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Number Cruncher Extra: Kirkland Lake Gold, IA Financial Corporation and Toromont Industries

OVERVIEW
In our system, Kirkland Lake Gold, Toromont Industries and IA Financial Corporation have an overall score higher than 60 which implies a positive outlook. These stocks are all clasified as quality because of their long-term track record. All stocks are classified as growth stocks as well because of their high growth in sales and profitability over the last years, but Toromont Industries is also classified as bad value because of its expensiveness determined by its price-to-book  and price/earnings ratio. Kirkland Lake is identified as a low risk stock because of its low beta. In portfolio construction, gold miners are often seen as a great diversification tool because of their low correlation or even negative correlation with the market.

A GOOD PERFORMANCE SPREAD IS KEY
The performance spread is the difference between the return on capital and the cost of capital. A company with high volatility will have a cost of capital higher than a less volatile one. This is why the price/earnings for highly cyclical stocks is often low, the market wants to be rewarded by taking higher risk. A company with high return on capital while maintaining a low cost of capital creates value.

Ia Financial Corporation and Kirkland had times where their cost of capital was higher than their return on capital while it never happened for Toromont Industries. If you are looking at quality, the latter seems the best of the list.


Ia Financial Corporation was slighly destroying value in 2015, but it reversed since. The company generated a return on capital higher than its cost of capital overall, but the company is vulnerable to lower interest rates because of its business in life insurance. Also, a bear market means lower fees from their advisors, This is why IA Financial Corporation is already down more than 50% since the start of the crisis. The company is correctly priced if we consider that it will generate a return on capital of 0% in 2020 and one of 10% in the long-term which should be considered as a conservative scenario.

 


If we look at peers, Kirkland seems affordable because it is at the right compared to the Y axis and produce high value because it is a lot higher than the X axis. That is exactly the kind of stock that you want. On the other hand, we need to be careful because the last 12-month has been incredible for Kirkland. This may overstate the company’s sustainable performance, but it still has a great long-term track record.

 

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

 

Cyclical Large-Cap Stocks for Investors to Keep on Their Radar

What are we looking for?

As expected, cyclical sectors have been hit harder than defensive ones in the past month. Switching now to defensive stocks, which are far less correlated than cyclicals to the overall economy, may limit losses in the shorter term, but also future gains during a rebound. On the expectation of an eventual slowdown in the number of COVID-19 cases, it may be prudent for investors to keep cyclical stocks on their radar.

Today, we will be looking at cyclical large caps in Canada with a focus on companies that have a good track record in the past five years. Please note that all financial ratios are reported at the end of the previous quarter and do not reflect the impact of low oil prices and COVID-19.

The screen

We screened Canadian companies from the consumer discretionary, energy, financials and materials sectors, focusing on the following criteria:

  • Market capitalization greater than $3.5-billion;
  • Five-year average return on capital higher than 8 per cent – we want to find profitable companies that have a good return on investment in the long term;
  • Sales growth higher than 6 per cent over 24 months – a great company should have been able to grow its revenue in the past 24 months;
  • Net operating profit growth higher than 20 per cent over 24 months – we want to see growth in the bottom line while excluding the impact of interest rates and taxes.

For informational purposes, we have also included recent stock price, dividend yield and one-year price return.

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. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks and American depositary receipts).

 

TICKER NAME PRICE ($) MKT CAP ($MIL.) SALES CH. 24M (%) RETURN ON CAPITAL 5-YEAR AVERAGE (%) NET OPERATING PROFIT Ch. 24M (%) 1Y PRICE RTN. (%) DIV. YIELD (%) SECTOR
KL-T Kirkland Lake Gold Ltd. 36.75 10540 88.7 19.5 266.3 -17.7 1.8 Materials
TIH-T Toromont Industries Ltd. 58.32 4780 56.5 17.5 63.9 -13.2 2.1 Industrial – Commercial Svcs and Supplies
IAG-T Ia Financial Corporation Inc. 37.05 3963 26.6 12.8 22.2 -26.7 5.2 Financials – Insurance
RBA-T Ritchie Bros. Auctioneers Inc. 40.91 4480 120.8 11.9 46.1 -9.5 2.6 Industrial – Commercial Svcs and Supplies
SLF-T Sun Life Financial Inc. 36.44 21391 22.1 11.0 21.2 -27.6 5.7 Financials – Insurance
MFC-T Manulife Financial Corporation 13.62 26540 37.0 10.6 173.1 -40.6 8.2 Financials – Insurance
WSP-T Wsp Global Inc. 64.08 6800 28.4 8.8 46.4 -11.7 2.3 Industrial – Capital Goods

