Stingy Investor Contact - Subscribe - Login
  Home | Articles | Screens | Links | SNW | Rothery Report
What value is good value for stocks?

Next time you're in the bathtub, consider the dynamics of the rubber duck - an easy-to-submerge toy that quickly pops to the surface when it is released.

In much the same way, value investors buy stocks that the market has pushed deep underwater because they expect these firms to turn around and head back to more normal levels.

The problem is that rubber ducks are much more reliable - Some stocks sink to the bottom and stay there. Nonetheless, most companies that suffer from periods of poor performance go on to rehabilitate themselves. That's why buying stocks when they are underwater - at least in terms of their usual valuations - can be a good investing strategy.

To make this work, though, you have to know what you're buying - and what a return to normalcy might look like. That's why I like to track how a stock's price-to-book-value (P/B) multiple has developed over time.

Book value provides a gauge of how much a firm's assets exceed its liabilities (although there are numerous accounting technicalities that make it only a rough estimate). Past patterns in the P/B ratio provide an indication of how much the market is willing to pay for a company both in good times and bad.

Take National Bank of Canada. It hit a P/B high of 2.59 in 2006 and a low of 0.86 in 2008 according to S&P Capital IQ. Recently, the bank's P/B came in at 1.9, which is just a touch above the middle of its historical range since the start of 2006.

A particularly optimistic investor might hope for the bank to move back to its old highs while a bargain hunter might be keen for a return to the depths of 2008.

Whichever way you lean, a look at past P/B ratios allows you to put reasonable limits on your hopes. Based on its recent book value of $41.02 a share, the optimist can dream of prices near $106 a share (2.59 times $41.02) while the bargain hunter would prefer prices near $35 a share (0.86 times $41.02).

This is not an exact science. Picking off a stock at its extreme low then selling at its extreme high would be grand but a stock rarely retraces its history that exactly. Instead, it's sensible to look to more moderate multiples. For instance, you might consider a buy when a stock trades in the lower 20 per cent of its P/B range. Or exiting if it's in the upper 80 per cent of the range.

Such levels are, of course, a matter of preference. You might decide that 25 per cent and 75 per cent are better. The very thrifty might buy near the lows and then look to sell when a stock returns to the middle of its P/B range.

Let's look at how all of the large stocks in the S&P/TSX60 index stack up. The table shows the 60 stocks in the index, along with their current P/B ratios, and where the ratios fall in the firms' high-low P/B range since the start of 2006. A firm trading at 0 per cent is at its lowest P/B ratio since 2006; a firm trading at 100 per cent is at its highest.

To help those who want to save their pennies, the table is ordered by P/B range. Stocks with low ratios compared to their historical levels are shown at the top of the table and high multiple stocks are at the bottom.

You'll notice that some of the stocks near the top of the table don't have low P/B ratios in an absolute sense. They're only low in comparison to their past histories. As a result, value investors might skip over these firms and stick to stocks with low ratios over all and low ratios compared to their own history.

Just keep in mind that, unlike the physics behind rubber ducks, multiple analysis isn't a precise science. It is best to use it to get a sense of where a stock has been.

