In the quarter ended October 9, 2011, Couche-Tard’s earnings per share rose 6.9%, to $0.62 from $0.58 a year earlier (all figures except share price and market cap in U.S. dollars).

Sales rose 24.1%, to $5.2 billion from $4.1 billion. The gains came from higher fuel prices, the stronger Canadian dollar and higher merchandise sales. The company gets 30% of its sales by selling merchandise.

Couche-Tard continues to grow through acquisitions. For example, it recently bought 33 convenience stores in Louisiana from Exxon Mobil (symbol XOM on New York) for an undisclosed amount. Acquisitions add risk, but Couche-Tard does a good job of integrating the companies and assets it buys.

Motorists could cut their fuel consumption in response to higher gasoline prices. That would hurt sales. However, the company is introducing new products with higher profit margins, including new drinks and improved fresh and takeout food.

The stock trades at 13.1 times the $2.32 a share that the company should earn in 2012.

Alimentation Couche-Tard is still a buy.

DOREL INDUSTRIES $24.54 (Toronto symbol DII.B; TSINetwork Rating: Extra Risk) (514-731-0000; www.dorel.com;Shares outstanding: 32.6 million; Market cap: $800.0 million; Dividend yield: 2.4%) makes a wide range of products, including ready-to-assemble home and office furniture; juvenile products, such as car seats, strollers, high chairs, toddler beds and cribs; home furnishings, and recreational products, including bicycles. It has 4,700 employees and plants in 19 countries.

In the three months ended September 30, 2011, Dorel’s sales rose 1.1%, to $575.8 million from $569.5 million a year earlier (all figures except share price in U.S. dollars). The recreational/leisure division’s sales rose 21.6%, mainly on strong demand for bicycles. That offset lower sales at the other divisions.

Still, earnings per share fell 24.7%, to $0.71 from $0.93 a year earlier, mostly due to rising shipping and raw-material costs. The company didn’t pass on all of these price increases to its customers due to continuing economic weakness in the U.S. and Europe.

Dorel has just completed the purchase of a 70% interest in Silfa, which operates 40 Baby Infanti stores in Chile and 12 in Peru. Silfa has annual sales of about $58 million, and should immediately add to Dorel’s earnings. The move is part of Dorel’s plan to expand further in the fast-growing South American market.

Dorel holds cash of $25.8 million, or $0.79 a share. Its long-term debt of $292.0 million is a manageable 36.5% of market cap. The stock trades at a low 6.8 times forecast 2012 earnings of $3.60 a share.

Dorel Industries is a buy.

Pershing has a long history of making undervalued companies more profitable. It often does this by encouraging management to sell real estate or underperforming divisions. For example, in 2006 Pershing helped pressure Wendy’s International Inc. to sell shares in its Tim Hortons coffee-and-donut chain and use the proceeds to buy back stock.

CP aims to become more efficient by investing in better trains and other equipment. Pershing’s involvement is an added plus.

CP Rail is still a buy.

The volatile markets of the past few years have offered up many tempting stocks at bargain prices. But it’s important to remember that not all bargain stocks are created equal.

Investment success depends more on the quality of your investments than on the price you pay for them. That’s why you have to be very selective about which undervalued stocks you buy.

When you start investing, you may think the secret to investment profit is “buy low, sell high.” But that’s hard to do. You’ll often buy just before prices fall, or sell just before they rise. If you stick to high-quality value stock picks, however, your short-term gains and losses can average out and you’ll still profit greatly in the long run.

I’ve just written a new free special report to help you uncover the bargain stocks with the greatest profit potential—and avoid the ones that could steer you into a financial disaster.

You can download your copy of my new report right away: Bargain Stocks: Your Guide to Finding the Best Undervalued Stocks.

