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Nine Companies Creating Shareholder Wealth

By December 2, 2020 No Comments

What are we looking for?

Companies showing momentum in their fundamentals as well as low volatility.

We mix two well-known metrics in the financial world to create our screener. We want a positive change in the economic value-added (EVA) figure, which tends to coincide with a positive stock return. We also use beta to find low-volatility stocks that should produce, on average, a better risk-adjusted return.

The Screen (available here on the Inovestor’s platform)
We screened Canadian companies, focusing on the following criteria:

  • A market capitalization higher than $1-billion;
  • A positive three-month change in the EVA metric between 5 per cent and 75 per cent – the EVA gives us a sense of how much value the stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the cost of capital;
  • A 24-month change in the EVA metric between 15 per cent and 200 per cent – we want a positive change in EVA in the medium-term;
  • A one-year return on capital higher than 7 per cent – we want a company with decent profitability;
  • Sales growth over 24 months higher than 4 per cent. Sales growth provides the opportunity to a company to expand and generate higher EVA in the long-term;
  • A beta lower than one – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large. This is our low-volatility factor.

The stocks are ranked by five-year mean return on capital. For informational purposes, we have included recent stock price, dividend yield and one-year return. Please note that some ratios may be reported at end-of-previous quarter.

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) EVA CH. 24M  (%) EVA CH. 3M (%) 24M SALES CH. (%) BETA RTN. ON CAPITAL (%) RTN. ON CAPITAL – 5Y MEAN 1Y PRICE RTN. (%) DIV. YIELD (%)
ENGH-T Enghouse Systems Limited 66.56 3680 85.4 13.2 44.2 0.89 23.6 23.4 60.7 0.8
RCH-T Richelieu Hardware Ltd 37.27 2105 51.4 69.0 7.8 0.76 18.1 16.9 40.0 0.7
TIH-T Toromont Industries Ltd. 90.21 7425 20.5 10.0 4.5 0.81 13.4 16.1 31.5 1.4
CP-T Canadian Pacific Railway Lim 421.8 56732 39.8 7.8 10.6 0.86 16.3 14.7 34.6 0.9
JWEL-T Jamieson Wellness, Inc. 35.53 1416 160.7 18.4 22.9 0.30 16.1 11.4 37.3 1.4
IFC-T Intact Financial Corporation 143.7 20552 49.3 34.4 16.1 0.81 11.4 10.3 5.6 2.3
L-T Loblaw Companies Limited 64.30 22860 34.2 74.1 9.1 0.03 7.5 8.4 -10.5 2.1
NPI-T Northland Power Inc. 46.31 9389 77.7 16.9 27.8 0.87 9.1 6.2 67.6 2.6
FNV-T Franco-nevada Corporation 169.45 32336 64.1 17.0 51.6 0.36 7.6 4.8 32.6 0.7

What we found

Software and services company Enghouse Systems Ltd. posted impressive financial results over the 24-month period in terms of sales and EVA change. The company has the highest return on capital over the past year as well as over the past five-year period. The share price rose 50 per cent in the first half of 2020, but has since given back some of this gain. It has declined by about 15 per cent since its record high of $80 on Sept. 2. With this pullback, the current price could offer an opportunistic entry point.

Hardware distribution company Richelieu Hardware Ltd. posted a massive uptick in its three-month EVA change. Moreover its short-term ROC is higher than its five-year average, another signal of momentum.

Toromont Industries Ltd., a construction equipment and power systems specialist, might seem less dynamic than the first two ideas at first glance, if comparing its one-year return on capital to its five-year corresponding figure. We think this is perfectly normal for a cyclical company at this time of the economic cycle. The market anticipates the changing cycle as the stock is up more than 25 per cent year-to-date regardless of lower revenues and earnings per share (not shown). The company has the third-highest long-term ROC and we anticipate the lower one-year ROC figure will converge rapidly to its long-term profitability.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.