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Anthony Menard

Number Cruncher Extra – Bank of Nova Scotia (BNS), Toronto-Dominion (TD) & The North West Company (NWC)

In our last Number Cruncher we discussed how Bank of Nova Scotia (BNS), Toronto-Dominion (TD) and The North West Company (NWC) are companies with defensive attributes that could limit losses in the event of a market collapse.

 

Let’s begin with BNS

BNS has an SP score of 66, down by one in the past 90 days. This is derived by using the Performance score of 59.8 and the Risk score of 14.5. Although the bank has hit setbacks in the past years, it is now attractive due to its strong Value score of 77 and a quality score of 75. In addition, it had a terrific year with an increase of 19.8% regarding sales growth and an average 5Y EPS growth of 6.2%.

 

As to the stock’s intrinsic value, our model values it at 112.89 versus its market price of 69.19. This represents a 63.2% upside. We further observe that the intrinsic value is continuing an upward trend that started in April 2021. Although the trend took a downturn last quarter, we expect the upward trend to continue.

 

Regarding the Toronto-Dominion bank,

TD’s SP score has increased by 3 points in the past 90 days, reaching 73. This score is calculated using the Performance score of 69 and the Risk score of 15.2. Overcoming challenges in recent years, TD remains appealing due to its high Value score of 72 and Quality score of 80.

 

Since its low of July 2020, TD’s EVA and NOPAT have until October 2022. We expect this trend to continue and influence the share price in the same manner.

 

Lastly, The North West Company (NWC).

NWC’s SP score has decreased by 1 point in the past 90 days, reaching a score of 73. This score is calculated using the Performance score of 72.2 and the Risk score of 22.4. NWC is attractive due to its strong Value score of 58 and Quality score of 77. Additionally, the company has seen an average annual sales growth of 4.1% over the last 5 years.

Regarding its Performance vs Risk, NWC exceptionally outperforms its peers in the grocery and retail industries. Consequently, NWC seems the best choice at this moment, at least, compared to its peers.

 

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

10 S&P/TSX Composite stocks with defensive attributes

What are we looking for?
Companies less risky than the market.

Investors are reluctant to add to equities given the possibility of further interest rate hikes and the risk of a recession. According to many research papers, it is impossible to time the market. We think investors are more likely to miss a potential rebound if they try waiting to jump back into the market at the perfect time.

As a half measure, investors could invest progressively in lower-risk stocks that would offer some protection in case of a market meltdown.

The screen (add this screener here)

We screened stocks from the S&P/TSX composite focusing on the following criteria:

Beta compared to the S&P/TSX composite lower than 0.9. (The beta is a measure of the volatility of the stock compared to the S&P/TSX composite.) A beta lower than one is considered less risky than the market;
StockPointer (SP) risk score lower than 30. The risk score is scaled from zero to 100, where 100 is a high-risk company and 30 is considered a low-risk one. The score takes into account many criteria; our software looks at leverage and stability of profitability, and uses an automatically calculated discounted cash flow to evaluate the expensiveness of the company;
Dividend yield higher than 4 per cent – a company that distributes a large portion of its profit to shareholders could be seen as less risky than one that needs to invest and innovate to perform.
For informational purposes, we have also included one-year dividend growth, three-month NOPAT (net operating profit after tax) growth, price/earnings and price/book ratios, 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

