2 bargain stocks ready to unlock value

Analysts follow as many as 20 stocks, most of which are rated ‘buys’. Of those buys, an analyst has one or two special favourites seen as most suitable for new buying. Portfolio manger Mike Vinokur reveals two US stocks, one knocked down to the bargain basement stock section by weak Q1 sales, the other a bargain dividend stock in the growing seniors’ retirement homes and services market.

Bargain_StocksToronto-based Trapeze Asset Management vice-president and portfolio manager Mike Vinokur says his brokerage has become increasingly cautious since stocks have fallen victim somewhat to their success since late last year.

“There appears to be fair to even over-valuation in many various asset classes.” Mr. Vinokur adds that following major gains, stocks on the TSX “have succumbed to the laws of gravity” so it is already in the midst of a pullback, possibly because it boasted strong results earlier than markets outside Canada.

“Our own domestic market is really concentrated on financials, oil and gas, and materials,” he explains. “While we do believe there is currently an opportunity in gold and precious metals . . . the Canadian banks are not cheap.” At the same time, oil and gas stocks may have more of a correction to go or may not go anywhere because of the price of the commodity, and materials “may be in their own rut for the next little while”, whether for industrial, agricultural, or other uses, he adds. The analyst also notes that the domestic economy has relied heavily on the real estate market for growth. As such, a slowdown in that sector could have an overarching effect.

Beyond our borders and the United States, both European and Asian stock and currency markets have performed well, according to Mr. Vinokur, adding to the likelihood of retreats there. A correction is actually healthy given how far stocks have run up, he asserts.

“It’s fair to expect a reasonable recession. Whether reasonable is three per cent to 10 per cent or anywhere in between . . . things have gotten a little bit too far ahead of themselves.

“It is becoming tougher and tougher to find undervaluation” for a value investor, says Mr. Vinokur. Nevertheless, he goes on to say there are still certain stocks that are undervalued, offer a margin of safety, high returns on equity, and large moats of cash to insulate them. The analyst says in his stock picking, he is always looking for a company’s edge, such as a certain technology, economy of scale, brand identity, or market share. “The ability to compete, eke out productivity and set themselves apart from the competition is in my mind extremely important.”

Weak Q1 sales knock consumer stock into bargain bin

It makes sense, then, that his first ‘best buy’, Foot Locker Inc. (NYSE—FL), is front runner in its field and has left a deep footprint in consumers’ minds.

“Anecdotally and from research, when people go to buy athletic footwear, one of the first places that is top of mind is Foot Locker.” The company almost exclusively deals in athletic footwear, carrying a variety of shoe brands and selling them through nine different store banners, including its flagship, Lady Foot Locker, Kids Foot Locker, and Champs. Although it is mostly active in North America, Foot Locker operates in 23 countries, reaching from Europe to New Zealand. Foot Locker sold about US$8 billion worth of athletic shoes last year, out of a US$84-billion market worldwide.

“These guys have been growing their sales, growing their operating margins, and growing their return on equity,” says Mr. Vinokur, who stresses that retail sales and retailers in general have faced shrinking margins. The company has improved sales per square foot at a rate of five per cent to 10 per cent annually by revamping and closing down struggling locations.

Beyond brand recognition, he attributes Foot Locker’s popularity to well-trained staff who know their inventory well and can make solid recommendations based on the customer and intended use. “The buying experience . . . for whomever is typically a good one.”

Mr. Vinokur points out that as of early May, this consumer goods stock traded at more than US$76 before weak first-quarter sales growth knocked it down by 30 per cent. However, management expressed optimism that new products in the second half of 2017 would drive up sales.

The analyst’s second ‘best buy’ is Care Capital Properties Inc. (NYSE—CCP), a U.S. real estate investment trust that owns retirement homes as well as skilled nursing facilities and specialty hospitals for the elderly.

The company has a very strong dividend yield of 8.7 per cent, he notes. Because it does not operate any of the facilities and merely acts as a landlord, their capital expenses are very low, the analyst adds. Although he was already a fan of Care Capital before, Mr. Vinokur says the stock is especially compelling now since it plans to merge with peer Sabra Health Care REIT (NASDAQ—SBRA). “This is a huge opportunity for both operators to become much bigger and more profitable.” The two parties hope to close the deal, under which each CCP share would be exchanged for 1.123 shares of the new entity (which will keep the Sabra name), before 2017’s end.

The analyst says the constantly rising number of seniors who need help to live their daily lives bodes well for Care Capital’s business. At present, the company’s market capitalization is just 10 times the pro forma combined funds from operations from the post-merger business, Mr. Vinokur adds.

This is an edited version of an article that was originally published for subscribers in the June 23, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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