Where Is the Deep Value in Canadian Stocks This Week?

The Acquirer’s Multiple® Canada All TSX screen gives investors a way to search Canadian-listed companies for value, cash generation and shareholder returns.

This week’s screen contains 83 companies, with a median Acquirer’s Multiple of approximately 7.7x and a median free-cash-flow yield of approximately 11.5%.

At the cheaper end, 62 companies trade below 10x, 47 trade below 8x and 15 trade below 5x.

More than half of the companies in this week's screen trade below an 8x Acquirer’s Multiple, highlighting a broad range of potentially undervalued businesses across the Canadian market.

Where the Cheapest Opportunities Are Concentrated

The sub-8x group spans several areas of the market, including:

• Insurance, investment services and specialty finance

• Energy exploration, downstream energy and oilfield services

• Automotive parts and consumer-related businesses

• Food and beverage producers and retailers

• Telecommunications, software and technology services

• Industrial distributors, construction materials and packaging

• Healthcare and professional services

• Mining, chemicals and forestry products

• Transportation, hospitality and leisure goods

Insurance and automotive-related businesses remain particularly well represented, each accounting for four companies trading below 8x.

Oilfield services and industrial distribution also feature prominently, each contributing three companies to the sub-8x group.

Software, telecommunications, packaging, chemicals, leisure goods, and marketing and printing services each contribute multiple companies.

Energy remains an important source of statistically cheap businesses, spanning exploration and production, integrated oil and gas, downstream operations and oilfield services.

These companies operate across different parts of the energy value chain, with earnings influenced by commodity prices, production costs, refining margins and capital expenditure cycles.

Technology contributes candidates across software, internet and data services, telecommunications and technology consulting.

These businesses have different growth drivers and competitive characteristics, ranging from recurring software revenue to telecommunications infrastructure and corporate technology spending.

Consumer-related businesses also feature across automotive parts, food production, retail, leisure goods and hospitality.

Their inclusion highlights opportunities beyond Canada's traditional resource and financial sectors, although consumer demand, operating margins and competitive pressures remain important considerations.

Industrial businesses provide further diversity, with qualifying companies involved in distribution, construction materials, packaging and related services.

The range of industries gives Canadian value investors opportunities to investigate beyond the country's largest banks, energy producers and mining companies.

Cheap—But Are They Producing Cash?

A low valuation becomes more interesting when supported by consistent cash generation.

Among the 47 companies trading below 8x, the median free-cash-flow yield is approximately 15.8%, and all 47 report a positive free-cash-flow yield.

The group's median five-year return on assets is approximately 10.5%, while 46 companies report a positive shareholder yield.

These figures suggest that many of the statistically cheap Canadian companies are also generating cash and reporting positive shareholder returns.

The combination of a median free-cash-flow yield approaching 16% and positive shareholder yields across almost the entire group provides investors with a substantial pool of candidates for further research.

Compared with last week, the median free-cash-flow yield among sub-8x companies has increased from approximately 15.0% to 15.8%, while the median five-year return on assets has risen from 9.5% to 10.5%.

The number of companies reporting positive free-cash-flow yields has increased from 46 to 47, while the number reporting positive shareholder yields has risen from 45 to 46.

These changes suggest that the cheaper end of the supplied screen continues to demonstrate attractive cash-generation and historical profitability characteristics.

However, high free-cash-flow yields do not necessarily indicate sustainable earnings. Commodity prices, cyclical demand, working-capital movements and temporary improvements in profitability can all influence reported cash generation.

Investors should also examine whether shareholder distributions are supported by recurring cash flow rather than borrowing or asset sales.

Why Canadian Value Stocks Require Additional Research

Canada's equity market offers exposure to a diverse range of businesses, but investors should consider the different risks affecting each industry.

Energy and mining companies can generate substantial cash flow during favourable commodity cycles, although earnings and valuations may change significantly when prices weaken.

Financial businesses require particular attention because conventional enterprise-value and cash-flow measures can behave differently from those of non-financial companies.

This is particularly relevant given the continued representation of insurance businesses among the companies trading below 8x.

Consumer and industrial companies may also face cyclical demand, changing input costs, competitive pressures and fluctuations in operating margins.

Technology businesses require closer examination of revenue durability, customer retention, capital requirements and the potential impact of industry disruption.

Smaller Canadian-listed companies may also have lower trading liquidity, concentrated customer bases and less comprehensive analyst coverage.

The Acquirer’s Multiple is a starting point for research. Investors should examine balance-sheet strength, cash-flow consistency, capital allocation, competitive advantages and whether recent earnings are representative of longer-term profitability.

Bottom Line

Approximately 57% of this week's 83 Canada All TSX companies trade below an 8x Acquirer’s Multiple, with 15 companies trading below 5x.

The sub-8x group has a median free-cash-flow yield of approximately 15.8%, with all 47 companies reporting positive free-cash-flow yields.

The group's median five-year return on assets is approximately 10.5%, while 46 of the 47 companies report positive shareholder yields.

Compared with last week, the number of companies trading below 8x has increased from 46 to 47, while the number trading below 5x has risen from 13 to 15.

The median Acquirer’s Multiple remains unchanged at approximately 7.7x, while the median free-cash-flow yield across the entire screen remains approximately 11.5%.

Among sub-8x companies, the median free-cash-flow yield has increased from 15.0% to 15.8%, while the median five-year return on assets has improved from 9.5% to 10.5%.

The number of companies reporting positive free cash flow and positive shareholder yields has also increased slightly.

Insurance and automotive-related businesses continue to feature prominently, alongside opportunities across energy, industrials, technology, healthcare and consumer-related industries.

These measures suggest that the cheaper end of the Canadian market continues to offer a substantial pool of statistically inexpensive, cash-generating businesses, with modest improvements in several underlying quality and cash-flow measures.

As always, attractive screening metrics are a starting point rather than a conclusion about investment quality. Investors should assess earnings durability, financial strength and the risks behind each valuation before making investment decisions.

The complete premium screen provides company names, rankings and the underlying valuation, free-cash-flow, shareholder-yield and quality measures, allowing subscribers to investigate the individual businesses behind these statistics.

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