How Expensive Are Canadian Stocks? A Look at the S&P/TSX Composite Index

Taking a quick peek at the relative valuation of the Canadian market.

The Motley Fool

The S&P/TSX Composite Index (TSX:^OSPTX) is up about 2% year to date, after posting a 4% gain in 2012.

The S&P/TSX held up better than the Dow Jones Industrial Average (INDEX: ^DJI) during the financial crisis of 2008, so its recovery since 2009 hasn’t been as massive, and it’s still below its all-time high. (The Dow broke its all-time record back in March.) Still the two indices have roughly mirrored each other over the past 10 years:

tsx v djia

Source: Google Finance. Blue line = S&P/TSX Composite. Red = Dow Jones Industrial Average.

The S&P/TSX Composite covers about 70% of the market capitalization of Canadian stocks, and so is a fair representation of the overall market. With that in mind, let’s look at its current valuation, relative to the past four calendar years:

S&P/TSX   Composite Index Current 2012 2011 2010 2009
P/E 19.1 18.0 16.8 17.9 30.6
P/B 1.8 1.8 2.0 2.2 2.3
ROE 9.3% 10.1% 12.0% 12.1% 8.1%
Net   Income Margin 8.2% 8.8% 9.9% 10.2% 6.7%

Data from S&P Capital IQ.

The price-to-earnings ratio of Canadian stocks has inched up in the past few years, even as price-to-book multiples have decreased slightly. At the same time, returns on equity and net income margin figures have bounced around.

Compared with the Dow, the Canadian figures look less enticing. Even as the Dow has reached new highs, its P/E and P/B multiples have come down, while its ROE and net income margin have edged slightly higher:

Dow Jones   Industrial Average Current 2012 2011 2010 2009
P/E 16.5 16.7 16.8 17.6 22.2
P/B 2.4 2.5 2.6 2.6 2.8
ROE 15.4% 15.4% 16.2% 15.9% 14.6%
Net   Income Margin 9.6% 9.3% 9.6% 9.9% 9.1%

Data from S&P Capital IQ.

Not only are Canadian stocks more expensive relative to their American neighbours, the S&P/TSX Composite is flawed for index-tracking — it’s overweight in resource and financial stocks, meaning index investors lack proper diversification.

We have created an exclusive free report detailing “5 Stocks That Should Replace Your Canadian Index Fund,” designed as an easy-to-implement strategy for market-beating returns. To download a copy of this FREE report, simply click here right now.

Follow us on Twitter and Facebook for the latest in Foolish investing.

This post was created by Fool contributor Brian Richards.   

Fool contributor Brian Richards does not own shares of any of the companies mentioned at this time.  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.

More on Investing

Canadian stocks are rising
Dividend Stocks

1 Dividend-Growth Stock You Won’t Want to Miss in the Real Estate Sector

A growth-oriented REIT is a strong buy today after raising its dividend by more than 5% in each of the…

Read more »

Hand arranging wood block stacking as step stair with arrow up.

Retirement Investors: 3 TSX Stocks That Could Rally With the Economy 

Always buy stocks you are bullish on when they trade below their 52-week highs. A recovery rally can enhance your…

Read more »

some canadian stocks rose

3 Stocks I’ll Load Up on in 2023

Toronto-Dominion Bank (TSX:TD) is one stock I'll load up on in 2023. There are others, too.

Read more »

Dividend Stocks

Better Buy: Emera Stock vs. Hydro One

Higher-risk utility Emera should provide higher returns over the next five years, given the dip and its higher yield.

Read more »

Growing plant shoots on coins
Tech Stocks

3 Growth Stocks That Look Ready to Double in 1 Year

These three growth stocks are "sleeping giants" ready to blast off in 2023 and beyond for investors who pick them…

Read more »

Payday ringed on a calendar
Dividend Stocks

Passive-Income Hat Trick: 3 TSX Stocks to Buy for Monthly Cash

Investors seeking passive income can invest in these Canadian dividend stocks and earn attractive monthly passive income.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Get Passive Income of $435/Month With This TSX Stock

Here’s how dividend investing in Canada could help you get reliable monthly passive income.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

2 Undervalued Growth Stocks to Buy Right Now

Once a growth stock becomes too heavily discounted or undervalued, investors begin to wonder about its ability to bounce back,…

Read more »