Monthly Archives

January 2021

Eight profitable North American stocks with tempting valuations

What are we looking for?

Companies with strong profitability and below-average valuations.

Companies with high multiples tend to have high expectations. At some point these expectations may exceed the company’s capabilities and result in a poor investment outcome. We believe that analyzing companies with solid profitability and reasonable valuations is an effective way to limit this risk and uncover attractive securities.

The screen (you can find it here on the Inovestor’s platform)

We screened North American stocks focusing on the following criteria:

· Market capitalization higher than $1-billion;

· Five-year mean return on capital higher than 10 per cent. We want a company with solid long-term profitability;

· Free-cash-flow-to-capital higher than 12.5 per cent. We want a company that generates a high amount of free cash flow as a percentage of capital. It shows the company has plenty of capital to invest or to redistribute to shareholders;

· A price-to-book ratio lower than two. We want a company that sells at a reasonable price based on shareholders’ equity;

· A positive price-to-earnings ratio lower than 20. We don’t want to pay too much for the company’s profits.

For informational purposes, we have also included recent stock price, trailing 12-month return on capital, dividend yield and one-year return. Please note that some ratios may be reported as of 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).

What we found

Home furnishings retailer Leon’s Furniture Ltd. generates a whopping 33.4-per-cent free cash flow as a percentage of capital. The stock is also inexpensive based on the price-to-earnings ratio of 11.1. With the lockdowns, individuals have necessarily cut back spending on social activities. Interest rates, meanwhile, have dropped substantially. Combined, these elements support the purchase of durable goods. This could explain the company’s above-trend return on capital.

Juice producer Lassonde Industries Inc. is a resilient company as evidenced by its five-year mean return on capital, which, at 14.1 per cent, is about equal to its most recent return on capital. The company’s earnings reports over the past year have been exceptional, owing largely to its market segment: retail consumers. It could be an interesting defensive choice in case of lower-than-expected economic growth or further COVID-19 restrictions.

Lumber, finishing products and pulp producer Canfor Corp. saw its stock price rise by 84.5 per cent in the past year as lumber prices soared by more than 75 per cent. The company is highly cyclical. An investor who believes that the economy will expand vigorously and who has a high risk tolerance may consider the stock to enhance portfolio returns.

Although the screener is for North American companies, it’s notable that five out of eight companies are Canadian, even with this country’s more limited universe of stocks. Valuation criteria (P/E and P/B) would seem to limit the number of U.S. companies, suggesting value investors may want to concentrate their search efforts in the North American market to Canadian-listed names.

 

TICKER NAME PRICE MKT. CAP ($MIL) FCF/CAPITAL (%) RTN. ON CAPITAL – 5Y MEAN (%) P/E P/B RTN. ON CAPITAL (%) 1Y PRICE RTN. (%) DIV. YIELD (%)
LNF-T Leon’s Furniture 21.00 1660 33.4 10.2 11.1 1.7 11.2 23.8 3.0
BIG-N Big Lots** 50.82 1885 20.7 10.2 3.2 1.5 14.1 82.4 2.4
LAS-A-T Lassonde Industries 172.00 1193 18.1 14.1 11.6 1.6 14.2 15.2 1.5
UHS-N Universal Health Services 129.10 10971 17.9 10.2 12.6 1.8 10.4 -12.3 0.6
CFP-T Canfor Corp 23.67 2964 15.1 11.0 17.0 1.6 9.8 84.5 0.0
DISCK-Q Discovery Comm Inc 32.89 16478 14.4 20.6 13.5 1.6 19.0 14.8 0.0
WTE-T Westshore Terminals Investment Corp 17.34 1125 13.3 17.8 8.6 1.5 16.0 -3.5 3.7
IFP-T Interfor Corp 24.04 1617 13.0 11.7 18.1 1.6 14.3 58.6 0.0

*Market cap and stock price figures are in native currency
**Please note that some figures for Big Lots are inflated by a capital gain caused by a sale-leaseback transaction of distribution centres.

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

Anthony Menard is an investment analyst at Inovestor Asset Management.

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Canadian ETFs: A look at December’s launches and terminations – and how the industry grew in 2020

INDUSTRY REVIEW
The Canadian ETF industry reached $257 billion in assets under management at the end of November, compared to $205 billion one year ago, for an annual growth rate of 25.4%. ETFs reported record inflows of $40 billion this year representing 19.5% of the AUM at the beginning of the year. In the last 5-year period, the ETF industry passed from $89.6 billion to $257 billion for an annual growth rate of 23.5%.

Thematic ETFs were popular this year. ESG ETFs saw inflows of $1.8 billion compared to the last record set in 2018 of approximately $750 million. The number of ESG ETFs created during the year was 49, bringing the number at year-end to 58. Innovation was another major theme. Emerge, a thematic ETF provider, was able to take full advantage of this trend by increasing its assets under management from $10M to $204M as a result of the $157M inflow.

In the last few years, asset allocation ETFs have made a breakthrough for investors who want simplicity. Since their introduction in 2018, they collectively provided an inflow of approximately $100 million each month. 13 out of 39 ETF providers offer asset allocation ETFs.

NEW LAUNCHES
December was rather quiet in terms of launches which is not unusual. Only Horizons launched a new ETF. The Horizons Tactical Absolute Return Bond ETF takes long and short positions in debt instruments and derivatives, primarily North American, across the entire credit spectrum in order to provide positive absolute returns with low volatility in any environment.

Interest in bitcoin has returned strongly as a result of the impressive rise in price. For bitcoin enthusiasts, there is no bitcoin ETF yet, but there are other structures. Honourable mention to the CI Galaxy Bitcoin Fund (BTCG.UN & BTCG.U) managed by CI Investments and structured as a limited partnership (LP) that started operations on December 16.

Portfolio Manager’s January Comment For Q4 2020 Results

Global equities ended the year on a strong finish. The S&P/TSX Composite Total Return Index increased by 9% in Q4 for a total annual return of 5.6%. During Q4, the S&P500 produced a 12.1% return for an annual total return of 18.4% while the MSCI ACWI ex US posted a 17.1% return leading to an annual return of 11.1%.

There was a number of drivers behind this strong finish. Firstly, most company’s results were inline or better than expected. Secondly, central banks have maintained a dovish tone. Finally, the arrival of highly potent anti-COVID vaccines.

In Canada, the best Q4 sectors were Health care up 29.9% and Consumer discretionary up 20.4%. The worst sectors were Consumer Staples down 6.0% and Materials down 4%.

For the year, Info-Tech and Utilities were the top performers up 80.3%% and 19.5% respectively while Energy and Health Care were the weakest down 30.8% and 23.6%

NQICA in Q4 returned 7.3% leading to an annual total return of 2% versus the S&P/TSX TR composite return of 9% in Q4 and 5.6% for the year.

The best performers in NQICA were First National up 8.9%, Equitable Group up 6.6% and Stella-Jones up 4.8% on the back of excellent Q3 results.
On the other hand, the worst performers in Q4 were Richelieu Hardware down 12.6% and Metro down 4.8% on profit taking.