What we found

Kirkland Lake Gold Ltd., Toromont Industries Ltd. and IA Financial Corp. Inc. are the companies with the best five-year average return on capital while showing strong operating profits and sales growth. We believe these stocks in particular are worth further investigation by investors.

Note that three of the seven stocks on our list are life insurance companies, which are negatively affected by lower interest rates, but they also have strong capital ratios that will help them weather the current environment.

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

For more information about these cyclical stocks, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/

Opportunities might arise during bear markets

WHAT ARE WE LOOKING FOR?

From February 20, to March 5, 2020, the S&P 500 was down more than -15%, officially landing in the market correction territory. As the COVID-19 continues to spread in new territories, global supply chains are being disrupted, and companies are readjusting their forecasts. Mainland China is the most impacted with 111,363 confirmed cases and a death rate of 3.7% (as of 09/03/2020). Although we are facing a lot of uncertainty in the global economy and the financial markets, this might be a good opportunity for investors to buy stocks at a discounted price.

Today we will be looking at US fundamentally-sound stocks that are trading at a discount, giving the recent market correction.

THE SCREENER

  • market cap: $1B – we are only looking for large cap companies
  • Current SP Score: A minimum score of 50. The SP Score is a scoring system model, based on a 12-factor algorithm, which focuses on quality and value. The weights for quality and value are 75% and 25%, respectively.
  • Price 20-day Change (%): Stocks that are down at least –15% in the past 20 days. A 15% drop is considered a market correction
  • Increase in NOPAT over 24 months: at least 5% increase in NOPAT over the last 24 months. We are looking for companies that can increase the profitably of the business
  • Positive EVA: We are looking for companies with positive EVA only. Economic Value Added (EVA) is a measure of true economic profit created by a company. The higher Economic Value Added, the more value a company generates for its shareholders.
  • Increase in Sales over the last 24 months: At least a 7% increase in sales over the last 2 years. We are looking for company that can scale and grow the business
  • Dividend yield: At least a yield of 3%. This is an indicator that the company can distribute their profits with the shareholders

 

 

WHAT WE FOUND

We found 10 companies that were potentially affected by the market correction but appear to have strong fundamentals.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) CURRENT SP SCORE NOPAT ($) NOPAT CHG. 24M (%) EVA ($) SALES CHG. 24M (%) DIV. YIELD (%) 20D PRICE RETURN(%) 1YR PRICE RTN.(%)
CSCO Cisco Systems, Inc. 39.68 168282.88 57 12558.94 5.70 2178.16 7.19 3.05 -18.80 -22.87
VNO Vornado Realty Trust 52.35 9998.10 56 3717.36 12.19 2109.23 156.51 3.97 -20.95 -20.40
CMA Comerica Incorporated 44.81 6367.30 70 1207.15 6.88 196.67 15.81 3.74 -26.94 -39.57
SNV Synovus Financial Corp. 25.58 3764.29 71 607.47 9.44 241.97 67.08 3.06 -30.05 -26.86
SHLX Shell Midstream Partners Lp 15.1 3522.67 56 602.33 8.54 453.59 7.00 8.36 -24.31 -4.31
MCY Mercury General Corporation 44.31 2452.91 55 320.09 7.14 214.03 13.53 5.16 -17.49 -18.24
EVR Evercore Inc Class A 61.67 2415.98 73 360.46 6.86 221.71 17.08 3.00 -23.93 -27.67
PAGP Plains Gp Holdings Lp Class 12.2 2222.09 63 2304.97 6.24 803.80 26.32 7.28 -24.03 -40.62
GEF-B Greif Class B 37.07 2197.23 53 483.68 6.44 291.95 29.21 3.71 -24.47 -11.99
CADE Cadence Bancorporation Class 12.06 1538.83 56 217.18 7.29 4.67 99.04 3.86 -25.88 -29.36

