What are we looking for?
Today, we are searching for undervalued Canadian companies with high economic value. In other words, we are looking at companies creating the highest economic profit for their shareholders that are trading below their intrinsic value.
The screen
We screened the S&P/TSX Composite Index for the top 20 stocks with a minimum market cap of $750-million and looked at the following metrics.
- The economic performance index, or EPI (return on capital divided by cost of capital). An EPI ratio of one or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation). We want a ratio higher than one because it reflects wealth creation for shareholders.
- A price-to-intrinsic-value ratio of less than one to ensure that the stock is trading at a discount relative to its intrinsic value. (A stock’s intrinsic value, or “true value,” is the price the stock should, at least in theory, eventually achieve when properly valued.)
- Future growth value divided by market value (FGV/MV) is a ratio that helps determine whether the stock is trading at a discount or premium to its growth. A negative FGV/MV indicates the current market value is lower than the current value of the operations of the company.
- A market value-added (MVA/MV) ratio that is positive to ensure the invested capital is working properly. (MVA is the total market value minus the capital that was invested in the company.) This metric shows us the difference between the market value of the company and the capital that was invested in it.
More about Inovestor
Inovestor for Advisors is a research platform application based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.
What did we find?
Most companies are able to generate a return on capital much higher than their cost of capital. More than half of the companies in this top 20 list are priced at a discount to both their intrinsic value and their future growth value, and mostly derive from the financial and consumer discretionary sectors. A lot of the companies in the filter results are common household names, and are good wealth creators for their shareholders, such as Alimentation Couche-Tard Inc., Air Canada and Magna International Inc.
Investors are advised to do additional research before investing in any of the companies shown here.
Tiffana Paulrajah is an account executive for Inovestor Inc.