In our system, Kirkland Lake Gold, Toromont Industries and IA Financial Corporation have an overall score higher than 60 which implies a positive outlook. These stocks are all clasified as quality because of their long-term track record. All stocks are classified as growth stocks as well because of their high growth in sales and profitability over the last years, but Toromont Industries is also classified as bad value because of its expensiveness determined by its price-to-book and price/earnings ratio. Kirkland Lake is identified as a low risk stock because of its low beta. In portfolio construction, gold miners are often seen as a great diversification tool because of their low correlation or even negative correlation with the market.
A GOOD PERFORMANCE SPREAD IS KEY
The performance spread is the difference between the return on capital and the cost of capital. A company with high volatility will have a cost of capital higher than a less volatile one. This is why the price/earnings for highly cyclical stocks is often low, the market wants to be rewarded by taking higher risk. A company with high return on capital while maintaining a low cost of capital creates value.
Ia Financial Corporation and Kirkland had times where their cost of capital was higher than their return on capital while it never happened for Toromont Industries. If you are looking at quality, the latter seems the best of the list.
Ia Financial Corporation was slighly destroying value in 2015, but it reversed since. The company generated a return on capital higher than its cost of capital overall, but the company is vulnerable to lower interest rates because of its business in life insurance. Also, a bear market means lower fees from their advisors, This is why IA Financial Corporation is already down more than 50% since the start of the crisis. The company is correctly priced if we consider that it will generate a return on capital of 0% in 2020 and one of 10% in the long-term which should be considered as a conservative scenario.
If we look at peers, Kirkland seems affordable because it is at the right compared to the Y axis and produce high value because it is a lot higher than the X axis. That is exactly the kind of stock that you want. On the other hand, we need to be careful because the last 12-month has been incredible for Kirkland. This may overstate the company’s sustainable performance, but it still has a great long-term track record.
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