On Friday, markets recovered somewhat as the S&P 500 rose 1.4% and Toronto rose 0.6%
Visa was up 4.7% and Amazon was up 4.0% and so perhaps Thursday was the day to grab these. But it is never clear when these dips have hit a low.
Linamar, however was down another 2.2% to $53.74. I was just reading their Q2 report which very much reinforced my thinking that this stock is way under valued. Well, perhaps I am getting schooled in the ways of cyclic stocks which can be dangerous to buy based on past earnings when they are about to move into a period of sharply lower earnings or losses. We shall see. But here I see a stock that earned $5.40 in the first half of 2018. If that is annualized to $10.80 then this stock is trading at just 5.0 times earnings. Yahoo finance shows the forward P/E at 5.2. Adjusted earnings per share were $8.09 in 2017 and $7.92 in 2016. But certainly the company has had periods of very lower earnings per share in the past including 2009 when it barely made a profit at all, 2 cents per share.
I also look at its book value per share of $53.71. So it is trading precisely at book value. Now, book value can be meaningless in some cases but looking at the balance sheet and the history of profitability, I believe book value here is relevant and significantly understates what the company is worth. As a thought exercise, imagine you had built up a popular retail store or restaurant with growing sales that was averaging about a 20% return on equity: Would you then allow others to buy in at anything close book value?
Insider trading however looks a bit negative with two insiders selling in the past few weeks. And Q3 could certainly show some negative impacts from trade uncertainty. With the new NAFTA (USMCA) agreement, I though Linamar should recover but it rose only modestly on that news and has since given back that gain.
I can’t be certain, but I think Linamar is the kind of company Warren Buffett would love to buy if it were for sale. It has a long successful record under the management of the founding family. It seems somewhat similar to his Precision Castparts company.
Overall, certainly Linamar looks like a bargain to me. I have a fairly large percentage of my portfolio in this company and therefore perhaps should not add to it. Nevertheless I did add modestly to my position with a small purchase on Thursday and again on Friday.
Turning to housing, the Teranet index of new home prices for September was flat versus August and up 2.1% from a year earlier. The Edmonton market is the most important in regards to Melcor. Edmonton was flat in September but up 3.4% in the past six months and down 0.5% from one year ago. Calgary was down 0.1 in September versus August and on a seasonally adjusted basis is down in the past three months and down 1.3% in the past year. Overall, it appears that new home prices in Alberta are relatively flat with perhaps a very modest downward bias. What is more important to Melcor is the pace of new home sales and home building permits which I also mention whenever I see statistics on that.
We have now entered the Q3 earnings reporting season. Wells Fargo (no longer on our list) has already reported and beat expectations.