We’ve replaced non-Key stock Lowe’s Companies with non-Key stock Roots Corp. on The Investment Reporter Back Page. Roots is well priced. It’s a buy for potential long-term share price gains. But only if you need no dividends and you can accept buying a stock that we rate ‘Higher Risk’.
An undervalued Canadian classic
We moved non-Key stock Lowe’s Companies Inc. (NYSE—LOW) to the group of building-supply stocks. We believe that it belongs to a group of companies which includes its arch rival, non-Key stock Home Depot Inc. (NYSE—HD).
In this issue, we’ve replaced Lowe’s Companies with non-Key stock Roots Corp. (TSX—ROOT) on The Back Page. It’s well priced. As a result, we see it as a buy for long-term share price gains. But only if you need no dividends and you can accept buying a stock that we rate Higher Risk’.
Roots is geographically diversified
Toronto-based Roots describes itself as “a global lifestyle brand”. It has “over 100 corporate retail stores in Canada, two stores in the United States, and an eCommerce platform that serves over 55 international markets. We have more than 100 partner-operated stores in Asia, and we also operate a dedicated Roots-branded storefront on Tmall.com in China. We design, market, and sell a broad selection of products in different departments, including women’s men’s, children’s, and gender-free apparel, leather goods, footwear, and accessories. We also wholesale through business-to-business channels and license the brand to a select group of licensees selling products to major retailers.”
That is Root’s businesses are geographically diversified. This reduces its risk from lockdowns in China, for example.
Roots is well priced
Roots appears nicely valued. Its price of $3.07 a share trades 29 per cent below its book value of $4.33 a share. The shares trade at an appealing 5.9 times the 52 cents they’re expected to earn this year. On a more downbeat note, these earnings are down by 20 per from earnings of 65 cents a share that the company earned last year. In the year after next, Roots’ earnings are expected to recover by 5.8 per cent, to 55 cents a share.
In addition, Roots‘ price-to-cash-flow ratio is two times. This is well within the ratio of five times or less that can serve as a ‘buy’ indicator. This confirms our view that the company’s shares are worth buying.
Roots has a decent balance sheet. Its net debt-to-cash-flow ratio is 1.1 times, That’s within our standard comfort zone of two times or less. Even better, Roots holds cash of $20.4 million and prepaid expenses of more than $3.5 million.
Buy Roots Corp. for long-term share price gains. But only if you need no dividend. And only if you can accept buying a stock that we rate ‘Higher Risk’.
This is an edited version of an article that was originally published for subscribers in the September 9, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •10/18/22 •