When investing, how do we differentiate between noise and real actionable information?
Well, this is an age-old question that is much easier to answer in theory than in practice. Let’s look at a few examples of stocks that have been hit hard in the last year or so.
Were these stocks hit by “market noise?” Is it reactionary trading that is not reflective of a company’s long-term outlook? Or were they hit because something has structurally changed and put the company’s future into question?
Cineplex (TSX:CGX)
Cineplex stock has fallen 36% from its highs in 2017, as the company has certainly faced big challenges. Questions regarding the future of the movie exhibition business, Cineplex’s profitability, and its future have been top of mind for investors.
But has this fall been justified or is it just market noise? The key to this lies with management and the steps they have taken to change and adjust with the times.
At the end of the day, Cineplex has an unmatched position in the movie business, which has been a big cash generator, and it continues to diversify, thus ensuring its future profitability.
This undervalued dividend stock offers investors a 5.2% dividend yield and is trading at bargain multiples at this time.
AltaGas Ltd. (TSX:ALA)
With a 10.5% yield and continuing concerns regarding its debt levels and dividend payments, this undervalued dividend stock has had a very rough year. AltaGas stock is now trading almost 30% lower than it was a year ago.
But is this justified, and what is priced into the stock already?
Well, AltaGas has taken steps to address these issues, such as selling off assets to pay off debt and making select investments, such as the WGL acquisition, so AltaGas is ensuring its future health.
Longer term, WGL’s high-quality assets and market position will bring AltaGas many growth opportunities as well as significant earnings and cash flow accretion.
Also, bear in mind, AltaGas still an energy infrastructure company and, by its very nature, has a relatively predictable stream of cash flows.
Dollarama (TSX:DOL)
One thing about Dollarama stock that I think was real and lasting is that its valuation has been brought back down to Earth where it belongs, and this is where I believe it will stay.
I mean, the stock was trading at multiples well north of 30 times earnings, levels that could not realistically be sustained for a retailer, even one that has excelled in its execution and shown us retailing excellence, with strong margins, returns, and growth rates.
Now that we have gotten that out of the way, let’s move on to fundamentals.
With Dollarama’s second-quarter fiscal 2019 sales falling short of expectations, investors have had to come to the realization that maybe the sales growth that investors have become accustomed to cannot be sustained going forward.
