When you’re looking for good stocks to buy, it pays to look into beaten down stocks that are down due to temporary issues. Such stocks tend to recover sooner or later, making their temporarily depressed prices good buying opportunities.
Of course, there’s an art to distinguishing between a stock that’s down unfairly due to temporary issues, and one that is down because the underlying company is in terminal decline. The difference between the two can make the difference between a successful investment and a major failure. In this article, I will explore one stock that’s down 11%, whose problems appear to be temporary in nature.
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EQB Inc
EQB Inc (TSX:EQB) is a small online bank known as “Canada’s challenger bank.” It is considered a challenger because it challenges the Big Six Banks – the traditional leaders of Canada’s financial services sector – with a scrappy approach and a low-overhead business model. Its stock has rewarded investors long term, having risen about 95% over the last five years while paying dividends. Today, however, the stock is on an 11% dip from its all-time highs, for reasons that appear to be temporary.
Why EQB is down
The most likely reason why EQB stock is down 11% is because its most recent earnings release missed analyst expectations. Some highlights from the release included:
- $321.6 million in revenue, up 2% year over year.
- $2.51 in adjusted earnings per share, up 28%.
- $127 billion in assets under management, up 14%.
- $0.49 in dividends, up 4%.
- A 2.07% net interest margin, up from 1.95%.
As you can see, the actual numbers here are not especially bad. They were however behind Wall Street estimates, which is why the stock sold off after they came out. I’m inclined to think that this will reverse, because the expectations that EQB missed appeared to have been unreasonable, and the results are good in absolute terms.
High growth
As we saw with the EPS figure in EQB’s Q4 earnings, the company continues to grow. The revenue growth was not all that high, but the company achieved high earnings growth nonetheless. Over the last five years, EQB has compounded at much faster rates than other Canadian banks, yet it remains cheap, as I’ll show in the next section.
A cheap valuation
EQB has a pretty cheap valuation for a growing bank. At today’s prices, it trades at:
- 9.8 times earnings.
- 3.3 times sales.
- 1.2 times book value.
These are pretty low multiples for a company that grew its earnings 28% last quarter, and even more than that over the last five years.
One risk to bear in mind
Despite all the things EQB has going for it, EQB does face one major risk: a large amount of deposits relative to cash and liquid assets. The company has less than 20% of its deposit value in liquid assets. That hasn’t been a problem because EQB’s deposits are mostly GICs that mature on fixed intervals. However, it would become a problem if the bank’s deposit mix were to shift to more demand deposits. So, EQB’s deposit mix is something for investors to watch long term.
Foolish bottom line
Overall, EQB has a lot of things going for it. It’s cheap, it’s growing, it has been beaten down for reasons that don’t look reflective of long-term problems. Overall, it may be worth it.
