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StockPointer® Canada Portfolio Transactions – July 2020

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Stockpointer® Canada model portfolio. These trades are effective as of Friday, July 17th after market close. Here are the details of the trades:

Ins:

1. Thomson Reuters Corp (TRI) – Market Trend. Increase in the discretionary sector as shown by the Top 100 index, therefore, increasing our position in the portfolio.
2. Empire Company (EMP.A) – Market trend. Increase in the Consumer Staples sector.
3. Richelieu Hardware Ltd. (RCH) – Intra-sectorial transaction. In the top of its sector.

Outs:

1. CCL Industries Inc. Class B (CCL.B) – Market Trend. Decrease in the materials sector as shown by the Top 100 index, decreasing our position in the portfolio.
2. Stella-Jones (SJ) – Market trend. Decrease in the materials sector.
3. Gildan (GIL) – Intra-sectorial transaction. No longer in the top of its sector.

Rebalancing :
The purpose of rebalancing is to limit idiosyncratic risk associated with individual stocks. The re-balancing process resulted in a 3.5% weight for each on the following stocks: Thomson Reuters Corp. (TRI), Richelieu Hardware (RCH), Empire Company (EMP.A), Dollarama (DOL), Fortis Inc. (FTS) and Winpak (WPK).

1. We have reduced the weight of Constellation Software (CSU) from 11.3% to 9%.
2. We have reduced the weight of Alimentation Couche-Tard (ATD.B) from 10.6% to 9%.

 

Number Cruncher Extra: Alimentation Couche-Tard, Lassonde & Metro

In our last Number Cruncher, we covered Alimentation Couche-tard, Lassonde Industries and Metro. We will go into more detail about these titles with our software.

Here is the screener we used in our last Number Cruncher that you can play with. You also can subscribe the Inovestor for Advisors platform for free here

Let’s start with Alimentation Couche-Tard:

The company is solid despite its decrease in last year-over-year sales due to the decrease in gasoline sales. The increase in sales occurs organically, but also by acquisition, which explains its strong growth. The performance spread is also declining, but we will look at it more in detail and see why it is not a problem.

We see that the company has some volatility in its return on capital and that 2015 was a strong year. Although the software shows a decrease in the performance spread, we don’t think this is a cause for concern.


Lassonde had a good quarter and paves the way for a strong year thanks to the pandemic, which is causing consumers to spend more at the grocery store. The company has been able to generate double digits growth in earnings per share despite low single digits sales growth.

When looking at the Future growth value (FGV) of the company, one notices that the company is severely evaluated by the market. The FGV represents the growth portion of the company that an investor buys. In this case, the FGV is negative, so the investor would buy the company at a discount compared to its current activities. The market considers that the company will have a decrease in its growth in the coming years which may not be justified.

Metro has a very high score in our system. In fact, it is the Canadian company with the second highest score across all sectors. The average profit growth of 42% is certainly a reason. The risk is perceived as very low by our software. A large part of this risk is associated with evaluation, so according to our system Metro is cheap when compared to its previous performance.

Looking at the comparables, the company stands out by being the highest value for the Y-axis, which means that it is the best performer. Moreover, it is in the right-hand quadrant, which means that it is relatively inexpensive. GB is a micro cap of $3M and doesn’t have the stability of Metro.

 

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

Consumer Staples Stocks With Solid EPS Growth

What are we looking for?
Canadian consumer staple stocks with vigorous long-term growth in earnings per share and robust return on capital.Since the beginning of the year, the difference in returns between consumer staples and the broader Canadian market has been striking. In the first six months of the year, the sector has kept its head above water at 0.6 per cent while the broader market stood at minus 9.1 per cent.

The second quarter rebound by the S&P/TSX Composite Index was less evident among staples stocks, but they are still comfortably ahead of the broader market. Work-from-home policies and general consumer cautiousness to avoid crowded areas continue to drive grocery spending and place consumer staples in a profitable environment.

