Thursday, 11 August 2011

Summer Sale Event! 15% Off on Stocks

Every shopper knows and likes sales. It is an opportunity to buy the same item for less. So it is in the stock market. The same companies are now selling for less. The market declines over the last few months and especially in the last few weeks have cut 15% off the TSX index price since year highs in early April as seen in this chart copied from Google Finance.

Storewide Sale - To continue our analogy, the decline has affected every sector from financials, through energy, mining, telecommunications, consumer staples and consumer discretionary. It has not been quite to the same degree everywhere, with energy being hit harder and telecomms less so. Nevertheless the effect is that there are companies selling at much-reduced and potentially attractive prices.

Featured Companies on Sale - To find where the biggest bargains might lie, we have searched through equities within the TSX Composite using the TMX Stock Screener. We will define a stock to be attractive when it is cheaper than the overall TSX market average and pays more in dividends as well. At close of market on August 9th, a rare day of an upward market (though we see from our chart above it has not made much of a dent in countering the cumulative decline) the TSX Composite Price/Earnings (P/E) ratio, our measure of "cheaper", was 16.89 and the average dividend yield, our measure of "pays more", was 2.76%. (These figures are updated every day on TMX Money's page here). Using Stock Screener, the stocks we selected meet these criteria:
  • P/E under 15 (this number is also the approximate long term average P/E for the TSX). These companies necessarily are profitable - in order for P/E to be a positive number, E must be above zero.
  • Dividend Yield between 3 and 10% (we set an upper limit of 10% to start weeding out companies which are paying out unrealistically high amounts and may be forced to reduce dividends, a result we don't want)
Our search uncovered over 100 stocks (TMX limits results to 100), many of them amongst the biggest and most solid companies in the country, starting with all the banks. There are also utilities, life insurers, energy companies, telecomms providers, real estate investment trusts, in short a smattering of all sectors. The table below takes only the 30 largest companies, which means all have a market cap over $2 billion and ranks them top to bottom by amount of price fall since their respective 52 week high. There are many big discounts on offer for high quality companies these days. Re-run the search to get the rest of the list, which of course will change somewhat as stock prices continue to gyrate.

All Sales are Final - If you buy any of these stocks, there is no money back guarantee. They could fall more in price or get into financial trouble and go out of business. There is a lot of talk of a possible coming recession and some companies may suffer. Shareholders of such companies will suffer too. That's why more than blind buying is required.

Make Sure It's a Real Bargain - Sometimes shoddy merchandise goes on sale. That's not a bargain. As additional indication of the checking to do on the safety and staying power of these apparent stock bargains, we used the Stock Screener to extract data that can help. If recession strikes or credit freezes up again, companies with low debt and strong cash flow are likely to escape better and perhaps even grow at the expense of weaker rivals. Our comparison table thus includes three extra indicators (from the Stock Screener's extra columns selector) - Net Profit Margin (the higher the better), Total Debt/Equity ratio (the lower the better) and Price / Cash Flow (the lower the better). Note that safe levels of these indicators can and should vary by sector - for instance utilities can sustain much higher levels of debt than other companies because of the stability of that business and profit margins will be lower due to control of rates by regulators.

To find out more about the companies and their financial indicators, a handy free tool is GlobeInvestor's My Watchlist. By entering the trading symbols, we can build the portfolio of our stocks and obtain other data such as debt to cash flow, dividend or profit growth, price to sales and many others, as well as links to news, quotes, charts, analyst recommendations.

Caveat emptor but happy stock shopping. Who knows how long the bargains will last.

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.

No comments: