Monthly Archives

March 2021

ESG-friendly Companies that Combine Quality, Growth and Value

WHAT ARE WE LOOKING FOR?

ESG-friendly, quality companies demonstrating growth at acceptable valuations.

Essentially, our search combines the three most used fundamental factors: quality, growth and value. The objective is to find a solid company that grows and has an reasonable valuation. We consider environmental, social and governance criteria as part of our qualitative analysis.

THE SCREEN (access and save it on the Inovestor for Advisors platform)

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization higher than $5-billion;
  • StockPointer (SP) score of 70 or higher – the SP score is a complex composite that focuses on quality and value. The score varies between zero and 100. A score of more than 60 is considered solid.
  • PEG (price/earnings-to-growth) ratio below two – The ratio considers valuation and growth. It is the price-to-earnings ratio divided by the five-year mean of earnings per share growth.
  • ESG score lower than 22.1 – the current score of the S&P/TSX 60. The score uses Sustainalytics’s methodology to calculate unmanaged ESG risks. The score is the sum of the ESG risks. The score mostly varies between zero and 50, where zero stands for the most ESG-friendly company.

For informational purposes, we have also included the recent stock price, P/E ratio, five-year EPS growth mean, ESG scores, three-year dividend growth rate, one-year price return and dividend yield. Please note that some ratios may be shown as of the previous quarter’s end.

MORE ABOUT INOVESTOR

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WHAT WE FOUND

ESG-friendly companies that combine quality, growth and value

TICKER NAME PRICE MKT. CAP ($MIL) SP SCORE PEG P/E 5Y EPS GRTH. (%) ESG SCORE ENV. SCORE SOC. SCORE GOV. SCORE 3Y DIV. GRTH. (%) 1Y PRICE RTN. (%) DIV. YIELD (%)
MFC-T Manulife Financial Corporati 27.15 52710 72 0.41 9.3 22.6 19.4 1.7 7.5 10.1 11.0 109.3 4.1
QBR-B-T Quebecor Inc. Class B 35.48 8800 74 0.53 16.3 30.7 19.4 2.2 10.1 7.1 96.8 30.7 3.1
H-T Hydro One Limited 28.99 17320 72 0.60 9.8 16.3 16.3 3.4 7.8 5 4.8 38.1 3.5
TD-T Toronto-dominion Bank 82.42 149880 71 1.41 12.5 8.9 19.1 1.2 10.4 7.5 9.6 67.3 3.8
L-T Loblaw Companies Limited 66.59 22130 72 1.43 21.8 15.2 18.6 5 8.4 5.1 6.2 11.5 2.0
DOO-T Brp, Inc. 102.56 9020 73 1.59 42.4 26.7 14.4 0.1 7.6 6.7 -14.5 405.2 0.4
CP-T Canadian Pacific Railway Lim 474.27 63220 70 1.62 26.4 16.3 17 5.9 8.4 2.7 17.6 79.4 0.8
DOL-T Dollarama Inc. 51.25 15900 73 1.94 28.2 14.5 16.2 3.6 7.6 5.1 7.1 44.6 0.4

Source: Inovestor

Life insurer Manulife Financial Corp. has the most reasonable price relative to its growth, with a PEG ratio of 0.41, a result of its low P/E ratio of 9.3 and high EPS growth (five-year mean) of 22.6 per cent. Since the beginning of the year, the Government of Canada 10-year bond yield has increased by approximately one percentage point. Signs of a strong economic recovery tend to push bond yields higher. A rising yield environment tends to favour insurance companies because higher interest rates are inclined to generate higher fees.

Telecommunications company Quebecor Inc. achieved the highest five-year EPS growth of our list, at 30.7 per cent, while selling at a below-average P/E of 16.3. Note also its annual dividend growth of 96.8 per cent in the previous three-year period. The company announced on Feb. 25 that it will lift its quarterly dividend for 2021 by 38 per cent, continuing its streak of dividend hikes. Quebecor could benefit from reduced competition if Rogers Communications Inc.’s deal to purchase Shaw Communications Inc. goes through.

Hydro One Ltd., the electricity transmission and distribution utility serving Ontario, has an ESG score that is 26.2 per cent less than that of the S&P/TSX 60. The company has a virtual monopoly on the transmission of electricity, an essential good, which provides a high degree of stability to its operations. The company’s net income is inflated because of a favourable tax event in the past year, but it should not change its position in the table.