10 S&P/TSX Composite stocks with defensive attributes if the market melts down

TICKER NAME PRICE MKT VALUE ($ MIL.) BETA SP RISK SCORE DIV. YLD. (%) 1Y DIV. GRTH. (%) 3M NOPAT GRTH. (%) P/E P/B 1Y PRICE RTN. (%)
BNS-T BANK OF NOVA SCOTIA 69.19 82431 0.8 14.8 6.2 12.8 -4.1 8.6 1.1 -24.9
TD-T TORONTO-DOMINION BANK 88.84 161751 0.7 15.5 4.1 12.7 20.7 9.4 1.7 -12.7
CM-T CANADIAN IMPERIAL BANK OF COMMERCE 58.5 53003 0.9 15.6 5.3 12.0 -3.9 8.7 1.1 -28.5
GWO-T GREAT-WEST LIFECO INC. 34.06 31738 0.8 17.6 6.6 11.9 3.3 10.7 1.3 -11.8
NWC-T NORTH WEST COMPANY INC. 36.14 1723 0.5 22.6 4.2 2.8 -4.0 14.1 3.0 4.0
SLF-T SUN LIFE FINANCIAL INC. 64.72 37932 0.9 23.0 4.9 22.7 -12.1 11.9 1.4 -10.2
QBR-B-T QUEBECOR INC. CLASS B 31.58 7333 0.5 25.7 4.6 14.6 -1.2 12.1 1.0 4.2
T-T TELUS CORPORATION 28.15 39973 0.6 26.8 4.9 6.2 4.0 19.3 1.8 -5.5
BCE-T BCE INC. 62.48 56978 0.5 28.1 6.3 5.1 1.9 20.2 1.9 -5.6
ACO-X-T ATCO LTD. CLASS I 43.44 4948 0.5 29.2 4.3 3.0 2.9 12.8 1.1 5.2

Bank of Nova Scotia (BNS-T) has the lowest SP risk score and P/E of our screen at 14.8 and 8.6, respectively. The company underperforms other companies on the list on a three-month NOPAT basis with a decline of 4.1 per cent, the second-lowest on our list, leading to a one-year price performance of minus-24.9 per cent, the lowest of our list. However, the company has the third highest one-year dividend increase at 12.8 per cent, implying that the management could foresee a positive outlook despite the recent performance.

Toronto-Dominion (TD-T) is slightly more expensive than the Bank of Nova Scotia with a P/E of 9.4 and significantly more on a P/B basis, at 1.7 compared with 1.1 for the Bank of Nova Scotia. This higher valuation could be justified as it achieved favourable growth compared with the Bank of Nova Scotia with a three-month NOPAT growth of 20.7 per cent, the highest of our screen.

The North West Company (NWC-T), a general merchandise retailer owning brands such as Northern and Giant Tiger and which operates primarily in Northern Canadian communities, has the third highest one-year price change at 4 per cent and has a beta of only 0.5, demonstrating its resilience and low-risk profile. The company sold 36 Giant Tiger stores during the summer of 2020 for $45-million and has only five stores left. Following the divestiture, the company reorganized its operations and it seems to have paid off with an 87.2-per-cent increase in profits in 2022 compared with 2020.

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.

Number Cruncher Extra – TFI International Inc. (TFII), Richelieu Hardware Ltd. (RCH) and BRP Inc. (DOO)

In our last Number Cruncher we discussed howTFI International Inc. (TFII), Richelieu Hardware Ltd. (RCH) and BRP Inc. (DOO) are companies with decent short-term performance with valuation under their historical average.

Starting off with TFII

In the past 90 days, TFII’s SP score has been stable at 79. The SP score is derived from the Performance (88.7) and Risk (24.3) scores. The company has multiple decent factor scores but is most biased towards growth and quality, with scores of 82 and 72 respectively. TFII has a terrific track record with 5-year sales growth of 26.3% and 5-year EPS growth of 40.5%. Moreover, in the last year, the company’s EPS almost doubled its 5-year trend for both sales and EPS.

We can see that the company is a top performer when we compare it to its peers. The company does better than its peers both in terms of performance and risk making a clear choice

 

Continuing with RCH

ANRCH currently has an solid SP score of 79 which is stable since 90 days. The SP score is determined by their impressive performance (82.6) score and their risk (21.6) score. RCH has a strong bias tilt towards the quality factor, with scores of 79. Similarly to TFII, RCH has a robust track record of increased their sales and their earnings by 15.6% and 28% respectively.