 

Cisco Systems is one of the global players in the Network and Cloud industry. They have been increasing their revenue year-over-year as well as their operating margins. One of the strategies put in place to boost revenues is to offer new products targeted to small businesses This could be a game changer, as we see the rise of small businesses in North America. Although the company beat Q2 earning, the stock dropped due to fears of COVIS-19, as 40% of their sales is outside the US. Given its potential, the stock price has been trading at the same price level as February 2018 – this might be a good buying opportunity.

Vornado Realty Trust is a real estate investment trust formed in Maryland, with its primary office in New York City. The company invests in office buildings and street retail in Manhattan. They have been constantly distribution a stable dividend yield of around 3.9%. The company has been increasing the net profit margin, ROE and ROA over the last 3 years. They are the largest owner of LEED-certified property in the US, with more than 27 million square feet of LEED-certified properties. With a solid balance sheet and a strong market presence in the US, Vornado might be trading at a discount given a rent drop of -21% last 20 days

 

For more details about Vornado Realty Trust and Cisco Systems, performance, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/

A Closer Look at Seven Beaten-Down Tech Stocks

WHAT ARE WE LOOKING FOR?

Once again, the U.S Information Technology (IT) sector is outpacing the broader market. As of Feb. 21, The sector is up 10.7% while the S&P500 is up 4.4%, since the start of the year. The IT sector is well known for its high growth companies with high multiples while the value ones are often forgotten.

Today, we will be looking for value U.S large cap in the IT sector with the focus on companies that have been beaten by the market over the last year. Such stocks often offer great value, but sometimes the lower valuation is justified, so we need to be mindful of this caveat.

THE SCREEN

We screened the U.S companies from the IT sector by focusing on the following criteria:

  • Market capitalization greater than $10-billion;
  • Price earnings ratio between 0 and 27.5 – We want a company with positive earnings and one that is not too expensive;
  • Return on capital higher than 10% – We want to find profitable companies that have good return on investments;
  • A free-cash-flow-to-capital ratio higher than 0% – We want a company that generates positive free cashflow.

For informational purposes, we have also included recent stock price, dividend, one-year return and 24-month change in sale. Please note that some ratios may be reported at the 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. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

WHAT WE FOUND

First, we compute the inverse of the price earnings ratio, also known as the earnings yield. Then, we calculate the average of each of the following: earnings yield, the FCF to capital, the return on capital and the 24-month sales growth for each company. Taken together, these calculations allow us to distinguish cheap companies with good fundamentals from those with bad ones. They are ranked accordingly, by a filter selection score.

Based on our selection filter, Seagate Technology and NetApp have the worst results as their fundamentals seem to support the low valuation. Arista Networks has the highest score of the list. The company offers a decent price earnings of 20 for a great 26% return on capital, 28% FCF to capital and 46% 2-year sales growth. On February 13th, Arista Networks reported a decline of 7.2% in Q4 2019 sales over Q4 2018, but the sales increased of 12.1% on a year over year basis.

For more details about Arista Networks stock and performance, please subscribe the Inovestor for Advisors platform for free: https://www.inovestor.com/en-CA/store/

