Reports of Value’s Death are Premature

Value has had a reversal of fortune compared with growth stocks in the U.S. But in Canada, value still reigns
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Value hasn’t died after all—at least up north. In Canada it is alive and well.

I’m referring, of course, to the much-vaunted historical tendency for value stocks (those with low price/book ratios) to outperform growth stocks (those with high such ratios). Though this tendency used to appear strongly in the U.S. market, over the past 15 years it has largely disappeared.

Consider the performance of a value and a growth portfolio, containing respectively the 20% of stocks with the lowest price/book ratios and the 20% with the highest. According to data from Dartmouth finance professor Ken French, the value portfolio beat the growth portfolio by nearly 5 annualized percentage points between mid-1926 and mid-2005. Since then, however, the growth portfolio has outperformed the value portfolio by nearly 8 annualized percentage points.

This huge reversal of fortunes -- by nearly 13 annualized percentage points -- is why so many commentators in recent years have declared value to be dead. A one-quarter or one-year exception to the rule could be explained away. But could a 15-year exception to the historical rule, especially one this large?

That question has been hanging over value investors’ head for several years now. But a just-completed academic study gives long-suffering value investors hope.

The study, titled “The Value Premium Is NOT Dead in Canada,” was conducted by Lucy Ackert, a professor of economics, finance and quantitative analysts at Kennesaw State University, and George Athanassakos, a professor of finance at the University of Western Ontario. Upon analyzing all Canadian stocks from 1983 through 2018, they concluded that the “Canadian value premium persists in recent years, particularly for stocks with low prices.”

Why would the value premium evaporate in the U.S. but not in Canada? The researchers offer several possible explanations:

The Canadian economy in recent years has been in a relatively good position to weather economic storms, and thus needed less fiscal and monetary intervention than the U.S. economy. That’s relevant to this discussion because the value premium appears to be dependent on the existence of a more or less normal economy cycle. The extraordinary fiscal and monetary stimulus in the U.S. appears to have suspended anything resembling a normal cycle.

Canada’s economy is dominated by different industries. Some of the best performances in recent years in the U.S. market were in the pharmaceutical and high-tech arenas, industries that are dominated by growth stocks. The Canadian market, in contrast, is dominated by companies in the financials, materials and energy sectors.

Value investors may therefore want to focus their buying for the foreseeable future in Canada (and other countries that have more resilient economies). If so, below is a list of 10 low-priced Canadian value stocks that are recommended by at least one of the top-performing investment newsletters I monitor. I constructed the list by sorting a complete list of all recommended Canadian stocks by their current prices, and then sorting again on their price/book ratios.

To put the price/book ratios listed below in context, consider that the iShares MSCI Canada ETF  (EWC) - Get Report currently sports a price/book ratio of 1.74.

TickerCompanyPrice/Book RatioPrice (USD)

ESI

Ensign Energy Services

0.06

$0.43

SCL

ShawCor Ltd.

0.22

$1.59

CJR.B

Corus Entertainment B

0.68

$2.17

CVE

Cenovus Energy

0.36

$3.89

HLF

High Liner Foods

1.03

$6.39

DII.B

Dorel Industries B

0.84

$8.15

ACQ

AutoCanada

1.68

$11.96

TCL.A

Transcontinental A

0.84

$12.22

NFI

NFI Group

1.69

$12.32

LNF

Leon’s Furniture Ltd.

1.52

$13.68

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