 

The company had modest growth between 2018 and 2020 due to slugish economic growth, but has since increased its NOPAT by more more than 2 fold in a few years. On the other hand, the share price shows

 

Lastly, let’s look at DOO

DOO’s current SP score is 76, which has been stable over the past 90 days. The company’s SP score is determined through their promising Performance (79.6) score and unsatisfactory Risk (26.4) score. The company has a factor tilt towards quality with a respectable score of 76. DOO saw a decrease in EPS of 19.5% from last year, down from their 5-year growth average of 121.4%.

 

According to our system, DOO is currently trading at a high market value added level which represents high expectations from the market towards DOO compared to the last 5 years. Historical pricing suggests that CE’s stock may be overvalued at the moment despite the current price-to-earnings ratio being lower than its historical valuation.

 

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

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.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

StockPointer® US Portfolio Transactions – November 2022

We have rebalanced our Stockpointer® US model portfolio. The trades are effective as of Tuesday, November 15 after market close.
Here are the details of the trades:

In:

  1. Texas Instruments Incorporated (TXN) – Market Trend. Increase in the Information Technology sector as shown by the Top 100 index, therefore, increasing our position in the portfolio.

Out:

  1. Penske Automotive Group, Inc. (PAG) – Market Trend. Decrease in the Consumer Discretionary sector as shown by the Top 100 index, therefore, decreasing our position in the portfolio. The company was also no longer in the top of its sector.

Number Cruncher Extra – Commercial Metals Co. (CMC), AutoNation Inc. (AN) and Celanese Corp. (CE)

In our last Number Cruncher we discussed how Commercial Metals Co. (CMC), AutoNation Inc. (AN) and Celanese Corp. (CE)  are mid-caps with robust profitability and a cheap valuation.

Starting off with CMC

In the past 90 days, CMC’s SP score has decreased by 2, bringing it down to 71. The SP score is derived from the Performance (86.7) and Risk (34.6) scores. The company has multiple impressive factor scores but is most biased towards Value, with a score of 82. CMC experienced an incredible year, seeing a 1-year growth of 475% in Performance Spread. Moreover, in the last year, the company’s Earnings Per Share growth has more than doubled its 5-year average.

 

We can see that the company has been seeing a steady incline in its EVA and NOPAT for the last 5 years and this this growth has recently accelerated. Specifically, CMC’s EVA has grown faster than the Net Operating Profit in the last 3 years. This indicates that the company is creating value for its shareholders rather than simply inflating their numbers.

 

Continuing with AN

AN currently has an acceptable SP score of 63, having decreased by 1 over the past 90 days. The SP score is determined by their impressive Performance (78.2) score and their slightly worrying Risk (40.7) score. AN has a bias tilt towards the Value, Growth, and Quality factors, with scores of 77, 74 and 73 respectively.

 

The company is second best of its peers in terms of Economic Performance Index with a value of 3.7. This metric measures the amount of value created by the company. Contrastingly, AN has the highest risk associated with FGV of its peers. This could point towards the stock being underpriced by the market, making this possibly an attractive point of entry.

 

Lastly, let’s look at CE

Celanese Corp.’s current SP score is 66, which has decreased by 15 over the past 90 days. The company’s SP score is determined through their promising Performance (83.4) score and unsatisfactory Risk (38.9) score. The company has a factor tilt towards Value with a respectable score of 74. CE saw a decrease in Earnings Per Share of 38.5% from last year, down from their 5-year growth average of 77.2%.

 

According to our system, CE is currently trading at a discount. This can also be concluded through our Market Value added metric which shows that the market’s expectations for the company are currently low. Historical pricing suggests that CE’s stock may be undervalued at the moment.

 

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

13 U.S. mid-cap stocks that may be overlooked by the market

What are we looking for?

U.S. mid-capitalization stocks with robust profitability, trading at a reasonable price.

Since 2014, on a calendar basis, the S&P MidCap 400 outperformed the S&P 500 in only one year – 2016 – while in the prior 10 years it outperformed the large-cap index eight times.

