I was at a party on Saturday night (SUCK IT, HATERS) when I got roped into the following conversation after revealing what I do for a living:
“So, what stocks should I buy?”
(I assume this person knows nothing about the market, which is true 99% of the time) “Just buy a good S&P 500 or Russell 2000 ETF and call it a day.”
“What? Boring! Give me some stock picks.”
“Okay, fine. Here’s what I would buy today: nothing. I think the market is overvalued and is more likely to go down versus up.”
And that’s usually enough to shut people up.
I’m not just saying this stuff to extract myself from awkward conversations at dinner parties. I really do believe the market is overvalued. I look for cheap stocks constantly. There just aren’t that many out there.
But there are a few, which I will talk about in a minute. Before we do, here’s some big picture stuff about investing.
Eventually, you gotta do the work
I spend a lot of time talking about big picture investing stuff on this here blogening. I also talk about a lot of individual investment ideas, but the majority of discussion is pretty broad. This is for one simple reason: because I know that some of you hate discussions of individual stocks.
I’ve seen the stats. The numbers don’t lie.
Allow me to put my parent hat on, even though I’m nobody’s parent (that can be proven anyway, NO, I’M NOT TAKING THAT PATERNITY TEST LEAVE ME ALONE KATHY GOD). I’m going to force you kids to read about individual stocks in 2017. Yes, you little bastards will eat your broccoli — even if I have to sit here all night.
At the end of the day, all this big picture stuff is for is to learn how to analyze potential investment opportunities. If you don’t start doing that, all the words I’ve typed on this screen are useless.
Trust me; it’s far more fun to read Buffett quotes on finding one-foot bars to step over than it is to dig out an annual report and read all the footnotes. But if you don’t do the work, you’ll never get rich. Buffett has read thousands of annual reports in his time. I know investors who have yet to read their first.
That’s a problem. It’s a big problem.
So allow me to help y’all out, just a little. Here are three cheap Canadian stocks I’ve been looking at lately. I don’t own any of them yet, but will likely buy one or more in the near future. Don’t just buy any of these stocks because I like them. Use these ideas as the beginning of your own research.
Canaccord Genuity (TSX:CF) is Canada’s forgotten investment bank. It has also expanded into the wealth management business in Europe, which was supposed to serve as a nice hedge when the investment banking business falls off a cliff. Which happens from time to time.
Canaccord was humming along nicely in 2014. It had carved out a nice niche in the energy sector and was becoming the go-to name that energy producers would call when they wanted to IPO or just issue more shares. Then the sector fell upon hard times and Canaccord got hurt. Shares fell from a high of $13 to a low below $4. They sit at just under $5 today.
Things still look relatively bleak in the short-term, but you can’t beat the valuation. Shares trade at under book value and at 13 times 2017’s earnings estimates. It has a great balance sheet, and management has been buying back stock of late. It also posted $1.39 per share in free cash flow over the last year. Not bad for a stock that trades at $4.80.
The most encouraging thing about Canaccord is the recent price movement is a pattern. Every few years the stock falls off a cliff. It consolidates for a little while and then explodes 100% or 200% higher. This is the third time in a decade such a thing has happened.
Morguard is a simple investing idea that has multiple ways it could turn out pretty nicely.
There are several Morguard stocks out there. The one I like the most is Morguard REIT (TSX:MRT.UN), which owns retail, industrial, and office real estate from B.C. to Ontario. About a third of the portfolio is in Alberta (strike one!), with much of it in small regional malls (strike two!) and its largest single tenant is Penn West (strike three!).
But there’s no denying one thing. The stock is cheap. Damn cheap. Shares currently trade hands at $15.23. Book value is just under $26. That’s a 41% discount to book value. It’s the equivalent of paying 14.7 cents for a quarter. And you get a 6.3% dividend to wait that’s easily covered by cash flow.
There are two ways this investment turns out well. The first is Alberta recovers (which it’s already starting to do) and the market prices the stock at much closer to book value. The other is Morguard Corporation, the parent company, takes it private. Morguard owns 51% of the stock already. The guys running Morguard aren’t stupid. I’m sure they’ve at least thought about it.
Wait. Those assholes that knock on my door and bug me during dinner? Yep.
I’m the first to admit there’s a lot to not like about Just Energy (TSX:JE)(NYSE:JE). One search on the internet proves they’re about as unpopular as any one of Donald Trump’s policies. OH ZING HE’S STILL GOT IT. Sales reps constantly get accused of misleading customers.
The sales pitch is simple. You can lock in the price of natural gas or electricity, and save money. Which works when prices go up. The problem? Prices haven’t been going up lately.
Everybody fixates on the residential side of the business. This is wrong thinking. It’s the commercial side that really matters.
A business has a very clear benefit to locking in the price of electricity or gas. It creates cost certainty, something accounting guys LURVE. Many businesses will gladly pay a little more in exchange for predictability. About 60% of Just Energy’s customers are businesses.
I also like its expansion potential. It did $4 million in revenue in the United Kingdom in 2012. That grew to almost $600 million in 2016. Management is now looking to do the same thing in Germany. It’s also looking to expand more in the United States.
Shares trade hands at $7.74. It did $0.95 per share in free cash flow in the last year. That’s the kind of valuation I like. It also pays a 6.5% dividend.
Finally, I want to mention the company’s two largest shareholders. One is MY BOY, Jimmy Pattison. The other is Ron Joyce, the guy who built up Tim Hortons. Together they own about 30% of the company.
Stumped for investing ideas? Aren't we all. Don't worry, I've got just the thing.
This recent Canadian IPO has everything I look for in a stock. It has huge growth potential; a succulent dividend; a sharp management team; and, perhaps most importantly of all, it comes at a very reasonable price tag because most investors don't even know it exists.