5 Highly Profitable Companies Priced to Buy

These 5 offer an enticing combination that could have them poised for big time returns.

| More on:
The Motley Fool

Context is critical in the world of investing.  As are expectations.  When we’re evaluating stocks, we must not only understand the underlying business and how it has performed over the years, but also how the market expects that business to perform in the coming years.

One way to quickly analyze the strength of a company is by examining its return on equity (ROE) over time.  Companies that are able to consistently crank out a high ROE are typically very strong.  Think the Canadian banks.

However, just because a company consistently generates a high ROE doesn’t mean its stock is going to be a top performer.  The market tends to recognize a consistently high ROE when it sees it and typically will bid up the stock to reflect this characteristic.

This will be reflected by the stock’s multiples.  Companies that consistently generate a high ROE typically garner higher than average multiples.

Put ‘em together

Therefore, to try and uncover attractive companies trading at reasonable, and maybe even cheap valuations, we can look for consistently high ROEs and low multiples – and specifically when dealing with ROE, price/book multiples.

You see, ROE and the P/B multiple are anchored by the same denominator – shareholder’s equity.  ROE is calculated by dividing net income by equity, and the price to book multiple is calculated by dividing current market value by equity.

Taking it one step further, if we divide a company’s ROE by the P/B multiple, with some fancy math (not really), we’re left with net income/market value, which is just a company’s earnings yield (EY).

To illustrate, a company that consistently sports an ROE of 20% and trades at a P/B of 1 (EY = 20%) is much more attractive to an investor, all else being equal, than a 20% ROE and a P/B multiple of 2 (EY=10%).

Get to the stocks

Ok, ok.  The following table consists of 5 companies that offer an appealing combination of consistent ROE and low P/B.

Company Name

5 Yr. Avg ROE

Current P/B

“Earnings Yield”

First Quantum (TSX:FM)

17.7%

0.98

18.0%

IAMGold (TSX:IMG)

7.4%

0.45

16.6%

Teck Resources (TSX:TCK.B)

10.8%

0.72

15.0%

Home Capital Group   (TSX:HCG)

26.2%

2.00

13.4%

Brookfield Office Properties   (TSX:BPO)

11.0%

0.85

12.9%

Source:  Capital IQ

Foolish Takeaway

As are most things in the Canadian market, the list is resource heavy.  This of course is reflective of the sharp turn these stocks have had over the first half of 2013 in relation to how well the companies have performed over the past 5 years.  If the concerns over a slowdown in China, or the entire global economy for that matter, don’t play out as is currently being reflected by these stocks, they are poised to soar higher.  Expectations are low, and that can be a very good thing for investors.

One of the stocks in our special FREE report “5 Canadian Stocks to Replace Your Index Fund” just got taken out at a huge premium.  Click here now to learn about the 4 that are left standing.  It’s FREE!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

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

Fool contributor Iain Butler is short $26 August 2013 put options on Teck Resources and owns shares of Teck outright.  The Motley Fool doesn’t own shares in any of the companies mentioned.   

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

A worker gives a business presentation.
Dividend Stocks

TSX Communications in April 2024: The Best Stocks to Buy Right Now

Here are two of the best TSX communication stocks you can buy in April 2024 and hold for years to…

Read more »

Man holding magnifying glass over a document
Tech Stocks

Watching This 1 Key Metric Could Help You Beat the Stock Market

One key metric that Buffett looks at is the return on equity. Here's why you should watch it.

Read more »

Man considering whether to sell or buy
Dividend Stocks

Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY) has a high dividend yield. Should you buy it?

Read more »

oil tank at night
Energy Stocks

Is Suncor a Buy, Sell, or Hold?

Suncor Energy stock is off to a strong start in 2024. Is the TSX energy stock a good buy right…

Read more »

Daffodils in bloom
Tech Stocks

2 Best “Magnificent Seven” Stocks to Buy in April

Two surging mega-cap tech stocks are the best buys among the “Magnificent Seven” this April.

Read more »

A golden egg in a nest
Stocks for Beginners

Got $5,000? 5 Stocks to Buy for Lasting Wealth

Got $5,000 to build a long-term compounding stock portfolio? Here are five top Canadian stocks to building lasting lifetime wealth.

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

BCE’s Stock Price Has Fallen to its 10-Year Low of $44: How Low Can it Go?

BCE stock price has dipped 39% in two years and shows no signs of growth in the next few months.…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Invest $10,000 in This Dividend Stock for $3,974.80 in Passive Income

This dividend stock gives you far more passive income than just from dividends alone, so consider it if you want…

Read more »