Given the extended outperformance of large caps in the United States, we think it could be time for mid-caps to shine. It’s worth noting that the MidCap 400 is on track to outperform the S&P 500 this year.

 

The screen (add this screener here)

We screened U.S. stocks focusing on the following criteria:

  • Market capitalization between US$5-billion and US$15-billion;
  • Economic Performance Index (EPI) higher than 1.5. The EPI represents the return on capital divided by the cost of capital and is a measure of short-term wealth creation. An EPI higher than one implies short-term value creation;
  • Five-year return on capital higher than 12 per cent – companies with healthy return on capital tend to be wealth creators;
  • Market value-added as a percentage of market cap less than 40 per cent. This metric shows the discounted wealth creation priced in the company valuation. We derive the market value-added by subtracting the invested capital from the market cap, then dividing the result by the market cap. A positive value implies the market has priced in some future wealth creation; a lower positive value implies a cheaper valuation.

For informational purposes, we have also included price-to-earnings ratio, three-month sales growth, one-year price return and dividend yield. Please note that some ratios may be shown as of the end of the previous quarter.

 

What we found

U.S.-listed mid-cap stocks

TICKER NAME PRICE MKT VALUE ($ MIL.) EPI 5Y ROC (%) MVA/MV (%) P/E 3M SALES GRTH. (%) 1Y PRICE RTN. (%) DIV. YLD. (%)
CMC-N COMMERCIAL METALS COMPANY 47.46 5576 4.0 14.1 22.2 4.7 4.4 30.9 1.4
AN-N AUTONATION, INC. 119.7 6256 3.7 13.3 23.3 4.9 1.1 -5.0 n/a
RS-N RELIANCE STEEL & ALUMINUM CO. 205.95 12156 3.3 17.7 32.4 6.6 2.4 25.6 1.7
CE-N CELANESE CORPORATION 101.23 10972 3.2 16.5 30.2 6.6 0.4 -39.0 2.8
PAG-N PENSKE AUTOMOTIVE GROUP, INC. 124.21 8968 3.1 12.3 33.0 6.8 1.6 22.6 1.7
BLDR-N BUILDERS FIRSTSOURCE, INC. 64.2 9565 3.1 25.0 31.1 3.9 1.1 -10.6 n/a
LAD-N LITHIA MOTORS, INC. 227.81 6265 2.9 14.7 10.5 5.1 4.3 -22.7 0.7
WLK-N WESTLAKE CORPORATION 104.43 13331 2.7 13.5 22.1 5.1 6.0 6.6 1.4
CG-Q CARLYLE GROUP INC 28.29 10280 2.3 39.5 38.2 5.8 -7.9 -50.8 4.0
PHM-N PULTEGROUP, INC. 42.85 9780 2.2 12.7 5.3 4.3 3.1 -18.3 1.4
AMG-N AFFILIATED MANAGERS GROUP, INC. 153.87 5816 2.0 16.1 39.9 11.1 0.1 -11.7 0.0
WAL-N WESTERN ALLIANCE BANCORP 68.05 7412 1.8 17.8 32.3 7.2 7.5 -41.5 2.1
HII-N HUNTINGTON INGALLS INDUSTRIES, INC. 227.31 9070 1.6 12.9 36.7 15.8 2.8 19.3 2.2

 

Commercial Metals Co., which manufactures, recycles and fabricates steel and metal products, has the highest EPI on our list at four and the third-lowest P/E at 4.7. The company is showing resilience with sales up 4.4 per cent in the past quarter and has been rewarded by the market with a share-price increase of 30.9 over the past year. The company announced on Nov. 15 it would acquire a metal recycling facility from Kodiak Resources Inc. and Kodiak Properties LLC.