The screen
Here is the screener we used and that you can play with

We screened companies focusing on the following criteria:

  • Market capitalization higher than $250-million;
  • Five-year average EPS growth higher than 8 per cent – we want a company that has been able to grow its earnings per share at a rapid pace;
  • Most recently reported return on capital higher than 5 per cent. We look for a business with a decent ROC, and will rank the companies by this metric. We focus on the short-term return owing to the abnormal environment created by the pandemic;
  • Positive price-to-earnings ratio – We want to eliminate unprofitable companies.

For informational purposes, we have also included: recent stock price; dividend yield; one-year price return; change in net operating profit after taxes (NOPAT) over the most recent three months; sales growth over the past 12 months; and five-year average sales growth.

TICKER NAME PRICE ($) MKT CAP ($MIL.) EPS GROWTH AVG 5Y (%) RTN ON CAPITAL (%) NOPAT CH. 3M (%) SALES CH. 12M (%) 5Y AVG Sales Growth (%) P/E DIV. YIELD (%) 1Y PRICE RTN. (%)
ATD-B-T Alimentation Couche-tard 45.75 50940 24.2 13.6 0.7 -7.1 13.5 16.2 0.6 10.6
LAS-A-T Lassonde Industries, Inc. 154.45 1070 12.6 12.3 2.1 6.5 3.8 13.2 1.7 -18.9
MRU-T Metro Inc. 56.64 14280 9.2 11.1 0.3 6.6 8.3 19.5 1.6 14.0
WN-T George Weston Limited 101.30 15650 52.2 9.5 1.0 4.6 2.1 12.1 2.1 0.1
PBH-T Premium Brands Holdings Corp 87.32 3280 32.0 8.0 0.5 18.3 25.6 36.8 2.7 -7.0
ADW-A-T Andrew Peller Limited Class 8.26 383 8.5 7.3 -1.6 0.1 3.4 15.0 2.5 -41.7
L-T Loblaw Companies Limited 67.43 24130 69.9 5.5 0.3 4.1 1.8 21.9 1.9 0.4

 

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).

What we found

Convenient store giant Alimentation Couche-Tard tops our list with an ROC of 13.6 per cent. It shows a five-year EPS growth rate of 24.2 per cent and in the last year alone has increased its EPS by 29 per cent (not shown). Sales declined over the past 12 months compared with the previous year because of lower fuel volumes sold, but margins profited from the sharp decline in price of oil. The environment is certainly challenging, but the company showed resilience in its last quarterly report. Couche-Tard has an impressive track record and the P/E ratio seems quite reasonable considering its EPS growth and high return on capital. Economies of scale allow for greater margins while revenue diversification favours the stability of its returns.

Juice producer Lassonde Industries Inc. has the highest three-month NOPAT growth on our list. The company certainly has a substantial tailwind with its focus on retail products, but Lassonde also reported strong earnings growth and return on capital in the past. Twelve-month sales growth stands at 6.5 per cent, stronger than its 3.8 per cent annual sales growth over the past five years. Historically, its growth has been mostly done by acquisition owing to low growth in its industry, a strategy that seems to have paid off effectively.

Food and drug retailer Metro Inc. has realized an annual sales growth of 8.3 per cent over the past five years and 6.6 per cent in the most recent 12-month period. Its ability to increase the amount of invested capital combined with a strong return on capital while experiencing low sales volatility is the perfect recipe to a resilient business. The company has been fortunate in the crisis and could continue to benefit from increased grocery spending in the next few quarters.

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

Portfolio Manager’s July Comment For Q2 2020

In the second quarter, the S&P/TSX Composite Total Return Index increased by 17%, the S&P500 total return grew by 20.5% while the MSCI ACWI ex-USA returned 16.3%.

Q2 returns were eye-popping and are pointing to a V-shaped recovery. Growth and technology have continued their outperformance compared to the rest of the market.

In Q2, NQICA returned 15.2% leading to a year-to-date return of -13.4% versus the S&P/TSX composite which increased by 17% in Q2 and declined -7.5% on a year-to-date basis.

