Statistics Canada announced on Friday that Canada’s economy grew by a marginal 0.1% in April. While this marks the nation’s fourth consecutive month of GDP growth, the low number is indicative of the economy’s slowdown. The Bank of Canada, according to Reuters Canada, forecasts second-quarter growth on an annualized basis of 1.8%, falling from 2.5% growth in the first quarter.
Per Statistics Canada, goods production, including mining and oil and gas extraction, declined by 0.3% in April. Services experienced the largest expansion out of all sectors with a 0.3% gain. Manufacturing grew by 0.2% during the same period and durable goods production increased by 0.5%, led by computer and electronic products.
Given Canada’s weak GDP growth, which seems to confirm the expected second quarter contraction, we wanted to turn our attention to stocks that have actually outperformed over the quarter. Additionally, since Canada’s economy is slowing, we decided to look for undervalued, outperforming stocks that are potential value investments.
We focused on services and durable goods stocks for this screen due to their contribution to Canada’s April GDP growth. To begin, we constructed a universe comprised of Canadian computer, electronic, and services stocks. We then screened that universe for stocks outperforming the market, with a quarterly performance over 20%.
Next, we looked for potentially undervalued stocks as indicated by a low Price/Sales (P/S) ratio. A low P/S ratio means that the stock’s price is cheap when compared to the company’s revenues, and a stock with a P/S below 1 can be considered undervalued. However, investors should note that this ratio doesn’t take expenses or debt into consideration, and variation between industries is normal.
For this list we screened for stocks with P/S ratios under 2, which means that the company’s market cap isn’t greater than 2x its annual sales. We use 2 as our limit after a conversation with Neil Hennessy, Portfolio Manager and Chief Investment Officer of The Hennessy Mutual Funds, in which he shared it as one of his favorite investing strategies.
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Do you think these stocks are smart investments given Canada's current economic climate? Use this list as a starting point for your own analysis.
1. Sierra Wireless Inc. (SWIR, Earnings, Analysts, Financials): Provides wireless solutions for the machine-to-machine (M2M) and mobile computing markets.
Market cap at $398.42M, most recent closing price at $12.98.
Performance over the last quarter at 22.57%.
Price/sales ratio: 0.37.
2. Canadian Solar Inc. (CSIQ, Earnings, Analysts, Financials): Engages in the design, development, manufacture, and sale of solar power products in Canada and internationally.
Market cap at $478.2M, most recent closing price at $11.06.
Performance over the last quarter at 219.65%.
Price/sales ratio: 0.98.
3. Magna International, Inc. (MGA, Earnings, Analysts, Financials): Operates as an automotive supplier in North America, Europe, and internationally.
Market cap at $16.41B, most recent closing price at $70.58.
Performance over the last quarter at 20.84%.
Price/sales ratio: 0.52.
(List compiled by Mary-Lynn Cesar)
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Dig Deeper: Access Company Snapshots, Charts, FilingsSierra Wireless Inc. (SWIR, Chart, Download SEC Filings) Canadian Solar Inc. (CSIQ, Chart, Download SEC Filings) Magna International, Inc. (MGA, Chart, Download SEC Filings)
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