AutoNation Inc., an automotive retailer, has the second-highest EPI at 3.7. On Nov. 15, the company announced the acquisition of a minority ownership stake of 6.1 per cent in TrueCar Inc., an automotive digital marketplace; TrueCar’s Nasdaq-listed shares rose 32.8 per cent after the disclosure. The news sparked speculation about a possible acquisition or potential value creation through more collaboration between the two companies.

Celanese Corp., a chemical materials producer, has the fourth-highest EPI on our list at 3.2 and the second-highest dividend at 2.8 per cent. The company announced on Feb. 18 that it would acquire DuPont’s mobility and materials business for US$11-billion with cash on hand and debt. The acquisition was completed on Nov. 1. Celanese’s share price has declined 39 per cent over the past year, possibly reflecting skepticism from the market about the value creation of this major acquisition.

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.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

StockPointer® Canada Portfolio Transactions – October 2022

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Stockpointer® Canada model portfolio. These trades are effective as of Friday, October 21 after market close.Here are the details of the trades:

Ins:

  1. Imperial Oil Ltd (IMO)Market Trend. Increase in the Energy sector as shown by the Top 100 index, therefore, increasing our position in the portfolio.
  2. Brookfield Infrastructure Partners L.P. (BIP.UN) – Market Trend. Increase in the Utility sector.

Outs:

  1. Brookfield Asset Management Inc (BAM.A) – Market Trend. Decrease in the Financial sector as shown by the Top 100 index, therefore, decreasing our position in the portfolio. The company was also no longer in the top of its sector.
  2. Canadian Tire Corporation Limited Class A (CTC.A) – Market Trend. Decrease in the Consumer Discretionary sector.

Number Cruncher Extra – Hardwoods Distribution Inc. (HDI), A&W Revenue Royalties Income Fund (AW.UN) and Absolute Software Corporation (ABST)

In our last Number Cruncher we discussed how Hardwoods Distribution Inc. (HDI), A&W Revenue Royalties Income Fund (AW.UN) and Absolute Software Corporation (ABST) are small caps with tailwinds and a track record of long-term profitability.

Here is the screener we used to find these stocks and that you can add to your personalized screeners.

Starting off with HDI

In the past 90 days, HDI’s SP score has increased by 1, bringing it up to 65. The SP score is derived from the Performance (86.6) and Risk (42.0) scores. The company has an impressive bias to Value and Growth, with scores of 75 and 74 respectively. HDI experienced an incredible year, seeing a 1-year growth of 109.9% in annual sales. Moreover, the company’s return on capital (ROC) increased to 22.4% over the past year, from the 5-year average of 14.0%.

Up until midway through 2021, our system evaluated the company to be fairly priced. Since then, however, there has been a sharp divergence between our intrinsic valuation and the actual share price. Currently, our model indicates that HDI is intrinsically valued at $438.31. Interestingly, we can see that as the intrinsic value rose the share price slightly declined. This is likely due to the market expecting the reversal in the profitability of the company.

 

 

Continuing with AW.UN

AW.UN currently has a respectable SP score of 63, having increased by 3 over the past 90 days. The SP score is determined by their fair Performance (59.4) score and attractive Risk (22.3) score. AW.UN has quality and volatility bias with scores of 77 and 74 respectively.

 

As seen above, AW.UN completely surpasses its peers when it comes to risk, while also beating all but one in terms of performance. Such a low risk score reflects the stability of the company’s revenue which is attractive to its shareholders.

 

Lastly, let’s look at ABST

Absolute Software’s current SP score is 65, an increase of 5 over the past 90 days. The company’s SP score is determined through their Performance (78.9) and Risk (38.5) scores. The company has a strong factor tilt towards growth with an impressive score of 84, and towards momentum with a score of 73. ABST saw an increase in annual sales of 61.2% from last year, a positive divergence from their 5-year average of 22.2%.

When it comes to the company’s factor exposure, can see that ABST outshines its peers in terms of growth, momentum, yield, and overall ranking.

 

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 Ramzi:
rkahale@inovestor.com

Small-cap strategy looks for quality amid volatility

 

What are we looking for?

