Linamar’s (TSX:LNR) press release said it all.
“We are initiating this NCIB [normal course issuer bid] in recognition of what we believe is a significant level of under valuation of Linamar stock,” aid Linamar CEO Linda Hasenfratz. “We do not feel that the value of our business is being adequately reflected in our current share price.”
As part of the company’s NCIB, Linamar can repurchase up to 10% of its “public float” over the next year — a total of 4.5 million shares. It will be limited to repurchasing 93,558 shares in a single day of trading, which means it will take the company at least 49 days to complete the entire NCIB.
Hasenfratz feels the company’s stock is very cheap at $50. I do too. Here’s why.
It’s rarely traded below $50
If you go back over five years, Linamar stock’s only traded below $50 on three occasions: the first was in early 2014. The second was a short period in July 2016. The third was this past December. That’s it in over 60 months.
$50 has proven to be an excellent floor price for Linamar stock. When you consider that it’s traded over $70 in 2014, 2015, 2017, and 2018, it’s easy to see why Linamar wants to buy back 10% of its public float.
But there’s another reason why current prices make Linamar a very attractive buy.
The Dogs of the Dow theory
The Dogs of the Dow is a value portfolio DIY investors can quickly put together; it involves buying an equal amount of the 10-worst performing Dow stocks from the previous year, holding them for a year, and repeating the process in January of the next year. So, in 2019, you would buy the 10 worst Dow stocks from 2018, weighting them equally, and then selling them in 2020, and repeating the process until January 2021. And so on.
Out of the last 19 years, the Dogs of the Dow have outperformed the Dow on 11 occasions. It’s beaten the S&P 500 nine times. It tends to outperform when the indexes are in negative territory in any given year. On six occasions, the Dow’s been in negative territory over the past 19 years, and the Dogs of the Dow have beaten it five times.
So, if you think 2019 is going to be a down year — that’s hard to imagine with the Dow up 13% year to date through January 25 — the Dogs of the Dow is a smart play.
A Canadian version
Wickham Investment Counsel portfolio manager Sean Pugliese recently did a Dogs of the TSX analysis for the Globe and Mail’s “Number Cruncher” segment. Pugliese limited the candidates to stocks with at least a $1 billion market cap — companies whose stocks had total return losses of at least 30% over the past 52 weeks, that pay a dividend, that have low price-to-earnings and debt-to-equity ratios, and are currently making money.
Pugliese came up with 20 companies that fit the bill. Linamar was one of them. He believes that Linamar scores well for both safety and value. As far as value goes, Linamar’s P/E ratio is the cheapest of the 20 stocks on the list.
I’ve been very positive about Linamar stock over the past 24 months. In 2018, Linamar had a total return of -37%, leaving egg all over my face. Fortunately, some of my Foolish colleagues also believe it’s got long-term upside potential.
Brian Pacampara suggested investors take a closer look at Linamar January 19, along with TMX Group and Quebecor, three mid-cap TSX stocks he felt should outperform in 2019.
As far Linamar goes, Pacampara reminded investors that with the USMCA trade deal completed, the significant headwind facing the auto parts company has been lifted. I couldn’t agree more.
“The problems that it’s currently facing on the auto parts front will seem like a pesky mosquito bite in three to five years from now,” I wrote in September. “As recently as May, Linamar stock was trading close to $80; it’s now temporarily stuck in the $50s.”
Linamar’s commitment to buy back more than four million shares over the next year is a massive vote of confidence for LNR stock and one that Foolish investors should seriously consider.