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Here’s what you get in Bargain Stocks: Your Guide to Finding the Best Undervalued Stocks:

• You discover 9 keys to spotting the best undervalued stocks for long-term gains. A good bargain stock is first and foremost a high-quality stock, so we look at three sets of factors—financial factors, safety factors and survival/growth factors.
• High-quality bargain stocks are rare and hard to find. You’ll see how to use three financial ratios to uncover quality companies that have consistent histories of sales and earnings growth.
• You’ll also learn why it’s not always wise to try and snap up bargain stocks at below-market prices. Every investment involves a two-part decision and that decision plays a big role in determining your returns.
• Plus we reveal a proven strategy to help you spot the hidden assets that can make companies prime takeover targets. These can be the most attractive bargain stocks.
• You also discover the identity of two bargain stocks that we rate as buys—and another so-called bargain stock that you should avoid at all costs!

This report on bargain stocks is the latest in a series of reports I’ve written as free downloads on TSI Network. Previously, I wrote “Dividend Stocks: How High Dividend Stocks Can Supercharge Your Income Investing,” which showed investors how zero in on the best Canadian dividend stocks for your portfolio.

To get started, click here to download your copy of Bargain Stocks: Your Guide to Finding the Best Undervalued Stocks. I’d also encourage you to share the report with a friend.

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “How we use three financial ratios to uncover bargain stocks.”

When you’re looking for bargain stocks, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

High-quality bargain stocks like these are rare and hard to find, even when the markets are down. But when you know what to look for, you can discover them. We use these three financial ratios as a guide to spotting them:

1. Price-earnings ratios: The p/e is the ratio of a stock’s market price to its per-share earnings. As a rule, the lower the p/e, the better, and generally a p/e of less than 10 represents excellent value.
   
   We calculate each p/e ratio using the most recent financial data. But we also analyze the “quality” of the earnings. For instance, we disregard a low p/e ratio if it is due to a one-time capital gain on the sale of assets, since the gain temporarily bloats the “e”. (That shrinks the p/e.) Similarly, we add back any one-time earnings write-offs, so we don’t miss out on bargain stocks that would have had low p/e ratios if not for one-time write-offs.
   
   You need to remember that a low p/e can be a danger signal. A low share price in relation to earnings may mean earnings are falling or about to fall. That’s why it’s crucial to view p/e ratios in context. Instead, we check to see if other financial ratios confirm or contradict their value.

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2. Price-to-book-value ratios: The book value per share of a company is the value that the company’s books place on its assets, less all liabilities, divided by the number of shares outstanding. Book value per share gives you a rough idea of the stock’s asset value. This ratio represents a “snapshot” of an instant in time, and could change the next day. Asset values on a company’s books are the historical value of the assets when they were originally purchased, minus depreciation. (Certain types of assets on a balance sheet might have actual market values well above historical values, as sometimes happens with real estate or patents.)
   
   When we find a stock with a low price-to-book value, we look to see if the price is too low, or if its book value per share is inflated. Often, we find that the stock price is too low. But, sometimes, the company’s assets are overpriced on the balance sheet, and at risk of being written down.
3. Price-cash flow ratios: Cash flow is actually a better measure of a company’s performance than earnings. While reported earnings are subject to accounting interpretation and can be restated in later years, cash flow is a measure of the cash flowing into a company less cash outlays.
   
   Simply put, it’s earnings without taking into account non-cash charges such as depreciation, depletion and the write-off of intangible assets over time. Cash flow is particularly useful in valuing companies in industries in which depreciation and depletion charges are based on the historical value of assets instead of current values — industries such as oil & gas and real estate. As with any financial ratio, you have to look at it in context.

The final factor: Look at the quality of the company’s business

Once we’ve found a company that looks attractive using the financial ratios detailed above, we look to see if it has a solid business in an attractive industry, with a history of sales and earnings, if not dividends.

Even a stock with attractive financial ratios can stagnate if the company or its industry is in a difficult period. But if it’s a high-quality company, it’s likely to hold up better than other value-priced alternatives. Moreover, it may be first to move up when conditions improve.

If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 20 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s more, you can get this issue free. Click here to learn how.

Smucker has also agreed to license Sara Lee’s coffee-making technology for an additional $50 million over the next 10 years. To put these figures in context, Sara Lee earned $338 million, or $0.54 a share, in the fiscal year ended July 2, 2011.