Small capitalization stocks with tailwinds and a track record of long-term profitability.

In times of high volatility, small cap stocks tend to decline proportionately more than larger caps, as these less familiar names are considered more vulnerable to an economic downturn. While this is true on average, we think some quality companies could be unfairly punished because of this reputation.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization between $500-million and $1.5-billion;
  • a StockPointer (SP) score higher than 60 – 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 of 60 implies a better than average company;
  • five-year average return on capital higher than 7 per cent;
  • a positive one-year change in the economic performance index. The EPI represents the return on capital divided by the cost of capital. A positive change implies an improvement in the company’s risk-return profile. This is our metric to evaluate the company’s short-term performance.

For informational purposes, we have also included the actual EPI, price-to-earnings ratio, one-year price return and dividend yield. 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

TSX-listed small-cap stocks

TICKER NAME PRICE MKT VALUE ($ MIL.) SP SCORE 1Y EPI CH. ROC (5Y, %) EPI P/E 1Y PRICE RTN. (%) DIV. YLD. (%)
AW-UN-T A&W REVENUE ROYALTIES INCOME FUND 33.32 536 63 0.4 23.4 2.4 15.5 -14.1 5.4
HDI-T HARDWOODS DISTRIBUTION INC. 22.9 538 65 2.3 14.0 4.1 2.5 -42.4 2.1
AD-UN-T ALARIS EQUITY PARTNERS INCOME TRUST TRUST UNITS REG S 3C7 15.45 700 63 0.4 9.4 1.5 4.8 -17.2 8.8
AFM-X ALPHAMIN RESOURCES CORP. 0.62 789 67 1.2 10.7 3.2 5.3 -34.0 9.7
ABST-T ABSOLUTE SOFTWARE CORPORATION 15.92 814 66 1.3 15.5 2.6 n/a 12.7 2.9
CGO-T COGECO INC. 53.6 843 61 0.3 8.9 2.2 5.9 -36.6 4.6
ET-T EVERTZ TECHNOLOGIES LIMITED 11.08 845 70 1.4 15.9 2.8 9.6 -21.0 6.2
CVG-T CLAIRVEST GROUP INC. 69.05 1069 65 3.7 17.0 4.6 3.5 20.1 0.1
LNF-T LEON’S FURNITURE LIMITED 17.02 1141 64 0.8 11.8 2.9 6.5 -32.6 3.8
WDO-T WESDOME GOLD MINES LTD. 8.01 1141 69 0.5 14.1 2.3 39.5 -27.6 n/a
MTY-T MTY FOOD GROUP INC. 54.66 1334 63 0.3 10.6 0.9 14.5 -13.0 1.5

 

A&W Revenue Royalties Income Fund, which indirectly owns the trademarks used in A&W restaurants, has the highest five-year average return on capital of our list at 23.4 per cent. The trust receives a 3-per-cent royalty on the sales of restaurants in the royalty pool and distributes all royalties received after deducting the trust’s operating costs. The trust offers an attractive proposition as it should profit from the inflationary environment as royalties rise with higher sales, while not being affected by the operating expenses, such as higher food and wage costs.

Hardwoods Distribution Inc. , a wholesale distributor of building products in North America, has the second-highest EPI of our list at 4.1, but nevertheless has declined by 42.4 per cent over the past year as the market anticipates the effect of a slowing real estate market on the company’s results. While a slowdown seems already priced into the stock valuation, the company continues to perform well at the fundamental level as seen by the massive positive EPI change of 2.3, the second-highest of our screen.

Absolute Software Corp., a cybersecurity company, saw its share price increase by 12.7 per cent in the past year despite the collapse of the Canadian technology sector, which has declined 46.3 per cent over the same period. Part of the company’s positive aura could be attributed to its 2021 acquisition, for US$340-million, of NetMotion Software Inc., which will naturally boost the current year’s sales.

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

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