Friday, 21 December 2012

Good Christmas Buys Amongst the Low EPS Dispersion Stocks

In last week's post we ranked large cap Canadian stocks according to the tightness of the spread of future analyst earnings forecasts. We found that the lowest earnings dispersion stocks had been doing rather well - they had no recent losses and trailing 5-year returns for shareholders were solidly positive almost in every case. That certainly looks promising but we concluded on the cautious note, saying that these stocks might not be attractively priced at the moment. Are there any good Christmas season buys amongst them?

Let's try to go a step further and try to address that issue by looking at measures of price attractiveness, and at profitability, dividend growth and analyst forecasts. We are looking for patterns and consistency not a definitive answer based on a single number.

Screening out stocks that are a bit too extreme
Keeping with theme of safe, profitable companies we remove (again using the handy GlobeInvestor My Watchlist tool) from our list stocks with:
  • Price/Earnings (P/E) over 18
  • Price/Sales (P/S) over 4, except for REITs where we used 8
  • Price/Book Value over 3
  • No dividend growth in the past 5 years
  • No Earnings Per Share (EPS) growth over the past five years
  • Return On Equity (ROE) under 10%
Just to be sure we didn't miss any opportunities, we started with the top list of "More reward than risk" stocks plus the top half of the next group, the stocks under the heading "Potential Reward but Appreciable Risk Too". But that didn't change much - after applying our screens only one company from the second group of stocks, Empire (EMP.A), remained in contention. We are left with 17 stocks to examine further.

Assessing the stocks vs industry benchmarks and the TSX's leading ETF
The next step was to compare each stock's numbers against its industry averages (obtained from TD Waterhouse) since each industry can have differing good vs bad values (as is the case for REITs with the notably higher P/S ratio). Though not a screening criteria, we added Price/Cash Flow as a comparator since cold hard cash flowing is like the lifeblood of any company.

We also took as a benchmark comparator the dominant broad market ETF for large caps in Canada, the iShares S&P/TSX 60 Index (TSX: XIU). After all, if we cannot find anything more attractive than the overall index, why bother?

Return On Equity, EPS growth and dividend growth over the past 5 years are the measures we have used to assess the strength of the company.

Automated and human analyst stock ratings
Opinions about the future, prone to error as they might be (see our previous post Stock Market Analyst Forecasts: add Salt and Pepper), can add another dimension to our assessment. We've included the average of analysts' ratings as found in the My Watchlist, as well as the rating from a new automated tool offered by BMO Investorline to its clients, the Value Analyzer from Recognia. As if to prove that nothing is really obvious or certain about the future of these stocks, in three cases (highlighted with a red outline box in our comparison table below) the human and automated analysts give opposite recommendations!

Results - more than half of the stocks appear to be reasonably priced
Without using a mathematical formula, we looked at the stocks with the most favorable green factors and the least unfavourable orange factors to come up with an overall assessment.

Most, 11 of 17, or about two-thirds, of the stocks look to be reasonable buys at the moment. It is a close call among them, especially among the banks, as to which should be rated not worth buying at the moment.

At this point, we could delve into what the future could hold different for these companies through reading the commentary by management in financial reports and investor presentations or by analysts (many available to clients on their discount broker website) or by investors on chat sites (see our post on the Best of the Online Investing Discussion Forums). The companies have all been quite successful up to now and most will continue to be so, but some will not. It is very difficult to put a highly confident conclusion on such information and we will not attempt to do so. Even with such solid stocks, there is some risk and uncertainty about the future.

Merry Christmas!

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Disclosure: I own shares of several companies reviewed above, including Metro, National Bank, Bank of Montreal, Scotiabank, Boardwalk and RioCan in direct individual holdings, plus all of the companies within ETFs.

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