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

Anthony Ménard is an investment analyst at Inovestor Asset Management.

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Number Cruncher Extra – Manulife, Quebecor & Hydro One

In our last Number Cruncher we discussed how Manulife (MFC), Quebecor (QBR.B) & Hydro One (H) are companies with multiple qualities. Now, we will look at these with our software Stockpointer.

Let’s start with MFC

The company has a high score of 72 which is explained by the performance (69.8) and risk (20.1) score. The company strengths are more oriented toward its low valuation risk than its incredible performance although the company’s sales grew at a respectable 21% in the last 5-year period. Its performance spread has been positive in the last 3 years, but it declined during the period.

 

If the FGV is below the historical average, the company is considered cheap relative to the historical average. The company is around its historical mean, but a favorable environment, as mentionned in the Number Cruncher, could push the stock towards its 2017 peak.

 

Let’s continue with QBR.B.

 

QBR.B has a solid SP score of 74 fueled by both its strong performance (80) and low risk (27.9) score. Our system evaluates QBR.B to be a quality and growth company. The company increased its performance spread, in other words, the difference between the return on capital and the cost of capital, increased on a relative basis by 56.6% compared to the previous year. The company rose significantly its EPS although annual sales growth matched the inflation during the period.

The company grew its earnings per share steadily in the last 5-year and as a consequence the share price followed the same trend. A fairly straightforward relationship.

 

Our third pick: H

Hydro has a strong score of 72 explained by its performance score (70.8) and risk score (25) while being identified as a quality and value by our software. Utilities tend to have lower performance score in our system because their return on capital is generally low, but they compensate it by having more leverage than a traditionnal company. Earnings per share rose strongly in the last 3-year and the performance spread has followed the same trend. Sales also started to expend more vigorously 3 years ago. On the other hand, the company’s dividend yield has declined over the past 3 years. The company has potentially increased its capital expenditures instead of hiking its dividend. We do not see this negatively.

 

As mentionned in the Number Cruncher, the company has an excellent ESG score. It is indeed involved in nuclear power, but it is certainly much better than coal-fired power plant. The company has had only a few events, and they have all been rated at a low level of controversy.

 

If you have any questions about the article, feel free to contact Anthony :
Amenard@Inovestor.com

If you would like to sign up for a free trial and learn how Inovestor can benefit you, contact Olivier:
Olamothe@Inovestor.com

 

 

 

Canadian ETFs: February’s Launches and Terminations

At the end of February, the Canadian ETF Industry reached a new record high of $270 billion in assets under managementThe number of ETFs listed in Canada continues to grow as we welcome the World’s first Bitcoin ETF. Once more, Canadian regulators prove to be more accepting of disruptive investment products. In the U.S, approximately ten Bitcoin ETFs have either been rejected or are still waiting approval by the SEC. Will the success of the Canadian-listed Bitcoin ETFs pave the way for our U.S. counterparts? 

In only two days of trading, the Purpose Bitcoin ETF attracted over $420M in assets under management. It will invest directly in physically settled Bitcoin, not derivatives, allowing investors easy and efficient access to the emerging asset class of cryptocurrency without the associated risk of self-custody within a digital wallet. The ETFs charge management fees of 1% each. 

Shortly after, Evolve Funds Group introduced the Evolve Bitcoin ETFIn order to compete, Evolve slashed the management fee on its Bitcoin ETF from 1% to 0.75%. Several other providers have plans to join the Bitcoin ETF frenzy, including CI Global Asset Management that only charges 0.40% in management fee. In less than a month of trading, Bitcoin ETFs are shaking the investment community and a fee war is already taking place. The next race is who will launch the World’s first Ethereum ETF. Evolve Funds Group and CI Global Asset Management have already filed preliminary prospectus and are waiting for approval. 