In Canada, the best Q2 sectors were Info-Tech up 68.2%, Materials up 41.6% and consumer discretionary up 32%. The worst sectors were telecommunication services down 2.1%, Utilities up 2.7%, and Financials up 4.8%.

The NQICA’s worst performers in the second quarter were Evertz with a return of -14.3% as the company has been affected by the shutdown of professional sports, Fortis declined by 3.9% given the company’s profile was less attractive during the recovery and Winpak with a return of -3.3% caused by lower than expected sales and profits.

On the other hand, the best results in the second quarter were TFI International with a return of 56.2% as the acquisition of Gusgo Transport has been well received by the market, Canadian Tire jumped 40.1% as the retailer kept its stores open and was able to protect its profits and Parkland Corp. grew by 39.1% helped by rising oil prices.

StockPointer® US and ADR Model Portfolio Transactions – June 2020

We have rebalanced the Stockpointer® US and ADR model portfolios which are effective now. Here are the details for the US portfolio :

Ins:

  1. United Therapeutics Corporation (UTHR) – Market Trend. Increase in the Healthcare sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.
  2. AT&T Inc. (T) – Market Trend. Increase in the Telecommucations sector.
  3. Federated Investors (FHI) – Intra-sectoral transaction. In the top of its sector.


Outs:

  1. Constellation Brands, Inc. Class A (STZ) – Both a Market Trend and an intra-sectoral transaction. Decrease in the consumer staples sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio. The company’s EPI also fell below 1.
  2. Employers Holdings, Inc. (EIG) – Both a market trend and an intra-sectoral transaction. Decrease in the Financial sector and no longer in the top of its sector.
  3. South State Corp (SSB) – Intra-sectoral transaction. No longer in the top of its sector. This company was in our portfolio following the merger with CenterState Bank Corportation (CSFL).

 

Here are the details for the ADR portfolio:

Ins:

  1. Swedish Orphan Biovitrum AB (BIOVF) – Market Trend. Increase in the Healthcare sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.
  2. Globe Telecom Inc. (GTMEF) – Market Trend. Increase in the Telecommucations sector.
  3. Ford Otomotiv San (FOVSY) – Intra-sectoral transaction. In the top of its sector.
  4. Daito Trust Construction (DITTF) – Intra-sectoral transaction. In the top of its sector.
  5. Wipro Technologies (WIT) – Intra-sectoral transaction. In the top of its sector.
  6. China Resources Cement (CARCY) – Intra-sectoral transaction. In the top of its sector.

 

Outs:

  1.  Trane Technologies (TT) – Market Trend. Decrease in the industrial sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio.
  2. Fomento Económico Mexicano (FMX) – Market Trend. Decrease in the Industrial sector.
  3. Megacable Holdings (MHSDF) – Intra-sectoral transaction. No longer in the top of its sector.
  4. DBS Group Holdings (DBSDF) Intra-sectoral transaction. No longer in the top of its sector.
  5. Garmin (GRMN) – We decided to exclude this stock because it is not an ADR and we think this is a good timing to do it.
  6. LyondellBasell (LYB) – We decided to exclude this stock because it is not an ADR and we think this is a good timing to do it.

Defensive Stocks with High Dividend Growth & Sustainability: BWX Technologies Inc, Quebecor Inc & Telus

In our last Number Cruncher, BWX Technologies Inc, Quebecor Inc & Telus were the top 3 in our screen. In this Number Cruncher Extra, we will go into more detail about these companies in Stockpointer.

The company has a significant SP Score of 60. In the short-term, sales, earnings per share and performance spread is uptrending. The stock clearly has momentum in its fundamentals. The long-term perspective is also good with solid past growth in all the variables. Briefly, it is difficult to say anything negative about these numbers except for the risk score which stands at 48. It’s a bit high, but the performance score of 87 surely compensate that risk.

 

This is the factor comparaison of BWX Technologies Inc. The stock could be classified as a quality and growth stock. The overall ranking is higher than its peers and sends a good signal.

 

Quebecor is the second company of our list. The interessing element with this business is its tremendous dividend growth. The dividend yield, not to be confused with the dividend per share, increased by 54% in the last 5-year. The company aggressively grew it’s dividend resulting in a higher dividend yield and the market didn’t increase as much as the dividend growth. The company has also solid earnings per share in the last year and the last 5-year.