This sale is part of Sara Lee’s plan to break itself into two separate, publicly traded companies. One of these firms will consist of Sara Lee’s international coffee and tea businesses. The other will focus on its North American packaged meat operations. The company aims to complete the breakup in the first six months of 2012.

Breakups like this help unlock hidden value, and generally lead to above-average results for a period of years.

Sara Lee is a buy.

The plan’s cost has held back Maple Leaf’s earnings and share price. However, these moves will cut its costs, and help it better deal with rising prices for raw materials, such as pork, wheat and corn, as well as the higher Canadian dollar, which has hurt exports. In addition, the resulting productivity improvements will help it compete with large multinational food producers.

We like both companies, but Maple Leaf offers better value. At its current price, its stake in Canada Bread is worth roughly $7.20 per Maple Leaf share. That means you get Maple Leaf’s meat-processing operations, which account for nearly two-thirds of its revenue, for just $3.80 a share.

MAPLE LEAF FOODS INC. $11 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 144.4 million; Market cap: $1.6 billion; Price-to-sales ratio: 0.3; Dividend yield: 1.5%; TSINetwork Rating: Average; www.mapleleaf.ca) is Canada’s largest food-processing company. It mainly makes its products, which include fresh and prepared meats and poultry, under the Maple Leaf and Schneider brands. This business accounts for roughly 65% of its revenue.

The company also makes fresh and frozen bread, pastries and pasta through its 90.0% stake in Canada Bread Co. Ltd., which supplies 30% of Maple Leaf’s revenue. The remaining 5% comes from its agribusiness division, which raises hogs for the company’s processed-meat operations. This division also recycles animal by-products into other materials, such as soaps and biodiesel fuel.

In 2006, Maple Leaf began to shift its focus to more-profitable processed foods, and cut back its fresh pork production. It also sold its animal-feed business and most of its fresh-meat operations.

Still recovering from listeriosis crisis

As a result of this shift, Maple Leaf’s sales fell from $5.3 billion in 2006 to $5.21 billion in 2007. Sales crept up to $5.24 billion in 2008, despite a listeriosis outbreak at its Toronto meat-processing plant. Thanks to Maple Leaf’s quick response to this crisis, sales fell only slightly in 2009, to $5.22 billion. In 2010, sales fell to $5.0 billion, because it sold a pork-processing plant in Ontario.

Maple Leaf’s losses ballooned from $20 million, or $0.16 a share, in 2006 to $37 million, or $0.29 a share, in 2008, largely due to costs related to the listeriosis outbreak. Maple Leaf earned $52 million, or $0.40 a share, in 2009, but its earnings fell 50.0% to $26 million, or $0.19 a share, in 2010. Excluding unusual items, earnings per share rose 33.3%, from $0.57 in 2009 to $0.76 in 2010.

In addition to building new plants, Maple Leaf’s restructuring involves simplifying its product lines and focusing on its most profitable foods. (Right now it makes over 4,000 types of prepared meats.) This will also cut its packaging costs. As well, the company is installing a new computer system that will give its managers more timely information, and help them make better decisions.

In all, Maple Leaf plans to spend $757 million on its restructuring. However, it expects the plan to increase its gross margin (gross profits as a percentage of sales) from 7.3% in 2010 to 9.5% in 2012. It aims to raise this to 12.5% when it completes its restructuring in 2015.

Maple Leaf is borrowing the money it needs to complete its restructuring. That’s why its long-term debt rose from $389.1 million at the end of 2010 to $746.2 million on June 30, 2011. That’s a high, but still manageable, 47% of its market cap.

The company should earn $1.01 a share in 2011. The stock trades at 10.9 times that estimate. The $0.16 dividend yields 1.5%.

Maple Leaf Foods is a buy.

