Why West Fraser Timber Co could appeal to contrarian value investors
Contrarian value investors are always on the look-out for shares that the market has overlooked. In times of economic uncertainty - when stock prices become erratic - good quality stocks can become cheaper. The question is whether West Fraser Timber Co (TSE:WFG) is currently one of them.
Buying good quality stocks at cheap prices is a popular stock market strategy - but it isn't always easy to tell the difference between a genuine bargain and a value trap. Often, it's the quality of the stock makes all the difference.
The West Fraser Timber Co share price is currently trading at C$87.4. And the promising news is that it has some of the traits that are often associated with two influential drivers of investment returns: high quality and a relatively cheap valuation.
To understand where they show up, here's a closer look:
Buying quality at a fair price
Good quality stocks are loved by the market because they're more likely to be solid, dependable businesses. Profitability is important, but so is the firm's financial strength. A track record of improving finances is essential.
One of the quality metrics for West Fraser Timber Co is that it passes 8 of the 9 financial tests in the Piotroski F-Score. The F-Score is a world-class accounting-based checklist for finding stocks with an improving financial health trend. A good F-Score suggests that the company has strong signs of quality.
While quality is important, no-one wants to overpay for a stock, so an appealing valuation is vital too. With a weaker economy, earnings forecasts are unclear right across the market. But there are some valuation measures that can help, and one of them is the Earnings Yield.
Earnings Yield compares a company's profit with its market valuation (worked out by dividing its operating profit by its enterprise value). It gives you a total value of the stock (including its cash and debt), which makes it easier to compare different stocks. As a percentage, the higher the Earnings Yield, the better value the share.
A rule of thumb for a reasonable Earnings Yield might be 5%, and the Earnings Yield for West Fraser Timber Co is currently 19.8%.
In summary, good quality and relatively cheap valuations are pointers to those stocks that are some of the most appealing to contrarian value investors. It's among these shares that genuine mis-pricing can be found. Once the market recognises that these quality firms are on sale, those prices often rebound.
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