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Anthony Menard

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

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

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

 

 

 

StockPointer® Canada Portfolio Transactions – January 2021

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolio, effective today, January 22, after market close.

Here are the details:

Ins:

1. CCL Industries Inc. Class B (CCL.B) - Market trend. Increase in the Material sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.

2. Hydro One (H) - Intra-sectoral transaction. In the top of its sector.

Outs:

1. Great-West Lifeco (GWO) - Market trend. Decrease in the Financial sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio.

2. Fortis (FTS) - Intra-sectoral transaction. No longer in the top of its sector.

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.

StockPointer® US Model Portfolio Transactions – December 2020

We have rebalanced the Stockpointer® US which is effective now. Here are the details:

Ins:

  1. Amgen (AMGN) – Market Trend. Increase in the Health Care sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.
  2. Humana (HUM) – Intra-sectoral transaction. In the top of its sector.
  3. CDK Global (CDK) – Intra-sectoral transaction. In the top of its sector.
  4. Weight Watchers (WW) – Intra-sectoral transaction in replacement of DNKN. In the top of its sector.


Outs:

  1. AT&T (T) – Market trend. Decrease in the telecommunication sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio.
  2. American Express (AXP) – Intra-sectoral transaction. No longer in the top of its sector.
  3. TransDigm Group (TDG)Intra-sectoral transaction. No longer in the top of its sector.
  4. Dunkin’ Brands (DNKN) – The company has been bought by Inspire Brands in a cash deal.

Canadian ETFs: November’s Launches and Terminations

INDUSTRY REVIEW
The Canadian ETF industry reached $249 billion in assets under management at the end of November compared to $200 billion one year ago for an annual growth rate of 24.5%. The number of ETFs continued to grow as our Canadian ETF database has surpassed the 1000 mark including all classes. This number includes more than 800 unique ETFs.

NEW LAUNCHES
It is TD’s turn to launch new ESG ETFs. The geographic location is standard: Canada (TMEC-T), U.S. (TMEU-T) and international (TMEI-T). TD is not here to play around with management fees of 0.10%, 0.15% and 0.20% for the respective ETFs. They are one of the most competitive ETFs in terms of fees in the ESG space in Canada. As the ESG AUM continues to grow, we expect fees to decline as operational costs reduce as a percentage of AUM.

Ninepoint joined the group as an ETF provider in Canada, although it is not new to the asset management industry. It will offer some of their funds as an ETF series. Investors have access to a new ETF that works like a saving account (NSAV-NE), a precious metals ETF focusing on gold (GLDE-NE), a mining sector ETF focusing on silver (SLVE-NE), and a different way to invest in corporate bonds with Ninepoint Diversified Bond Fund (NBND-T).

Manulife has launched 3 fixed income ETFs that should cover the basic needs for investors. Manulife Smart Short-Term Bond ETF (TERM-T) invests in short-term securities in Canadian corporations based on its current holdings. The low maturity is perfect for short-term objectives while providing higher yield than a government bond ETF. Manulife Smart Core Bond ETF (BSKT-T) is a standard Canadian bond universe that every investor should own. It is mostly investment grade, but the manager has the possibility to invest in higher yielding securities. Manulife Smart Corporate Bond ETF (CBND-T) gives exposure to the Canadian corporate bond universe and is diversified across sectors. Manulife has also launched one Canadian (CDIV-T) and one U.S. (UDIV-T) ETF focusing on high paying and sustainable dividend stocks.

StockPointer® Canada Portfolio Transactions – October 2020

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Stockpointer® Canada model portfolio. These trades are effective as of Friday, October 16th after market close. Here are the details of the trades:

Ins:

  1. Quebecor Inc. (QBR.B) – Market Trend. Increase in the telecommunication sector as shown by the Top 100 index, therefore, increasing our position in the portfolio. The stock is in the top of its sector.
  2. Stella-Jones (SJ) – Market trend. Increase in the material sector. The stock is in the top of its sector.

Outs:

  1. Magna International (MG) – Market Trend. Decrease in the discretionary sector as shown by the Top 100 index, therefore, decreasing our position in the portfolio. Furthermore, the EPI fell under 1.
  2. Sun Life Financial Inc. (SLF) – Market trend. Decrease in the financial sector. Furthermore, the EPI fell under 1.