CANADA BREAD CO. LTD. $43 (Toronto symbol CBY; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 25.4 million; Market cap: $1.1 billion; Price-to-sales ratio: 0.7; Dividend yield: 1.9%; TSINetwork Rating: Above Average; www.canadabread.ca) is Canada’s second-largest producer of baked goods, after Weston Bakery. It also makes pastas and sauces. Its main brands include Dempster, Tenderflake and Olivieri.

Canada Bread’s sales rose from $1.3 billion in 2006 to $1.7 billion in 2008. The gain largely came from bakeries the company bought in the U.K. and U.S. However, sales fell to $1.6 billion in 2010, mainly due to unfavourable exchange rates.

Before unusual items, the company’s earnings per share rose from $3.09 in 2006 to $3.31 in 2007. Its 2008 earnings fell to $2.87 a share, but rebounded to $3.20 in 2009. The lower 2010 sales pushed down its 2010 earnings to $2.85 a share.

A big part of Maple Leaf’s restructuring is Canada Bread’s plan to build a new, $100-million bakery in Hamilton, Ontario. This plant, which opened in September 2011, is Canada’s largest bakery. The new plant also let Canada Bread close three outdated Toronto facilities.

In addition to making Canada Bread more efficient, this new bakery will help it launch new products. For example, it recently started selling a new line of breads, called Dempster’s Country Originals, that have no artificial preservatives, artificial colours, artificial flavours or high-fructose corn syrup. These products will help Canada Bread take advantage of rising demand for healthier food.

Low liquidity a risk factor

The stock trades at 13.0 times the $3.30 a share that Canada Bread will likely earn this year. The $0.80 dividend yields 1.9%. However, Maple Leaf’s large stake in the company hurts its liquidity.

Canada Bread is a hold.

One of these new firms, McGraw-Hill Markets, will sell a variety of financial-information products. This business will include Standard & Poor’s, which provides credit ratings on bonds, and McGraw-Hill’s J.D. Power market-research firm. McGraw-Hill Markets will have annual revenue of $4 billion. International sales will account for 40% of that total.

The other company, McGraw-Hill Education, will publish textbooks for schools and colleges. This business will have $2.4 billion of annual revenue.

The company is still working on the details of the split, but it aims to hand out shares of McGraw-Hill Education as a special dividend by the end of 2012. This will probably be a tax-free transaction: shareholders will not have to pay capital-gains taxes until they sell their new shares.

Break-ups like this tend to work out well for investors, because the total value of the two new companies usually exceeds the value of the former parent over time.

McGraw-Hill is still a buy.

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Don't miss your chance to download Pat McKeough's new FREE report, "Bargain Stocks: Your Guide to Finding the Best Undervalued Stocks." In this exclusive report, Pat will tell you how to zero in on the undervalued stocks with the greatest profit potential—and avoid the ones that could steer you into a financial disaster. Click here to download your copy and get started right away.

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MAPLE LEAF FOODS INC. $11 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 140.0 million; Market cap: $1.5 billion; Price-to-sales ratio: 0.3; Dividend yield: 1.4%; TSINetwork Rating: Average; www.mapleleaf.ca) is Canada’s largest food-processing company. It mainly makes its products, which include fresh and prepared meats and poultry, under the Maple Leaf and Schneider brands. Maple Leaf also owns 90.0% of Canada Bread.

In the three months ended March 31, 2011, Maple Leaf earned $10.5 million. That’s down 47.0% from $19.9 million a year earlier. Earnings per share fell 42.9%, to $0.08 from $0.14, on more shares outstanding. Without one-time items, such as restructuring costs, earnings per share would have jumped 157.1%, to $0.18 from $0.07. Sales fell 3.7%, to $1.15 billion from $1.19 billion a year earlier, mostly because the company sold some operations. If you exclude contributions from these businesses, sales would have risen 3.7%.

Maple Leaf’s long-term debt of $691.3 million is a manageable 40% of its market cap. It recently secured an $800 million, four-year line of credit. That will help it pay for Canada Bread’s new bakery.

At current prices, Maple Leaf’s stake in Canada Bread is worth roughly $7.50 per Maple Leaf share. That means you get Maple Leaf’s meat-processing operations, which account for 63% of its revenue, for just $3.50 a share.

