the stock and assigning stars to those that are trading below their fair value. A five-star stock is trading well below it’s fair value while a one-star stock would be considered over-valued based on our estimates.
  3. Price multiples of a stock against others in the sector: An investor might compare a stock’s price multiples against stocks that belong in the same sector or industry. The idea here is that if the companies in the same sector are slated to move in a similar direction over the long term, it might make sense to invest in those that are ‘cheaper’ or undervalued relative to their peers.

To illustrate the 3rd approach, I’ve used Morningstar® CPMS™ to screen companies in the S&P/TSX Composite Index on four key valuation metrics: price to forward earnings, price to cash flow, price to sales, and price to book. Moreover, I look for companies that are trading below the median of the sector to which they belong. For example, in the table below, a sector-relative price to earnings ratio of 0.7x would imply that the stock’s P/E ratio is 30% lower than that of the sector. To qualify, at least one of the four aforementioned ratios must be less than the sector.

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About Author

Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 

 

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