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Zarlink motherboard tuner, delivering bandwidth-intensive high-speed broadband access and high-definition television services. (Zarlink Semi-Conductor/Zarlink Semi-Conductor)
Zarlink motherboard tuner, delivering bandwidth-intensive high-speed broadband access and high-definition television services. (Zarlink Semi-Conductor/Zarlink Semi-Conductor)

The possible turnaround of poor performers Add to ...


George Athanassakos, professor of finance at the University of Western Ontario's Richard Ivey School of Business, continues his search for value by looking for stocks that have done poorly for a long, long time and analyzing them for a potential turnaround.


A few months ago, Prof. Athanassakos screened TSX stocks in this column to identify those with both the lowest quartile price-to-earnings ratios and no analyst coverage, on the theory that these were stocks that had become oversold and that generally flew under investors' radar, both factors that he believes contribute to undervaluation.

Now, Prof. Athanassakos seeks to further unlock the best bargains by examining stocks that not only have a low P/E and little exposure through analysts, but also have the worst five-year returns.

"I am doing some research which shows that shares that have fallen the most in value over the previous five years tend to be most undervalued and those that have risen the most over this period to be the most overvalued," Prof. Athanassakos said. "By buying the biggest losers, say the lowest 10 per cent, one can outperform the market."

The logic is that it takes a long time for a negative story to fully weigh down a stock, a long time for a company to make changes to reverse its fortunes and a long time for those efforts to become reflected in a share price.

"It can be undervalued for a number of years," Prof. Athanassakos said. "That's why value

investors take a long-term view."

The professor screened the TSX for stocks that are priced between $1 and $20; have declined in price over the past five years by

between 10 per cent and 98 per cent; have a five-year decline in dollar terms of up to $20; have a P/E of less than 20; have a price-to-book value ratio of less than 2; and have daily trading volume of at least 500 shares.


Perhaps the best combination of low valuation and five-year underperformance comes from Zarlink Semiconductor Inc., which is off 71 per cent over the past five years and has a P/E of 11.2, third-lowest in the screened group. Zarlink has been considered a weak performer with a relatively solid balance sheet, a trait that might suggest there is value to be unlocked. The company recently tapped that balance sheet to acquire Legerity Holdings Inc.; analysts are cautiously bullish, but the jury is still out on the purchase.

"As a value investor, I would take this screen and then look to see if these stocks are really undervalued," the professor

advised, recommending investors closely examine financial performance and the balance sheet. "They may have fallen because they are truly bad companies."

He noted that the biggest name among stocks that fit the screen, publishing giant Torstar Corp., has gotten a vote of confidence from one of Canada's biggest names in value investing: Fairfax Financial Holdings Ltd. has been buying up shares this year.

Company Sym $ Price as of Aug. 24 % chg PE Div. yield Market cap ($-mil) Price to book val (most rec Q)
Claude Resources CRJ-T 1.13 -0.9 12.7 0 106 1.15
Cossette Com. Gp KOS-T 12.22 2.7 14.7 0 204 1.48
Dalsa Corp. DSA-T 10.15 -1 16.5 0 193 1.05
Delphi Energy DEE-T 1.35 -2.2 11.5 0 84 0.53
Enerchem Int'l ECH-T 2.65 2.3 6.6 0 40 0.74
Firan Tech. Gp FTG-T 1.5 -0.7 12.6 0 27 1.33
Fortress Energy FEI-T 1.67 -2.3 15.6 0 153 1.52
Rand A Tech. RND-T 2.01 -0.5 10.6 0 40 1.59
Torstar Corp. TS.B-T 19.75 0.7 17.2 3.8 1545 1.71
Zarlink Semicond. ZL-T 1.44 -0.7 11.2 0 185 1.22


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