S&P/TSX 60 stock ranking based on historical P/B
CompanyPrice (Nov. 23, 2012) P/B P/B Range %
Imperial Oil (IMO) $43.45 2.35 0
Cameco (CCO) $17.49 1.41 1
Research In Motion (RIM) $11.610.652
Potash Corp. of Sask. (POT) $38.32 3.522
Shaw Communications (SJR.B) $21.64 2.56 2
Canadian Natural Res. (CNQ) $27.94 1.27 3
Penn West Petroleum (PWT) $10.83 0.57 5
Brookfield Asset Mgt. (BAM.A) $34.21 1.255
SNC-Lavalin Group (SNC) $41.54 3.12 6
Canadian Oil Sands (COS) $20.62 2.24 6
Kinross Gold (K) $10.03 0.9 6
Enerplus (ERF) $12.95 0.79 6
Barrick Gold (ABX) $35.19 1.427
Husky Energy (HSE) $27.36 1.44 8
Shoppers Drug Mart (SC) $41.90 2.028
Talisman Energy (TLM) $11.68 1.30 10
Eldorado Gold (ELD) $15.38 1.92 11
Suncor Energy (SU) $33.45 1.28 13*
Loblaw Companies (L) $33.50 1.50 14
TransAlta (TA) $15.13 1.71 15
First Quantum Minerals (FM) $21.842.0416
Nexen (NXY) $25.08 1.54 16
Crescent Point Energy (CPG) $39.051.7016
Canadian Tire (CTC.A) $67.71 1.19 18
Goldcorp (G) $41.03 1.51 18
Thomson Reuters (TRI) $27.31 1.3520
Bombardier (BBD.B) $3.08 6.4 20
Agrium (AGU) $100.03 2.12 20
Manulife Financial (MFC) $12.431.0222
Yamana Gold (YRI) $19.35 1.92 23
Teck Resources (TCK.B) $32.64 1.0723
Iamgold (IMG) $12.08 1.25 25
Gildan Activewear (GIL) $33.172.9429
Power Corp. (POW) $24.40 1.23 29
Agnico-Eagle Mines (AEM) $56.03 2.8731
Bank of Nova Scotia (BNS) $54.50 1.93 34
Fortis (FTS) $32.96 1.60 37
Cenovus Energy (CVE) $33.42 2.5137*
George Weston (WN) $63.69 1.72 37
Bank of Montreal (BMO) $58.95 1.50 39
CIBC (CM) $79.80 2.18 40
Royal Bank of Canada (RY) $57.952.1841
Sun Life Financial (SLF) $27.15 1.16 42
TD Bank (TD) $81.40 1.72 43
ARC Resources (ARX) $24.57 2.2344
Silver Wheaton (SLW) $36.77 4.44 50
TransCanada (TRP) $45.36 2.03 51
Tim Hortons (THI) $46.86 6.19 52*
Magna International (MG) $44.90 1.1656
National Bank (NA) $76.86 1.87 59
Rogers (RCI.B) $43.46 6.18 64
Telus (T) $64.98 2.63 66
Encana (ECA) $21.42 2.90 75
Saputo (SAP) $44.90 4.08 79
Metro (MRU) $60.63 2.32 80
CN Railway (CNR) $87.36 3.3387
Enbridge (ENB) $39.10 4.63 93
BCE (BCE) $42.15 3.17 94
Valeant Pharma (VRX) $55.384.594
CP Railway (CP) $92.50 3.05 97
Data Source: S&P Capital IQ, P/B range is based on the period since the start of 2006 except when noted with an asterisk, where shorter periods were used.

First published in the Globe and Mail, November 27 2012.

  MoneySense Articles
 Cdn Top 200 2016
 US Top 500 2016
 Retirement 100: 2015
 Cdn Top 200 2015
 US Top 500 2015
 Retirement 100: 2014
 Cdn Top 200 2014
 US Top 500 2014
 Retirement 100: 2013
 Cdn Top 200 2013
 US Top 500 2013
 Retirement 100: 2012
 Buffett Buys
 Stocks that pay
 Value in the S&P500
 Cdn Top 200 2012
 US Top 500 2012
 Retirement 100: 2011
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Cdn Top 200 2011
 US Top 500 2011
 Retirement 100
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividend growers
 Cdn Top 200 2010
 US Top 500 2010
 Graham's prescription
 Income 100: 2009
 The case for optimism
 Cdn Top 200 2009
 U.S. Top 500 2009
 Wicked investments
 Simply spectacular
 Income 2008
 Small stocks, big profits
 Cdn Top 200 2008
 US Top 500 2008
 Value that sizzles
 So simple it works
 Income 100
 No assembly required
 Investing by the book
 Cdn Top 200 2007
 US Top 500 2007
 Invest like the masters
 A simple way to get rich
 Top Trusts 2006
 Stocks for cannibals
 Car bites dogs
 Cdn Top 200 2006
 US Top 1000 2006
 So easy, so profitable
 Top Trusts 2005
 Dogs of the Dow
 Top 200 2005
 Money for nothing
 Yield of dreams
 Return of the master

MoneySaver Articles
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Globe & Mail Articles
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books

 Asset Mixer
 Periodic Table
 ETF Fee Calculator

About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...