How to find attractive, resilient companies – and not overpay for them

What are we looking for?

Companies with a decent share price performance over the past six months and trading below their historical valuations.

Economic uncertainty is fuelled by the relentless rise in interest rates by central banks around the world, which could be leading to a global recession. In these uncertain times, the companies seen as the safest are sometimes overbid, leading to stretched valuations.

The screen (add this screener here)

We screened non-energy Canadian stocks focusing on the following criteria:

A market capitalization higher than $1-billion;
A StockPointer (SP) performance score higher than 70 – the score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100, a score above 70 implies a high-performing company;
A five-year average price-to-earnings ratio under 30 and a current P/E that is lower than the five-year average P/E (in other words, only stocks trading below their historical valuations);
A positive six-month price change (the S&P/TSX Composite Index increased by 1.4 per cent, excluding dividends, during the period).

For informational purposes we have also included three-month growth in net operating profit after tax (NOPAT), one-year NOPAT growth, one-year price return and dividend yield. Please note that some ratios may be shown as of end of previous quarter.

We decided to exclude energy companies because of their extraordinary earnings in the past year, which makes them all attractive from a historical valuation standpoint.

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

TSX-listed non-energy stocks trading below their historical valuations

TICKER	NAME	PRICE	MKT VALUE ($ MIL.)	P/E	5Y AVG P/E	SP PERF. SCORE	6M PRICE RTN. (%)	3M NOPAT GRTH. (%)	1Y NOPAT GRTH. (%)	1Y PRICE RTN. (%)	DIV. YLD. (%)
TFII-T	TFI INTERNATIONAL INC.	144.37	12586	11.6	13.1	88.6	49.0	6.1	44.4	8.4	0.8
RCH-T	RICHELIEU HARDWARE LTD	37.26	2083	12.4	21.0	82.6	1.0	7.3	40.8	-6.8	1.4
DOO-T	BRP, INC.	103.93	8182	12.1	19.3	79.6	27.8	0.2	-13.8	1.7	0.6
STLC-T	STELCO HOLDINGS, INC.	44.6	2826	2.2	6.1	76.2	21.9	-28.5	-0.4	18.4	3.7
SJ-T	STELLA-JONES INC.	47.7	2859	13.1	14.4	75.8	40.9	16.2	0.0	23.1	1.6
LIF-T	LABRADOR IRON ORE ROYALTY CORPORATION	33.42	2139	7.2	8.6	74.2	3.4	-9.0	-22.7	-9.4	11.5
CCL-B-T	CCL INDUSTRIES INC. CLASS B	59.21	11180	17.5	19.6	74.1	0.9	1.4	4.4	-9.0	1.6
IFC-T	INTACT FINANCIAL CORPORATION	198.1	34720	13.2	19.9	73.5	10.3	0.9	46.2	22.8	2.0
QSR-T	RESTAURANT BRANDS INTERNATIONAL INC	90.43	27659	22.7	25.4	73.4	44.9	11.3	11.6	22.0	3.2
L-T	LOBLAW COMPANIES LIMITED	122.14	39568	19.0	26.9	71.6	8.1	10.6	22.9	18.6	1.3
X-T	TMX GROUP LTD.	136.46	7589	14.4	22.0	70.9	1.8	3.6	81.8	10.5	2.4
QBR-B-T	QUEBECOR INC. CLASS B	27.86	6469	10.7	14.0	70.6	2.5	-1.2	-5.0	0.8	4.3

The screen turned up a dozen companies. Here are the top three, as ranked by the StockPointer performance score:

TFI International Inc. , a trucking company, has the highest performance score of our screen at 88.6 and the highest six-month price increase at 49 per cent. The performance could be due to management’s determination to execute a sound capital allocation strategy. After completing one acquisition in 2020 and 2021, the company decided to divest some operations in August. According to chief executive Alain Bédard, the divesture aligns with TFI’s longstanding focus on increasing cash flow and return on invested capital.

Richelieu Hardware Ltd., a specialty hardware distributor, is mostly affected by home renovation activity. This is likely correlated to house prices and real estate activity, both of which have severely declined during the year. Richelieu has managed to do damage control over the past six months, with the share price inching up 1 per cent. The company trades at a P/E of 12.4, significantly lower than its five-year average of 21.

BRP Inc., a powersports manufacturer, grew its NOPAT by 0.2 per cent in the past three months although over the past year NOPAT has fallen 13.8 per cent. Although the performance seems weak, BRP is highly cyclical, and the performance was more resilient than the market expected. The market rewarded its performance with a share price increase of 27.8 per cent in the past six months. The company’s P/E stands at 12.1, notably lower than its five-year average of 19.3.

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

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.

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