Maple Leaf Foods is a buy.

CANADA BREAD CO. LTD. $47 (Toronto symbol CBY; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 25.4 million; Market cap: $1.2 billion; Price-to-sales ratio: 0.8; Dividend yield: 0.5%; TSINetwork Rating: Above Average; www.canadabread.ca) is Canada’s second-largest producer of baked goods, after Weston Bakery. It also makes pastas and sauces. Its main brands include Dempster, Tenderflake and Olivieri.

A big part of Maple Leaf’s restructuring is Canada Bread’s plan to build a new, $100-million bakery in Hamilton, Ontario. This plant, which will be Canada’s largest bakery when it begins operating in July 2011, will let Canada Bread close three outdated Toronto plants.

Meanwhile, Canada Bread lost $966,000, or $0.04 a share, in the three months ended March 31, 2011. However, that’s mainly because of $20.1 million in restructuring charges. It earned $13.0 million, or $0.51 a share, a year earlier. Sales fell 2.7%, to $371.8 million from $381.9 million, after the company sold its fresh sandwich business in the latest quarter.

The stock trades at a reasonable 14.8 times Canada Bread’s likely 2011 earnings of $3.18 a share. However, Maple Leaf’s 90.0% interest hurts the stock’s liquidity.

Canada Bread is a hold.

Spinoffs are in many ways the opposite of new issues. Companies often do spinoffs when they feel it isn’t a good time to sell. Instead, they choose to hand out shares of the new firm to their shareholders. That often results in buying opportunities in undervalued stocks.

(In a just-published issue of Wall Street Stock Forecaster, our newsletter for investing in the U.S. markets, we update our buy/sell/hold advice on a spinoff whose shares have soared 79% for us since September 2010. See below for further details on this potentially undervalued stock’s outlook.)

Why spinoffs are often undervalued stocks in disguise

When a spinoff begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant, stockholders who have limited expectations for it, and who are willing to sell when they get around to it. Moreover, there is often little, if any, brokerage research available on the new company.

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The only investors who might be willing to buy a new spinoff are those who have taken the trouble to read the voluminous material that companies hand out as part of the spinoff process. But on the whole, it pays to follow the lead of these seekers of undervalued stocks, and to hang on through months of sluggish trading while reluctant spinoff holders exercise their urge to sell.

Undervalued stocks: This spinoff is looking for growth in smartphones and tablet computers

In the current issue of Wall Street Stock Forecaster, we update our buy/sell/hold advice on Agilent Technologies Inc. (symbol A on New York).

Agilent makes testing systems that help improve electronic products, such as cellphones and computer networking equipment. The company was a unit of Hewlett-Packard Co. until 1999, when Hewlett spun it off as a separate company. In the current Wall Street Stock Forecaster, we take an in-depth look at the company’s development since the spinoff.

Agilent is now working on products that test devices designed for new, high-speed wireless networks, such as smartphones and tablet computers. That adds to the company’s growth prospects, especially as countries like China and India increase the speed and capacity of their wireless networks.

Get our complete analysis of Agilent—including our clear buy/sell/hold advice—FREE

As I mentioned, the stock has risen over 79% for us since September 2010. In the latest Wall Street Stock Forecaster, we look to see if it can go even higher.

We’ve based our analysis on all of Agilent’s fundamentals, including its latest sales and earnings, its debt level, and our outlook for its recent move into smartphones and tablet computers. We also look to see what effect Agilent’s soaring share price has had on its price-to-earnings (p/e) ratio, an indicator that can tell you whether or not a company is an undervalued stock.

We’ve concluded our analysis with clear advice on whether you should buy, hold—or sell—this unique investment.

You can get our full analysis, including our clear buy/sell/hold advice on Agilent and 18 other stocks in the fast-moving U.S. market in the latest Wall Street Stock Forecaster. What’s more, you can get this issue absolutely free when you subscribe today. Click here to learn how.