What are we looking for?
Small and mid-cap stocks in the financial sector with attractive trade-offs between performance and valuation.
Everyone appreciates large Canadian banks and they are indeed solid companies. Unfortunately, when a stock is highly appreciated it will naturally sell at a higher price and our banks, beloved by investors, are no different.
We believe smaller companies in the financial sector could be overlooked owing to the large weightings portfolio managers typically assigned to the large Canadian banks and the current volatility in the stock market.
The screen (add this screener here)
We screened Canadian financials focusing on the following criteria:
- Market capitalization between $500-million and $10-billion, which would exclude any of the Big Six banks;
- StockPointer (SP) Performance score higher than 60. The score mainly considers risk-adjusted return on capital, earnings a share growth and free cash flow by share. The score varies between zero and 100. A score above 60 implies a better-than-average company.
For informational purposes, we have also included five-year annualized earnings a share growth, four-year annualized dividend growth, one-year dividend growth, return on capital, beta, price-to-earnings and price-to-book ratios, dividend yield and one-year price return. Please note that some ratios may be shown as of end of previous quarter.
More about Inovestor
Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios and easily communicate investment decisions with clients through client-friendly reports.
What we found
Smaller financial players that may be flying under your radar
|TICKER||NAME||PRICE||MKT VALUE ($ MIL.)||SP PERF. SCORE||5Y EPS GRTH. (%)||4Y DIV GRTH. (%)||1Y DIV GRTH. (%)||ROC (%)||BETA||P/E||P/B||1Y PRICE RTN. (%)||DIV YLD. (%)|
|CVG-T||CLAIRVEST GROUP INC.||65.01||978.6||75.7||55.4||16.7||36.8||38.5||0.27||3.0||0.83||-2.2||0.2|
|CF-T||CANACCORD GENUITY GROUP INC.||8.43||742.3||75.0||435.4||68.2||28.0||18.6||1.26||3.4||0.46||-39.9||3.8|
|X-T||TMX GROUP LTD.||131||7325.2||70.2||25.7||11.9||13.8||12.5||0.66||14.4||1.82||0.9||2.5|
|GCG-A-T||GUARDIAN CAPITAL GROUP LIMITED CLASS A||30.3||814.8||69.0||-16.1||15.8||12.5||16.2||0.70||5.7||0.83||-8.2||3.3|
|CWB-T||CANADIAN WESTERN BANK||26.03||2383.5||62.8||9.0||5.3||1.7||11.3||1.27||6.9||0.80||-25.7||4.8|
|IAG-T||IA FINANCIAL CORPORATION INC.||64.02||6891.3||60.4||10.9||11.0||14.4||11.7||1.45||8.5||0.94||-5.8||4.1|
|FN-T||FIRST NATIONAL FINANCIAL CORPORATION||33.11||1985.5||60.2||13.7||5.9||15.7||40.5||1.15||10.3||4.11||-33.5||7.0|
Non-prime lender goeasy Ltd. increased its dividend by 43.8 per cent and 39.4 per cent on an annualized basis over the past year and the past four years, respectively. While these hikes seem aggressive, they were fuelled by an annualized EPS growth of 63.9 per cent over the past five years, which indicates a margin of safety in the dividend policy. Affected by the uncertainty of an economic slowdown, goeasy is 54.9 per cent cheaper than at its peak last September. As the bad news gets incorporated in the stock, the gradual decline in the valuation is worth keeping an eye on.
TMX Group Ltd., owner of the TSX and other financial exchanges, is the most expensive stock of our list on a P/E basis, standing at 14.4. However, it has increased its EPS by an annualized 25.7 per cent in the past five years and seems less risky than many of its counterparts, as reflected by its beta of 0.66, the second-lowest of our list. On Aug. 12, 2021, the company completed the acquisition of AST Investor Services Inc. (Canada), a provider of transfer agency, corporate trust and related services.
Digital bank EQB Inc. recently changed its name from Equitable Group to more closely align it with subsidiary Equitable Bank and its trade name, EQ Bank. This followed the acquisition of Concentra Bank, the 13th largest Schedule 1 bank in Canada. The deal, announced in February, is expected to close in the second half of 2022. EQB generated a healthy return on capital of 16.5 per cent, which contrasts with its P/E of only 5.9.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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