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Is This The Cheapest Large Cap In The S&P/TSX Composite (Part 4)?

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 (TSX:MG,NYSE:MGA)

$11,764

1.31

12.2

16.0%

Barrick Gold (TSX:ABX,NYSE:ABX)

$34,102

1.42

11.0

12.9%

Suncor Energy

$51,192

1.28

10.1

12.3

                                                                                                                                                                                                      Source:  Capital IQ

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

Suncor Energy (TSX:SU, NYSE:SU)

Energy is something that all of us use on a day to day basis.  The fact that a producer of such an essential product has appeared on our list is intriguing.

A reasonable recipe for success in the game of investing is to purchase companies that produce things that are crucial to everyday life.  And, if you can get these companies at a discounted valuation, the chance of success over the long term is even higher.

The issue for Suncor, and many of the Canadian energy producers for that matter, is that there is a glut of supply currently in North America given the explosion of shale oil in the U.S.  This has tied up pipeline capacity and made heavy oil from the oil sands a less desirable commodity thus impacting the price that these producers are receiving.  Companies like Suncor, Imperial Oil, and Cenovus are vertically integrated and therefore not fully exposed to this dynamic.  Nevertheless, their stock prices have felt the pinch.

Suncor’s valuation metrics are in line with historic lows and should the commodity co-operate, can be expected to expand to more mean like levels with time.  Unlike the other two names that we unearthed with the screen, nothing on the surface says stay away from Suncor and therefore, of the three, it is probably the name that most deserves further investigation.

The Foolish Bottom Line

An indication of where you should be spending your time investigating is really all the end result of a screen should be.  Just because a stock shows up as “cheap” doesn’t mean it’s an automatic buy.  Every idea needs to be poked and prodded from several angles before a true assessment can be made.  If it can’t withstand the poking and prodding – move on.  Plenty of other opportunities to make money exist.

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 at the valuation of Canadian auto part giant Magna and uncover what’s been plaguing Barrick Gold by clicking the respective links.   

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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.

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