Overlooked stocks are often some of the best buys in the market. Value investors have among the best long-term track records out of all types of investors, and academic studies repeatedly show that value stocks outperform. Although the tendency of value stocks to outperform the market has lessened in recent years, it holds over such a long period of time that we’d expect value to come back into favour at some point in the future.
The question is, where do you find quality value stocks to buy and hold in your family’s portfolio? While it’s tempting to go out and buy whatever “hot stock” looks appealing to you, investing your family’s money takes more discipline than that. A single bad bet could destroy your net worth. So, you need to pick investments carefully. In this article, I explore one Canadian bank that could jumpstart your family’s generational wealth.
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EQB
EQB Inc (TSX: EQB) is a Canadian bank that is sometimes referred to as “Canada’s challenger bank.” It is called “challenger” because
- It is relatively young and relatively small; and
- With its branchless model, it is “challenging” the traditional bank business model of having branches.
EQB has been going through a major growth spurt lately. Over the last five years, it has compounded its revenue, net income and free cash flow (FCF) at the following annualized rates:
- Revenue: 18.8%.
- Net income: 11%.
- Book value: 15%.
These are impressive growth rates for any company and yet–as we’ll see momentarily — EQB is actually a value stock trading at low multiples.
Cheap valuation
Despite its relatively high historical growth, EQB trades like a bargain-basement stock, with the following multiples:
- A 9.4 price-to-earnings (P/E) ratio.
- A 3.1 price-to-sales ratio.
- A 1.08 price-to-book ratio.
- An 8.7 price-to-cash flow ratio
These multiples are fairly low, even for stocks that aren’t growing; the P/E ratio is lower than that of the TSX Index (about 20); and EQB is in fact growing. So, it looks like EQB is undervalued.
Can EQB continue growing
It’s one thing to note that a company looks undervalued, but quite another thing to conclude that it is in fact undervalued. If a company is destined to go bankrupt next year, then a P/E ratio of five today means nothing. We need to know what is making a company optically cheap before we can conclude that it is truly cheap.
So, what’s making EQB cheap?
It doesn’t appear to be a risk thing. EQB has comfortable capital and liquidity ratios, although as a small bank, it lacks the “systemically important” label. That means that, in a crisis, EQB might not get a bailout.
The bank does appear to face limits to its growth. The Canadian financial services market is only so big, and is not uncompetitive, with six large banks competing for Canadians’ money. EQB could continue growing in Canada, but it would face an uphill battle for market share against the Big Six.
What you’d like to see from EQB is an expansion into new markets — particularly ones with underdeveloped banking sectors, like Latin America. That could drive some real gains for the stock. Today, EQB has no such catalysts, but at 9.4 times earnings, it’s likely a decent buy anyway.