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

Ticker Name PRICE($) PRICE/EARNINGS EARNINGS YIELD (%) FCF / CAPITAL RETURN ON CAPITAL (%) SALES CH. 24M (%) PRICE BELOW 12M HIGH (%) 1Y PRICE RTN. (%) MKT CAP ($MIL.) DIV. YIELD (%) FILTER SELECTION SCORE
ANET-N Arista Networks, Inc. 228.28 20.3 4.9 28.1 26.0 46.4 31.1 4.0 17438 0.0 25.2
TWTR-N Twitter, Inc. 39.05 20.5 4.9 7.4 11.1 41.6 14.8 -3.2 30444 0.0 15.0
XLNX-Q Xilinx, Inc. 89.79 25.9 3.9 10.0 14.7 30.7 36.6 -24.5 22343 1.7 13.9
DELL-N Dell Technologies Inc Class 52.95 9.7 10.3 4.3 16.8 19.4 25.0 0.4 38601 0.0 10.2
CSCO-Q Cisco Systems, Inc. 46.85 18.2 5.5 8.8 12.5 7.2 19.6 -2.8 198691 3.1 7.2
NTAP-Q Netapp, Inc. 53.71 12.5 8.0 7.2 15.2 -2.6 31.4 -16.3 11924 3.7 5.0
STX-Q Seagate Technology Plc 54.75 8.8 11.4 4.1 14.1 -6.3 14.7 28.7 14290 4.8 3.0

Number Cruncher Extra: Arista Networks Inc

Following our article in the Globe and Mail, here is a Number Cruncher Extra for our readers about our top pick of the week Arista Networks Inc.

In our system, Arista Networks comes out with a positive outlook of 58. The performance score is close to 78 showing a strong performing company while the risk score of 47 displays a medium risk company. Arista Networks had sale growth of 30,8% annually and earnings growth of 74.7% in the last 5 years. The performance spread, which represents the difference between the return on capital and the cost of capital, grew by 12.3% in the last five years and is now close to 14%.

Here, we can see the company continues to add value through its EVA and the trailing twelve months NOPAT grew at almost every quarter. The NOPAT exploded in the last 5 years from $162.7M$ to 876.1M$. The return on capital is higher than 5 years ago, but the cost of capital increased also because of the volatility of the stock. The performance spread is still higher than 5 years ago showing a company that creates value for their shareholders.

 

Compared to peers, the stock does well overall and is often in the top of the list for the quality, value, growth and risk factor. first of a list of 10 companies, Arista Networks does particularity well on the quality factor.

10 Canadian midcap stocks with good momentum

What are we looking for?

At least until Monday’s pullback, the S&P/TSX Composite Index has been on a great run, rising more than 3 per cent this year as of Friday’s close. Investor sentiment driven by expectations of a positive earnings season, a stable economic outlook and the China-U.S. Phase 1 trade deal have helped the market reach new record highs in 2020. Investor sentiment, driven by expectations of a positive earnings season, a stable economic outlook and the China-U.S. Phase 1 trade deal, have helped the market reach new record highs in 2020.
Today, we look for Canadian mid-cap stocks that had a good run in the short term, and where price gains are supported by fundamentals such as sales and profitability.

The screen
We screened the Canadian companies by focusing on the following criteria:
•Market capitalization greater than $500-million and lower than $3-billion;
•Price change over one month higher than 2 per cent – we are looking for companies with a positive momentum in the very short-term;
•Price change over three months higher than 6 per cent – we are looking for companies with a positive momentum in the short-term;
•A return on capital more than 7 per cent – we want to find profitable companies that have a good return on investment;
•Sales growth higher than 10 per cent over 12 months – we are looking for a growing company. (Sales growth of 10 per cent may seem like a lot, but smaller companies can grow more easily than big ones);
For informational purposes, we have also included recent stock price, dividend yield and one-year price return. Please note that some ratios may be reported at the end of the previous quarter.

What we found

We found 10 companies with these criteria, with the accompanying table ranked by 12-month sales growth. K92 Mining Inc, Wall Financial Corp, and Heroux-Devtek Inc being the top three of the group.

Log in to you account to get additional information in Number Cruncher Extra or to modify the original screener.

Dividend Paying Stocks in the Gold Sector

WHAT ARE WE LOOKING FOR?
Gold is reaching price highs not seen since 2013, because of dovish central banks and the geopolitical volatility caused by the U.S.-China trade war and, most recently, the U.S.-Iran crisis. Gold is up 21 per cent over the past 12 months. Expect gold miners to report better results in their next quarterly reports. Today, we will be looking more closely at gold miners that pay a dividend. The yield is our proxy for stable operations and we use the change in net operating profit after tax, or NOPAT, to find growing companies.
For the Globe and Mail this week, we look at dividend stocks in the volatile gold sector.

