Update 496: Low P/E Stocks, Housing Market, Companies Mentioned in the Past
21Jan23
Dear Friends of Purple Chips,
On Thursday the Dow was at 33,100, barely changed from a few weeks ago. The main preoccupations at this time are rising rates and recessions. In this weekend's video, we look at the following:
We point out a few low PE multiple stocks with high yields;
The North American housing market;
We review some companies that we mentioned in the past: DIRTT, Goodfellow and Fairfax;
Our next video is on February 4th.
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Stocks mentioned: DRT (TSX) DRTT (NASDAQ) GDL (TSX) FFH (TSX)
Transcription of Update 496:
Welcome to Purple Chips Update number 496 for January 21st, 2023. I'm John Schwinghamer, the author of Purple Chips. Please pause the video to read our disclaimer.
On Thursday the Dow was a 33,100 - barely a change from where it was two weeks ago. And we're now starting to see Q4 earnings come out and there still haven't been a lot of downward revisions. This should start happening over the next few weeks and there's a good chance that this will have a negative effect on stocks. I think the most vulnerable stocks will be the ones that have high multiples. When I see a stock that has a PE multiple of 20 to 25 times that tells me that the risk level is high because this company will have to grow their earnings at 20 to 25% just to justify the high multiple. In addition, because bonds are now paying good interest rates, you're attracting a lot of capital away from the stock market; when interest rates rise, stock multiples go down. The good news is that there are many stocks that are trading at low multiples and paying good dividends.
In this slide, I've listed a few stocks with multiples lower than 10 times that pay good dividends. Most of the stocks that I listed here are in Canada with the exception of Unum which is on the US side. It's not an exhaustive list, so there are many others like this. Please also note that for full disclosure, I do own some of these stocks.
Getting back to the market. There are a lot of doom and gloom comments out there. But please recall that the stock market is amazingly resilient and does not usually go straight up or down. And more importantly, even if the market sells off a bit, it doesn't mean that an undervalued stock will go down. Here are the stocks that are trading at low valuations.
And in the spotlight this week we look at the housing market in North America. Please pause the video to read through this. My view of the housing market is that when interest rates are rising, housing values stay flat or come down. The last 20 years have been very unusual in the Canadian housing market because most real estate has doubled or tripled in value, whereas the average historical gain in real estate is closer to 5% per annum; and using the rule of 72, 5% per annum means about 15 years roughly to double your money.
There were no changes in any of our positions for two weeks.
And this week, I thought it would be good to give you an update on a few stocks that we've talked about over the last couple of years that weren't Purple Chips. Some have done well and some haven't.
And first the bad news, Dirtt Environmental. About two years ago I highlighted Dirtt Environmental as a riskier investment that had a good chance of rising because there were some hedge funds that had taken a large position in the stock. I should have known that any company with a name like Dirtt is not destined for great things. My mistake.
The stock was around Canadian $3 at the time and based on my experience, I figured these hedge funds had so much invested that they had a plan that would add value. Skip ahead 2 years and the stock is at $1.20, which is up from the low of 34 cents not long ago. And the hedge funds and some new insiders have been increasing their shareholding so there may still be hope for this stock. From my perspective, the stock could appreciate more but it's still a risky trade. In this case, I'm just looking to salvage whatever I can.
Now to Goodfellow. I started talking about this company four years ago when it was around $7. Today it's at $15.45. I liked it because the stock was trading at 50% of its accounting book value at the time. Today the liquidation value is closer to $30 a share when real estate assets are taken at market value. The shares have risen lately because in November, the company announced that it would buy back up to 450,000 shares - and by the way, that's 10% of the outstanding float on this stock. I think this was a smart move that will help the stock get closer to its book value which is currently at $21.69. Now that's the accounting book value; that's not the liquidation value - the liquidation value is higher. Now eventually this stock should be worth $25 plus, and it pays a variable dividend that's based on profits. And last time I looked at stock was paying about 90 cents in dividends. So pretty interesting.
Next, we have Fairfax. Prem Watsa is the Chairman and CEO of Fairfax, a property insurance and financial company. In the summer of 2020. he announced that he was investing 100 million of his money to buy the stock at around $400 a share. I mentioned that and said that it was a good buy because this company has a good reputation and he was investing a serious amount of his own money in this stock. So there was a good chance to be right Two and a half years later, the stock reached $837. The moral of the story is that insiders are usually right when they say that their stock is undervalued. It also takes a few years to see the full value of a stock.
My next video will be on February the fourth - and we plan to modify how we communicate with you. So after video number 500, will be moving to a "blog style" / "interview" that promises to be more flexible and more interactive. So stay tuned for that. And if you have any questions about this video or about Purple Chips, please don't hesitate to contact me at info@purplechips.com.
So that's it for this week. I'm John Schwinghamer - thank you for listening and have a great weekend.
Transcribed by https://otter.ai