What are we looking for?
As expected, cyclical sectors have been hit harder than defensive ones in the past month. Switching now to defensive stocks, which are far less correlated than cyclicals to the overall economy, may limit losses in the shorter term, but also future gains during a rebound. On the expectation of an eventual slowdown in the number of COVID-19 cases, it may be prudent for investors to keep cyclical stocks on their radar.
Today, we will be looking at cyclical large caps in Canada with a focus on companies that have a good track record in the past five years. Please note that all financial ratios are reported at the end of the previous quarter and do not reflect the impact of low oil prices and COVID-19.
The screen
We screened Canadian companies from the consumer discretionary, energy, financials and materials sectors, focusing on the following criteria:
- Market capitalization greater than $3.5-billion;
- Five-year average return on capital higher than 8 per cent – we want to find profitable companies that have a good return on investment in the long term;
- Sales growth higher than 6 per cent over 24 months – a great company should have been able to grow its revenue in the past 24 months;
- Net operating profit growth higher than 20 per cent over 24 months – we want to see growth in the bottom line while excluding the impact of interest rates and taxes.
For informational purposes, we have also included recent stock price, dividend yield and one-year price return.
More about Inovestor
Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks and American depositary receipts).
| TICKER | NAME | PRICE ($) | MKT CAP ($MIL.) | SALES CH. 24M (%) | RETURN ON CAPITAL 5-YEAR AVERAGE (%) | NET OPERATING PROFIT Ch. 24M (%) | 1Y PRICE RTN. (%) | DIV. YIELD (%) | SECTOR |
| KL-T | Kirkland Lake Gold Ltd. | 36.75 | 10540 | 88.7 | 19.5 | 266.3 | -17.7 | 1.8 | Materials |
| TIH-T | Toromont Industries Ltd. | 58.32 | 4780 | 56.5 | 17.5 | 63.9 | -13.2 | 2.1 | Industrial – Commercial Svcs and Supplies |
| IAG-T | Ia Financial Corporation Inc. | 37.05 | 3963 | 26.6 | 12.8 | 22.2 | -26.7 | 5.2 | Financials – Insurance |
| RBA-T | Ritchie Bros. Auctioneers Inc. | 40.91 | 4480 | 120.8 | 11.9 | 46.1 | -9.5 | 2.6 | Industrial – Commercial Svcs and Supplies |
| SLF-T | Sun Life Financial Inc. | 36.44 | 21391 | 22.1 | 11.0 | 21.2 | -27.6 | 5.7 | Financials – Insurance |
| MFC-T | Manulife Financial Corporation | 13.62 | 26540 | 37.0 | 10.6 | 173.1 | -40.6 | 8.2 | Financials – Insurance |
| WSP-T | Wsp Global Inc. | 64.08 | 6800 | 28.4 | 8.8 | 46.4 | -11.7 | 2.3 | Industrial – Capital Goods |
What we found
Kirkland Lake Gold Ltd., Toromont Industries Ltd. and IA Financial Corp. Inc. are the companies with the best five-year average return on capital while showing strong operating profits and sales growth. We believe these stocks in particular are worth further investigation by investors.
Note that three of the seven stocks on our list are life insurance companies, which are negatively affected by lower interest rates, but they also have strong capital ratios that will help them weather the current environment.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
