Value investor Joel Greenblatt, who do-it-yourselfers might recognize because of his 2005 investment book The Little Book That Beats the Market, recently appeared on CNBC touting Apple Inc. (NASDAQ: AAPL) as incredibly cheap.
Greenblatt has made a career out of finding good companies whose stocks are being valued at far less than their true worth. Cheap, but good is Greenblatt’s mantra.
Greenblatt looks at two metrics: a company’s earnings power measured by enterprise value (EV) divided by earnings before interest and taxes (EBIT) and the effective use of capital measured by return on tangible capital. The first metric should be as low as possible; the second should be as high as possible.
For the sake of saving time in the screening process I’ll substitute P/E (30 or less) for EV/EBIT and return on assets (10 or higher) for return on tangible capital.
Although Greenblatt primarily buys U.S. companies, here are three TSX-listed value stocks he would die for.
Canadian National Railway
Hunter Harrison is credited with delivering “precision railroading” to three major railroads in his career, which isn’t over by a long shot despite being 72 years old. He held the top job at Canadian National Railway Company (TSX: CNR)(NYSE: CNI) for seven years before temporarily retiring in 2009.
He left it in such good shape that it’s become one of the largest holdings of the Bill and Melinda Gates Foundation’s $19 billion investment portfolio.
Fool.ca contributor Jacob Donnelly recently tackled the question of whether or not CN was a smart income play; while he had some reservations about its P/E ratio (20.6), he ultimately recommended that its stock was good for income investors to hold because it’s increasing cash flow in a big way and is sure to continue growing its dividend.
They say you have to build a house with a strong foundation; the same applies for an investment portfolio. CN is a building block you can count on.
Gildan
Gildan Activewear Inc. (TSX: GIL)(NYSE: GIL) is another one of those stocks that appears expensive until you compare it to other companies it competes with, such as Hanesbrands Inc. (NYSE:HB). It’s then that you realize value is a relative thing.
While Gildan’s P/E ratio is higher than Hanesbrands — 17.4 vs. 14.4 — its price-to-cash flow is actually lower; Gildan released strong fourth-quarters earnings (up 14% on a per-share basis) in February that suggest its business is doing well and organic growth is still possible over the next few years.
Personally, I think its purchase of American Apparel’s name and trademarks for $88 million was a brilliant move because it gives it instant access to American Apparel’s large wholesale business without taking on any of the company’s expensive manufacturing costs operating in Los Angeles.
Last September, I recommended Gildan stock despite the outward appearance it wasn’t a value investors’ dream stock. But truth be told, price is what you pay and value is what you get. Gildan is a very well managed business that will continue to outshine its competition.
For me, it’s another one of those foundational stocks a portfolio has just got to have.
Open Text
It’s arguably one of the top three publicly traded Canadian tech stocks, yet Open Text Corp. (TSX: OTEX)(NASDAQ: OTEX) trades for 13.4 times forward earnings compared to Constellation Software Inc. — it’s one of the other top three tech stocks with Shopify Inc. (TSX: SHOP)(NYSE:SHOP) being the third — at 22.2 times its forward earnings.
Yes, I get that OTEX stock is up more than 40% over the past 52 weeks, but compared to some of its peers, it’s still got a lot of room to run. I see it as one of the dividend stocks to own for the next five years. It’s a company that’s consistently grown operating cash flow over the past decade and will continue to do so thanks to acquisitions like the one it completed in January when it bought Dell-EMC’s enterprise content division.
Would I go as far as saying it’s a better stock than Apple, one of Joel Greenblatt’s favourite companies to own? No, I definitely would not. However, when it comes to the TSX and Canada, Open Text is at the top of the mountain.
