Value Investors: This Stock Is Absurdly Cheap!

Why I’m attracted to the “double discount” on offer at Morguard Corp (TSX:MRC).

| More on:

A favourite investing strategy of mine involves buying companies at a discount to their tangible net equity value (NEV) that are also buying back their own shares. To see why this is a great strategy, let’s consider a company ABC with one million shares priced at $10 dollar a share. Let’s say this company owns $12 million of tangible assets (cash, shares of other companies, and real estate) without any debt.

($12,000,000 net assets) / (1,000,000 shares) = $12 of assets per share

This is already sounding like a great company to invest in, as you can buy $12 worth of assets for just $10, but let’s attempt to predict the result when that company uses its own money to buy back its shares. Let’s say the company purchases 10% of its shares. That means purchasing 100,000 shares at $10 per share for a net cost of $1,000,000.

($11,000,000 net assets) / (900,000 shares) = $12.22 of assets per share

As shown, the net assets reduced by $1,000,000 to pay for the shares, and the total number of shares reduced by 100,000. The result of which is that the remaining shares now own $12.22 of assets per share! There has been a 1.8% increase in remaining share value. The company utilizes its own money to purchase shares, which are worth $12 each for a cost of only $10, resulting in an immediate profit for the remaining shareowners.

Companies that are in this position are rare, but one of them is Morguard (TSX:MRC).

Morguard is a real estate holding company with $21.1 billion assets under management. It directly owns and invests in real estate in North America. Based on its 2019  first-quarter financial statements, it ended Q1 2019 with $304.99 per share of net assets. As of May 15, the price of the shares is $190.66, letting you buy the shares at a 37% discount to their net asset value.

((NEV per share) – (price/share)) / (NEV per share) = discount

($304.99 – $190.66) / $304.99) = 37.49%

It actually is even more attractive when you consider the company’s share-buyback program. We can look at SEDAR filings and see that the company has retired shares at a price in the $180’s per share, representing an average discount well above 30%.

The discount in the stock price could be attributed to Morguard’s exposure to Alberta and headwinds with the advent of Amazon and e-commerce. Morguard has equity exposure in two subsidiaries: approximately 33 million shares of Morguard Real Estate Investment Trust and seven million shares of Morguard North American Residential REIT.

If the company keeps buying back its shares, it should be a excellent investment over the long term, and if the share discount to the net asset value decreases from the current 37.5% to a more acceptable 10%, the shares could be sold at a healthy profit or help for the long term in the stewardship of Morguard’s enterprising CEO, Kuldip Rai Sahi.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of Amazon. Fool contributor Nikhil Kumar has no position in the companies mentioned.

More on Investing

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Is Fortis Stock a Buy for its 4% Dividend Yield?

Here's why Fortis (TSX:FTS) certainly looks like a long-term buy for its strong and growing dividend yield over time.

Read more »

ways to boost income
Investing

2 Financial Stocks That Canadian Investors Should Grab in November

Great-West Lifeco (TSX:GWO) and another financial stock have huge yields and upside potential in 2025.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Investing

Here’s the Average TFSA Balance at Age 64 in Canada

This highly diversified Vanguard retirement income ETF is perfect for passive income.

Read more »

money goes up and down in balance
Bank Stocks

Is Toronto-Dominion Bank Stock a Good Buy?

TD stock is underperforming its peers in 2024. Will 2025 be different?

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, November 26

U.S. consumer confidence and new home sales data will remain on TSX investors’ radar today.

Read more »

Dividend Stocks

Top Canadian Stocks to Buy Right Now With $1,000

Investing in stocks is not about timing but consistency. If you have $1,000 to invest, these stocks offer an attractive…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Investing

1 Way to Use a TFSA to Earn $250 Monthly Income

Here's one way long-term investors can utilize a Tax-Free Savings Account to generate $250 per month in passive income in…

Read more »

cloud computing
Dividend Stocks

Is Manulife Stock a Buy for its 3.5% Dividend Yield?

Manulife stock has been a long-time dividend winner, but the average has come down over the last few years. So…

Read more »