Anthony Menard

What are we looking for?

Profitable companies in defensive sectors selling at a reasonable price.

Despite a small decrease in inflation in Canada, a few points force us to stay conservative. The decrease was mainly due to cyclical factors such as gasoline prices. Inflation is still at 7.6 per cent and the Bank of Canada is expected to continue to tighten financial conditions through its monetary policy. Consequently, we think the market surged too much following the decline in headline inflation. We believe that defensive stocks are attractive given the recent rise in cyclical stocks.

The screen (add this screener here)

We screened Canadian stocks in the consumer staples, telecommunications and utilities sectors, focusing on the following criteria:

• Market capitalization higher than $1-billion;
• 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 above 60 implies a better than average company;
• Relative economic performance index (Rel. EPI) higher than 0.8 – Rel. EPI is a multistep calculation that compares the profitability of a company with its valuation and cost of capital. Higher profitability, a lower valuation and a lower cost of capital increase the ratio. Ninety-five per cent of the time the ratio falls between zero and two and is not meaningful below zero, which implies a negative return on capital. A ratio of 0.8 indicates economic performance in the top 20 per cent of the Canadian universe;
• Three-year annualized dividend growth higher than 3 per cent.

For informational purposes, we have also included one-year dividend growth, return on capital, price-to-earnings and price-to-book ratios, one-year price return and dividend yield. Please note that some ratios may be shown as of end of the 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

Empire Co. Ltd., owner of the supermarket chain Sobey’s, top our list with a relative EPI of 1.38. Moreover, its SP score, at 76, is tied with North West Co. Ltd. for highest of our names, and Empire also has second-highest one-year dividend growth at 15.4 per cent. The company ranks higher than other grocery chains on our screen, such as Metro Inc. and Loblaw Cos. Ltd., owing to Empire’s significantly lower valuation on a P/E or P/B basis. The market seems cautious to award credibility to the company’s recent strong results.

Quebecor Inc., a telecom primarily serving Quebec, has the highest three-year and one-year dividend increase at 60.6 and 21.1 per cent. It also has the second-highest relative EPI at 1.37, reflecting its lower valuation. The company trades at the lowest P/E and P/B of our screen, at 11.3 and 0.9, respectively. Despite its recent plan to acquire Freedom Mobile, which would expand Quebecor’s wireless operations nationally, the market didn’t particularly react to the news. The market could fear the impact of the acquisition on the balance sheet or doubt the management’s ability to succeed in this breakthrough outside of Quebec.

Atco Ltd., an electricity, logistics and energy infrastructure company, is fourth in our list, the highest-ranking name from the utilities sector. Its performance metrics are generally less impressive than either Quebecor or Empire, but like the other utilities stocks on our list (Hydro One Ltd., Fortis Inc.), Atco provides stable results and is a candidate to weather almost any storm.

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: inovestor.com/en-CA/store/

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.

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

Source: Inovestor

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.

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.

What are we looking for?

Consumer discretionary companies whose trailing return on capital is below historical levels, suggesting that there is room to grow their profitability.

The screen (add this screener here)

The consumer discretionary sector is cyclical, and a trend reversal is anticipated. Companies that have profited heavily from the pandemic environment, pushing their return on capital to unsustainable levels, can expect this key profitability metric to revert to historical levels in the next few quarters.

That said, not all consumer discretionary companies will be equally affected by the trend. A solid contrarian strategy is to buy companies where the return on capital is historically low – and sell when it is high.

With that in mind, we screened North American stocks focusing on the following criteria:

• Market capitalization higher than $1-billion in their respective currency;
• Five-year average annual return on capital higher than 10 per cent – we look for a company with proven long-term profitability;
• Trailing return on capital lower than the five-year return on capital (and which, according to our strategy, can reasonably be expected to revert to its historical level);
• Positive sales growth in the past three months – we look for a company with a positive industry trend (and this is how our list is ranked);
• Three-month growth in net operating profit after tax (NOPAT) higher than 3 per cent.

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