In other new launchesSmartBe introduced a suite of Canadian and U.S. Factor-based investing ETFs. The “value” investment style behind the SmartBe U.S. Quantitative Value Index ETF (SBQV-NE) and the SmartBe Canadian Quantitative Value Index ETF (SBCV-NE) emphasizes investing in securities that are considered undervalued, based on quantitative analysis compared to other securities. The “momentum” style of investing underpinning the SmartBe U.S. Quantitative Momentum Index ETF (SBQM-NE) and the SmartBe Canadian Quantitative Momentum Index ETF (SBCM-NE) emphasizes investing in securities with higher recent total return performance than other securities.

As part of its commitment to helping investors reach their long-term goals, TD Asset Management reduced the management fees on six of its broad market index TD Exchange-Traded Funds. After these management fee reductions, the TD ETFs will be among the lowest priced broad market index exchange-traded funds in Canada.

Portfolio Manager’s March Comment for February Results

The S&P/TSX Total Return Index expanded by 4.4% in February and the S&P 500 grew by 2.8% while the MSCI ACWI ex. USA increased by 2.0%. At February end, the 12-month S&P/TSX Total Return Index rose 14.7% behind the S&P500 gain of 31.3% and higher than the MSCI ACWI ex. USA who nevertheless rose by 26.7%. The markets grew on the back of strong company results.

In February, NQICAT increased by 3% while it climbed by 12.9% on an annual basis.

The best TSX sector for the month of February was Energy up 22.4%, followed by Consumer Discretionary up 8.7%, and Financials up 6.7%. At the opposite, the worst performing sectors were Utilities down 5.7%, Material down 4.5% and Consumer Staples down 0.9%.

The best performers in February were Equitable Group up 31.1%, CCL Industries up 14.2% and National Bank up 12.5% due to impressive results.

On the other hand, the weakest contributors were Kirkland Lake Gold down 15.3% as gold prices fell 6.1% during the month. Hydro one was down 8.8% due to rising long-term interest rate and Metro was down 4.3% as investors continue to focus on cyclical stocks and expect lower revenue growth.

Why Integrate ESG in the Portfolio Selection Process?

Sustainable investing has gained traction over the past few years. According to Morningstar Research Inc., more than $1.5 billion was invested in Canadian sustainable funds in the fourth quarter of 2020 alone.

Due to its rising popularity among advisors and retail investors, Inovestor has partnered with Sustainalytics in order to cater to our client’s needs. Through this venture, we now offer ESG risk ratings for over 12,000 companies worldwide reinforced by assessment of their controversies. This new trend seems to suit both retail and institutional investor due to its risk minimization and enhanced returns characteristics. With the scoring system established, we help investors reduce the time spent on narrowing down the research.

Risk mitigation
Portfolio managers realize the significance of ESG issues as a way to mitigate risks. The scoring system used by ESG factors help identify potential risks that could negatively impact a company, such as litigations and lawsuits, strikes and bad reputations.

A good illustration of how ESG data can help identify risks is the Facebook-Cambridge Analytica scandal. Prior to the scandal, Facebook received several criticisms relating to data privacy management of users. The tipping point occurred when a whistleblower revealed that Cambridge Analytica harvested personal data from over 50 million Facebook users without their consent to interfere with the 2016 U.S. presidential election. Facebook saw 26% of users delete the app from their phones, according to a September 2018 survey by Pew Research Center. The company’s stock plunged by over 20% and had to pay $5 billion in fines to the Federal Trade Commission for privacy violations.

Improved performance
Taking ESG criteria into consideration has been associated with higher returns over time. According to MorningStar Direct, more than 60% of funds that incorporate high sustainability ratings in their model, beat their respective benchmarks as of December 31, 2020. The percentage of funds that outperformed their benchmark decreases incrementally with ESG risk category, except for funds with a low ESG rating.

Aligning investment and values
Some investors also choose to add ESG factors in their portfolio selection process to fulfill a fiduciary duty and/or values. Tobacco production, oil and gas, conventional weapons and firearms are among the sectors that are usually excluded from ESG portfolios due to their controversial nature. On the other hand, companies that exert a positive impact on stakeholders are sought-after such as electric vehicle companies and solar panel manufacturing companies.

You can access Sustainalytics’ 12,000+ ESG risk ratings by subscribing to the Inovestor for Advisors platform, which now offers ESG risk ratings in addition to investment research, idea generation, model portfolio options and portfolio analytics.

Sustainable investing is the future. Access ESG risk ratings on 12,000+ companies worldwide today.