Overlooked stocks are often among the best buys on the market. Value investors have some of the best long-term track records of all types of investors, and academic studies repeatedly show that value stocks outperform. While value stocks’ tendency to outperform the market has waned in recent years, it has persisted for such a long period of time that we expect value to return to favor at some point in the future.
The question is, Where Are you finding quality stocks to buy and hold in your family’s portfolio? While it’s tempting to go out and buy the “hot stocks” that seem attractive to you, investing your family’s money takes more discipline than that. A single bad bet can destroy your net worth. So you must choose investments carefully. In this article, I explore a Canadian bank that could boost your family’s generational wealth.
EQB
EQB Inc (TSX:EQB) is a Canadian bank that is also called ‘Canada’s challenger bank’. It’s called ‘challenger’ because
- It is relatively young and relatively small; And
- With its branchless model, it ‘challenges’ the traditional banking business model of having branches.
EQB has undergone a major growth spurt recently. Over the past five years, it has grown its annualized revenue, net income and free cash flow (FCF) to the following levels:
- Turnover: 18.8%.
- Net income: 11%.
- Book value: 15%.
These are impressive growth rates for any company and yet, as we’ll see in a moment, EQB is actually a value stock trading at low multiples.
Cheap appreciation
Despite relatively high historical growth, EQB is trading like a bargain stock, with the following multiples:
- A price-earnings ratio (P/E) of 9.4.
- A price-sales ratio of 3.1.
- A price-to-book ratio of 1.08.
- A price-cash flow ratio of 8.7
These multiples are fairly low even for stocks that aren’t growing; the price/earnings ratio is lower than that of the TSX Index (approximately 20); and EQB is in fact growing. So it appears that EQB is undervalued.
Can EQB continue to grow?
It’s one thing to note that a company looks undervalued, but it is quite another to conclude that this is the case in reality undervalued. If a company is destined to fail next year, a price-to-earnings ratio of five means nothing today. We need to know what makes a company visually cheap before we can conclude that it is Real cheap.
So what makes EQB cheap?
It doesn’t seem to be a risk issue. EQB has comfortable capital and liquidity ratios, but as a small bank it lacks the ‘systemically important’ label. This means that EQB may not receive a rescue package in a crisis.
It appears that the bank is facing limits to its growth. The Canadian financial services market is only so big, and not uncompetitive, with six major banks competing for Canadians’ money. EQB could continue to grow in Canada, but it would face an uphill battle for market share against the Big Six.
What you would like to see from EQB is an expansion into new markets – especially those with underdeveloped banking sectors, such as Latin America. That could mean real gains for the stock. These days, EQB doesn’t have such catalysts, but at 9.4 times earnings it’s probably still a decent buy.
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