THE SCREEN
We screened the Canadian- and U.S.-listed gold miners by focusing on the following criteria: Market capitalization greater than $1-billion; Dividend yield; 12-month and 24-month change in the company’s NOPAT – appositive figure would indicate that there is growth and progress in operating efficiencies. For informational purposes, we have also included recent stock price, cost of capital (a weighted cost combining equity and debt, expressed as a percentage of total capital) and one-year return. Please note that some ratios maybe reported at the end of the previous quarter.

WHAT WE FOUND

Only 11 gold miners with a market capitalization of more than $1-billion pay a dividend.

 

Log in to you account to get additional information in Number Cruncher Extra or to modify the original screener.

Eleven Canadian companies with profit growth

Amid earnings season, investors are eager to see how companies on their watch list and in their portfolios have performed during the latest quarter. Today, we will search for Canadian dividend-paying companies with growing returns on capital invested and rising profits.

For the Globe and Mail this week, we look for Eleven Canadian companies with profit growth.

We screened the Canadian stock universe by focusing on the following criteria:

  • Market capitalization greater than $500-million;
  • Three-month and 12-month growth in net operating profit (NOP). This is a measure of operating efficiency that excludes operating costs, focusing on the company’s core operations;
  • Three-month and 12-month growth in the return on capital (ROC). This is a profitability ratio that measures the returns expected for both debt and equity investors;
  • A current economic performance index (EPI) equal to or greater than one – this ratio is the return on capital to the cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent. An EPI of one would indicate that return of capital is just enough to cover the costs of capital.
  • Dividend yield greater than 2 per cent;
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio.
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Ten utilities with the power to generate dividend growth

A review of the recently ended third quarter shows that the best performing sectors, in both Canadian and U.S. markets, were those that are particularly interest-rate sensitive, such as utilities (up 9 per cent and 6 per cent in the quarter, respectively) and real estate (up 7.4 per cent and 4.9 per cent). Today we focus on utilities. The sector has benefited from the recent decline in long-term interest rates and the market appetite for yielding assets, and it operates largely under the umbrella of long-term contracts. Hence, in our screen we look for defensive utility companies that have an attractive history of dividend growth.

For the Globe and Mail this week, we look for utility companies with the power to generate dividend growth.

We screened the North American utility stock universe by focusing on the following criteria:

  • Market capitalization greater than $5-billion;
  • A low beta – a stock with a beta less than one is considered less volatile than the market and ultimately giving companies a defensive edge;
  • Three-month growth in net operating profit after tax (NOPAT). A measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • A current economic performance index (EPI) equal to or greater than one – this ratio is the return on capital to cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent; an EPI of one would indicate that return of capital are just sufficient to cover the costs of capital.
  • Dividend yield greater than 2 per cent and dividend growth over one-, two- and four-year periods;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the NOPAT minus capital expenses.

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Revisiting Canadian energy stocks in wake of Aramco attack

West Texas Intermediate, the North American crude oil benchmark, fluctuated between US$57 and US$62 last week after the attack on Saudi Aramco, the world’s largest exporter of petroleum. The Saudi incident in and of itself will not revive the fortunes of Canada’s energy sector, but it did cause some stock prices of companies in the sector to surge, however briefly.

For the Globe and Mail this week, we look for Canadian companies involved in oil and gas production, extraction and distribution, with a focus on quality and sustainability, amid global geopolitical tensions.

We screen the domestic energy sector for companies by using the following criteria:

  • Market capitalization greater than $2-billion;
  • A positive change in the 12-month net operating profit after tax (NOPAT) – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • A future-growth-value-to-market-value ratio (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent;
  • Economic performance index (EPI) greater than 0.5 and growth in the 12-month EPI, which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. For EPI, anything above one is favourable – the higher the figure the better.

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