Anthony Menard

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

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.

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

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

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.

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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

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.

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