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What are we looking for?

Undervalued North American stocks with excellent upside.

The screen

The Canadian and U.S. economies have been through a lot in the first half of 2022. Inflation is at its highest level in decades and housing prices have significantly surpassed previous record levels. In response, the Canadian and U.S. central banks have increased interest rates over three consecutive meetings, aiming to ensure economies remain stable. As a result, equity markets have drastically slipped, with the S&P/TSX Composite Index and S&P 500 declining by 8.5 per cent cent and 17.7 per cent, respectively.

The sharp decline in equities brings opportunity, since it’s likely that several companies’ stock prices have slipped below fair market value. Today we review companies with stock prices that appear undervalued and show strong growth potential.

First, we screen for companies traded in North America, with a market capitalization of more than US$5-billion. Next, we select two components of the StarMine Intrinsic Value Model to create an equally weighted, two-factor model:

  • The forward earnings per share compound average growth rate (CAGR) is an estimated average annual EPS growth rate projected by analysts over the next five years. We are looking for higher figures;
  • The market-implied five-year EPS CAGR is the average annual EPS growth rate that is currently “priced in” by the market. In other words, it is the hypothetical growth rate needed over the next five years for a company to sustain its current stock price. A very low rate suggests the company can experience little to no growth and remain at its current stock price. We’re looking for lower figures.

Using these two components, the model seeks the best combination of the lowest value market-implied and the highest forward rates. Such a combo would indicate the company’s stock price is severely oversold and below its predicted current value as determined by the StarMine IV Model. (Companies with a low market-implied and low forward rates wouldn’t have much future upside. Companies with high market-implied and high forward rates aren’t helpful since the stock won’t be that undervalued and EPS must grow to meet its fair value.)

More about Refinitiv

Refinitiv, a London Stock Exchange Group business, is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges and scale intelligently.

What we found

Value strategy seeking stocks with strong growth potential

Company TickerMkt. Cap. (US$ Mil.)IV Market Implied 5Y EPS CAGR (%)IV Fwd. 5Y EPS CAGR (%)Dividend yield (%)Recent Close ($)*IV Predicted Curr. Fair Value ($)YTD Total Return (%)1 Year Total Return (%)
Nutrien Ltd.NTR-T46,099.2-2.219.22.3107.81211.3813.950.6
Diamondback Energy Inc.FANG-Q22,078.3-0.917.12.3124.39261.2318.739.8
Seagate Technology Hldgs.STX-Q15,943.6-2.914.63.874.21147.88-33.2-11.1
APA Corp.APA-Q12,673.60.320.71.337.4794.5640.380.1
Ovintiv Inc.OVV-N12,204.6-5.121.52.147.28134.6641.652.3
Lincoln National Corp.LNC-N8,384.1-8.712.83.748.76212.44-27.6-20.7
Southwestern Energy Co.SWN-N8,036.5-5.912.9n/a7.2018.4254.533.8
PDC Energy Inc.PDCE-Q6,325.7-6.726.12.263.72282.9131.643.4
Toll Brothers Inc.TOL-N5,246.4-7.915.91.845.63168.63-36.5-20.6

Source: Refinitiv

* Both recent stock close and predicted current fair value are shown in native currency.

The screen produced nine companies. Here are a couple to highlight.

Nutrien Ltd. is a Saskatoon-based fertilizer producer. Its stock’s previous close price was $107.81. The current market-implied, five-year EPS CAGR suggests the company could post an EPS growth rate of minus 2.2 per cent over the next five years and sustain its current stock price, according to the StarMine IV Model. On the other hand, analysts expect Nutrien’s EPS to increase, on average, by 19.2 per cent a year, which presents excellent upside. One aspect of this expected high-future growth rate is that fertilizer prices will remain higher than average over the next several years owing to the supply shock tied to Russia’s invasion of Ukraine and China’s move to limit phosphate exports.

Toll Brothers Inc. is a builder of luxury homes. The company, headquartered in Fort Washington, Pa., has strong brand recognition and is a market leader in the luxury home-building space. But it operates in an extremely cyclical, competitive and capital-intensive industry, making it difficult to generate profits in all stages of the business cycle. It had the lowest year-to-date total return on the list, at 36.5 per cent. The drastic decline was mainly caused by the rapid increase in interest rates, which in turn has pushed up mortgage rates, making its real estate less affordable. The decline may have been overshot. Currently, the model predicts the stock’s current fair value at US$168.63, which is well above its most recent closing price of US$45.63.

Note that the StarMine IV Model focuses solely on the inputs from analysts’ estimates and company fundamentals to construct a fair value of a company. It does not incorporate outside market factors that will have an influence on the company’s stock price. Investors are advised to do their own research before trading in any of the securities shown.

Erik Foo, CFA, is a proposition sales specialist at Refinitiv, covering research and portfolio management sales.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 30/09/24 11:59pm EDT.

SymbolName% changeLast
NTR-T
Nutrien Ltd
+1.99%65.45
FANG-Q
Diamondback Energy
+0.68%182.7
STX-Q
Seagate Technology Hldgs Plc
+1.94%99.92
APA-Q
Apa Corp
+1.4%22.44
OVV-N
Ovintiv Inc
+1.86%46.59
LNC-N
Lincoln National Corp
+1.6%34.82
SWN-N
Southwestern Energy Company
-0.56%7.11
TOL-N
Toll Brothers Inc
+0.3%152.36

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