I’m slowly in the process of expanding my investing horizons. Up to this point I’ve always stuck with tried and true solid blue chip dividend stocks with a higher dividend yield. While I have done quite well I’ve noticed two problems. First the upside is generally limited and secondly in taking profits it be hard to find where to re-invest profits. On the first point Intact Financial is a great example 2% yield but up 100% in the last 3 years. The second point I only buy stocks that are undervalued and when you investing universe is only 15 stocks it’s hard to find any. What I did was to sign up for several premium newsletters (more on that in a later post).
This stock came up on my radar thanks to Canadian Dividend Growth Investor
over at Seeking Alpha. Yield under 1% so normally it wouldn’t show up on my stock screeners. To quote his summary.
Why I like this stock
· Linamar is priced at a cheap multiple of 8.6 and it just reported double-digit growth in its sales and earnings for Q4 and 2015 overall.
- Discounted by 35%. Upside potential of 50%.
- Exceptional business performance expected to continue.
- Strong balance sheet.
Again let me insert a Fastgraphs chart. This is what I like to call a classic Fastgraphs chart, steady as she goes earnings and then kaboom the earnings take off (ignoring 2008)
Second chart is earnings growth (which drives the stock price) and normal PE ratio and the price should the stock return to it's historical PE ratio
As you can see the potential 50% price gain more than makes up for the low yield. Now before I go out and put down my hard earned savings I do have a few thoughts/questions.
1. Does earnings drive the stock price?
This is the underlying theory behind Fastgraphs. You find a strong company that for whatever reason the market is ignoring. This could be because the sector is out of favour - this happened during the tech bubble. The company could have had problems and have recovered, Manulife after 2008. It could be just a bear market. Knowing this will help you decide when to buy and how much to buy.
2. Can the stock really go higher?
This was Microsoft back in it’s heyday. It was a hot growth stock I remember one analyst who was following the stock never bought it because it always felt expensive and simply couldn’t go any higher. Needless to say this was a 10 bagger stock. Currently Facebook feels the same way.
3. The lower the price the more the opportunity for it to go up
This is the underlying theory behind Benj Gallander and Contra the Herd. A two dollar stock has a better chance of doubling than a fifty dollar stock
4. Small dividend
This is probably my biggest concern as a dividend junkie, at 1% it’s peanuts. When I bought Manulife the healthy dividend was a fall back in case I got it wrong.