There are value stocks and there are deep-value stocks. Roots Corp. (TSX:ROOT) and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) are two premier stocks that have taken one too many hits to the chin over the past year. And if I were to place a bet, I’d say they’re down, but not out.
Let’s have a closer look at these two out-of-favour firms to see which, if any, is worthy of your investment dollars as they look to bounce off their 52-week lows:
Roots shares imploded 15.65% in a single trading session to hit a new all-time low following the release of its abysmal second-quarter fiscal 2019 results. The company clocked in an adjusted loss per share of $0.06, a considerably steeper loss than the $0.02 loss per share that Bay Street was expecting.
The 2017 IPO is looking like a real dud now, as shares move deeper into single-digit territory. Most investors have thrown in the towel on the iconic Canadian company, but I think there’s tremendous opportunity to be had for bargain hunters who are willing to endure some short-term pain amidst the recent bout of carnage.
Management maintained its fiscal 2019 guidance, but CEO Jim Gabel acknowledged that he and his team “haven’t transitioned far enough” and that there exist apparent areas where Roots “can be better”.
While the results were nothing to write home about, I do believe there are longer-term growth drivers that may propel the stock out of its funk — most notably the continued U.S. expedition and ever-improving direct-to-consumer (DTC) platform.
After the latest earnings disappointment, Roots shares down 42% from all-time highs reached in May. The stock now trades at a 19.53 TTM P/E, a 1.69 P/B, and a 1.0 P/S, all of which are considerably lower than industry average multiples.
I think the post-earnings +15% sell-off was overblown and represents an incredible entry point for “cheap” investors who seek a solid margin of safety. Come year-end; I don’t expect Roots to remain in the single digits.
Bank of Nova Scotia
You’re probably surprised to see this Big Five bank here at a time when its peers are blasting past their all-time highs. Something went wrong at Big Red, as the company has fallen behind with shares down 12% from all-time highs at the time of writing.
Bank of Nova Scotia recently reported a “meet and raise” third-quarter where it met analyst expectations with its adjusted EPS of $1.79 and hiked the quarterly dividend to $0.85 per share, up 7.6% on a year-over-year basis. The international business was still firing on all cylinders, but capital markets numbers and net interest income underwhelmed, dragging down what would have been a pretty solid quarter.
The biggest turn-off from the quarter was the meagre 3% year over year revenue growth, which I’m sure you’d admit is a colossal disappointment given what the bank’s capable of.
There’s no question that the bank looked like a peasant among kings for the quarter. The swollen 4.54% dividend yield and its depressed valuation are compelling to patient bargain hunters, however. The stock trades at a 10.1 forward P/E, a 1.5 P/B, and a 3.3 P/S, all of which are lower than the company’s five-year historical average multiples of 11.9, 1.8, and 3.5, respectively.
Roots and Bank of Nova Scotia are terrific bargain bets for those looking to obtain a margin of safety. Both firms delivered unremarkable quarters of late, but I think the worst is already in the rear-view mirror. If I had to choose one value stock, I’d go with Roots, as everybody is heavily discounting the potential of the company’s long-term growth drivers.
Stay hungry. Stay Foolish.
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.
Fool contributor Joey Frenette has no position in any of the stocks mentioned.