Three truly medium risk ideas

Last week, I poked gentle fun at the risk rating methodology used by my employer. Today, I look at income investments that I would consider to be medium risk. I make this determination based on a low P/E ratio, a low Price/Book ratio, a low Debt/Equity ratio and a low Payout ratio.

I began by double-checking the companies that I presented last week. Parkland (PKI.UN) has a P/E ratio of 18.3, a debt/equity ratio of 1.75, price/book ratio of a little over 3 and a payout ratio of around 200%. The high level of each of these ratios is due to unusually low earnings. That is what makes purchasing shares, in my mind, speculative. I equate that with high risk.

WesternOne (WEQ.UN) is in much the same situation as Parkland. Net earnings over the most recent 12 months were negative, causing all the ratios to be undefined. Purchasing shares at this time is speculative on the return of profitability of the company. Further, at a market cap of $57 million, this is a very small (regional) company. I would definitely consider it a high risk investment.

I was slightly surprised to see that Davis+Henderson (DHF.UN) fits my criteria for a medium risk investment. The P/E is a low 9.8 with price/book at a reasonable 1.73 and debt/equity is low at 0.36. The payout ratio may cause some uncertainty at 98%, forcing the company to change its distribution policy when it becomes taxable in January 2011. However, with a yield of 10%, it should still be able to provide at least 6.5% yield after paying taxes. As long as expectations are tempered, this opportunity qualifies for me as medium risk.

There are two other companies that I previously profiled, that I also think should qualify as medium risk investments. The first is Canfor Pulp (CFX.UN). Canfor has a P/E ratio of 9.7, a price/book ratio of 0.95, a debt/equity ratio of 0.21 and a payout ratio of 67%. The company is a reasonable size, at over $500 million. While these numbers are all very impressive, they are due to a large increase in earnings over the last 24 months.

The final company I will look back on is Richards Packaging (RPI.UN). The company has a P/E ratio of just 7.2, a price/book ratio of 1.07, a debt/equity ratio of 0.62 and a very low payout ratio of 46%. The company is quite small still, at a little over $80 million. The share price has been made large movements over the past 18 months, although the movement has been from under $3 to over $8. That’s the kind of volatility that I like.

While no investment is truly safe, these three companies seem to be as insulated as possible from economic turmoil. It takes courage to buy companies where the future is uncertain, but that’s the reality of investing in any company, even “blue chips.”