Is This The Cheapest Large Cap In The S&P/TSX Composite (Part 2)?

A continuation from our First Step article….find out what names were left standing after we tightened our screening parameters and get a more detailed rundown of the first company on the list.

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Who doesn’t love a bargain?  Whether it’s stocks or sweaters, everyone loves a deal.  And I am definitely a cheapskate when it comes to stocks.  That’s why I set up a screen to uncover a list of large cap Canadian stocks trading at what could be very attractive valuations.

In Part 1 of this series, I outlined the importance of screening to narrow the field and arrive at stock ideas that warrant further research.  Here in the remaining parts, the field has been whittled down even further by tightening the screening criteria from Part 1.  These tightened parameters are outlined in the table below:

Metric

Parameter

Screen 1

Screen 2

Market Capitalization Greater Than

$5 billion

$10 billion

Price/Book Value Less Than

2.0

1.5

Price/LTM Norm EPS Less Than

13

13

LTM ROE Greater Than

10%

10%

From a pool of 43 that met the $10 billion market cap minimum, three profitable big cap companies that trade at relatively cheap multiples have been revealed.  They are listed below:

Company Name

Market Cap (MM)

P/BV

P/E

ROE

Magna International

$11,764

1.31

12.2

16.0%

Barrick Gold (TSX:ABX,NYSE:ABX)

$34,102

1.42

11.0

12.9%

Suncor Energy (TSX:SU,NYSE:SU)

$51,192

1.28

10.1

12.3%

Source:  Capital IQ

Let’s dig in to the first name on the list to see if it warrants an investment at this time.

Magna International (TSX:MG, NYSE:MGA)

Magna is one of the largest auto parts suppliers in the world.  The company’s manufacturing capabilities are vast, as is its geographic reach.  Built from a modest beginning in Frank Stronach’s garage, Magna now employs 117,000 around the world and is one of the great Canadian business success stories.

To determine whether or not Magna’s valuation is as appealing as it may appear in the table, we can use historical information to put these numbers into context.  Over the past 10 years, Magna’s P/BV ratio has averaged 1.1  and been as high as 1.8 and as low as 0.3.  At its current level of 1.3, Magna trades above its long term P/BV average and above the middle of its range.

In terms of P/E, Magna has a 10 year average earnings multiple of 13.2 and a range that spans from 10 to 18.  At 12.2 Magna is a bit below average, and in the lower portion of its historic range.

These metrics offer a somewhat conflicting tale.  What this indicates is that purchasing Magna based on valuation is not as clear as the original screen may have you believe.  Magna’s stock has been on a tear of late as forecasts for auto sales here in North America are increasingly bullish.  With Magna’s current valuation being closer to its historical norm vs. an anomaly, and given the near 50% return the stock has had from its 52 week low, I think there will be a better time to buy Magna shares.

Be sure not to miss the full list of names that made it through the initial screen in Part 1 of this series.  In addition, take a closer look into what’s plaguing Barrick Gold and uncover the rationale behind why one of Canada’s leading energy companies, Suncor, appears in this collection of discounted large caps.

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Fool contributor Iain Butler owns shares in Magna International (TSX:MG).  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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