Monday, 22 April 2013

Stock Market: Is it Sky Falling Again, Business as Usual or Spring Sale?

In the last few days we witnessed the Toronto Stock Exchange Composite Index fall sharply several days in a row, prompting some to worry e.g. this somewhat frantic news article. So, we asked ourselves, where are things, is this a major reversal, or just par for the course, part of the normal ups and downs of the market? The drop also triggered the thought to go look for stocks on sale at attractive bargain prices, such as we did in August 2011 during another significant drop.

Sky not falling, more like business as usual
A brief look at the Yahoo Finance chart below of the TSX shows us that the current decline is only one of many that have occurred over the past several years alone. It is not nearly the most severe or prolonged.
(click image to enlarge)

The fact is, the market does go up and down. The ride is never smooth. Our previous post on investing risk about volatility and business cycles gives us more context on what extremes we should expect. Being aware of such constant volatility helps us investors avoid panic reaction and allows us to sleep better.

Mining and Oil & Gas in a two-year funk
These two sectors have caused the sustained fall from the TSX high in April 2011. They comprise a significant portion of the TSX Composite. The charts from TMX Money of the Mining and Oil and Gas indices show the market price decline and the tables from Globe Investor's MyWatchlist show the falling profits at the majority of companies that have spurred the declines.

(click to enlarge)

Oil & Gas

Opportunity lurking?
As we also see in the tables, most of the companies are still profitable. A good number, like First Quantum Minerals (TSX symbol: FM), Agrium (AGU), IAMGold (IMG) and Katanga Mining (KAT) amongst miners, and Canadian Oil Sands (COS) and Imperial Oil (IMO) amongst energy companies sport very appealing low Price to Earnings ratios. Such indications of possible bargains need to be assessed further using the various accounting figures and ratios such as the Watchlist provides automatically.

At some point down the road, when exactly it is impossible to tell, these industries will revive with more vigorous economic growth in other countries who need the resources produced by these companies. Picking individual company stocks or buying a basket of companies in a sector ETF (find them using one of the ETF screeners we compared here). Or failing that, continuing to hold the broad TSX through a composite ETF that includes these sectors will eventually gain the benefit of a rebound too.

Spring sale on other stocks
Using the same filter as in the August 2011 post, we picked out the medium (above $500 million in market cap) to large cap stocks with more attractive P/Es of under 15 and appealing dividend yields of over 3% on the TMX Money stock screener. Then we copied various the stocks along with their data to a spreadsheet and found the potential bargains by calculating and ranking which stocks were most below their highest price of the past year. Along with that we calculated which were closest to their 52 week lowest price.
(click to enlarge) 

The result:

  • There are still plenty of low P/E stocks paying attractive dividends - our table above shows the 30 largest companies only, which includes all the banks and several mining and and energy companies. Many have solid profitability (higher Return on Equity), though not as consistently growing sales or earnings. Most of the list is less volatile than the overall TSX, as shown by trailing 60 month betas below 1.0 (above 1.0 is more volatile than the market average).
  • Price cuts are less today than 2011 - Price reductions off the highs are not as large as in 2011 when we compare the two lists
  • There are fewer bargain stocks overall - our initial screen in 2011 gave more than 100 stocks while this time it was only 98
August 2011 bargain stocks generally fared well
When we looked at the results for the previous effort, they showed generally quite good outcomes:
  • TSX Composite as a benchmark lost 1.9% in total return from August 2011 to 19 April 2013 (see GlobeFund chart)
  • Eight of the twelve stocks at the top of the list had overall significantly positive returns (symbols BLS, BPO, SLF, MIC, POW, GWO, RY, HSE), three were around zero like the TSX (COS, PWF, IGM) and only one a big negative, Larbrador Iron Ore Royalty Corp (LIF.UN) which had its dividend haved and a 7.5% price drop. Interestingly, seven of these are on our new bargain list - COS, SLF, MIC, POW, GWO, RY and HSE)
Bottom line: Using such filters to seek out good buys amongst stocks generally points in the right direction, though not infallibly so.

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.

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