 

This is the Economic Value Added section of Quebecor. The firm increased its NOPAT over the years, but also increased it’s EVA. The EVA can be seen as the value created by a company. Typically, some companies can growth their NOPAT, but engages in non-value generating activities which hurt shareholders in the long-term. In this case, the management intelligently used its capital to generate value.

Telus has the highest score of our Number Cruncher Extra. The performance score is close to 70 and at the same time the risk score is only at 36. With these scores, Telus has a great risk-return profile and a appreciable SP score of 65. The firm is more mature than the others and generated lower growth, but Telus also pays a 5% dividend which represent 64% of its net income. 5.5% growth in EPS and a 5% dividend could be seen as a 10.5% return for its shareholders.


The low risk score can be explained with its high and stable return on capital. It’s important to mention that the company increased it’s net operating profit after taxes (NOPAT) by 35% over 5-year which represents a 6.1% growth. The firm may not be the most exciting in terms of growth, but it is impressively solid.

You can subscribe the Inovestor for Advisors platform for free here

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

Seeking Downside Protection Among Utilities, Telecom Sectors

What are we looking for?
Last week’s sharp market downturn reminded us of the not so distant, painful memories of the market correction of last February and March. As the saying goes, stocks take the staircase up and the elevator down. This is why investors can make use of defensive stocks to protect their portfolios and limit their downside. Utilities and telecommunications stocks can be great defensive holdings.

Today, we will look at Canadian and U.S. large caps in the telecom and utilities sectors. Dividends are a key component of these sectors, so we will focus on companies with a sustainable payouts.

The screen
We screened companies focusing on the following criteria:
· Market capitalization greater than $5-billion (Canadian);

· Four-year annual dividend growth higher than 6 per cent. A company whose dividend is
increasing should see its total return follow the same trend;

· Growth in net operating profit after taxes (NOPAT) over 24 months. The company needs to increase its operating income to have a sustainable growth in its dividend;

· StockPointer (SP) Performance Score of more than 65 – The score mainly takes into account risk-adjusted return on capital and free cash flow per share. A great score means the company has a good profitability to increase its dividend. The score varies between zero and 100.

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

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). For more details about these defensive stocks, please subscribe the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/

Company Ticker Sector Mkt. Cap. ($ Mil.)* 4Y Ann. Div. Growth (%) 24M NOPAT Chg. (%) SP Perform. Score Div. Payout (%) Div. Yld. (%) 1Y Price Rtn. (%) Recent Price ($)*
BWX Technologies Inc. BWXT-N Utilities 5,600 22.6 2.0 87.5 24.8 1.3 17.5 58.79
Quebecor Inc. QBR-B-T Telecom 7,450 66.5 0.5 70.0 16.8 2.7 -8.6 29.50
Telus Corp. T-T Telecom 29,780 7.4 0.9 69.7 64.0 5.0 -4.5 23.30
Portland Gen’l Electric POR-N Utilities 3,990 6.4 2.7 68.8 61.3 3.5 -19.3 44.63
Fortis Inc. FTS-T Utilities 23,860 6.7 1.6 68.1 38.0 3.7 -1.0 51.39
Canadian Utilities Ltd. CU-T Utilities 8,490 8.9 1.8 66.7 59.6 5.6 -18.5 31.02
American Water Works AWK-N Utilities 23,040 10.1 0.8 66.3 56.8 1.7 9.1 127.29
CMS Energy Corp. CMS-N Utilities 16,690 7.1 1.1 65.9 62.5 2.8 0.6 58.30
* Figures shown in native currency. Source: Inovestor

What we found
BWX Technologies Inc., a U.S. supplier of nuclear fuel and components, has the highest SP Performance Score of our filtered list. Its dividend grew at an average annual rate of 22.6 per cent over the past four years. Its revenue grew by more than 6 per cent annually over the past five years and return on capital went from 8.5 per cent to 19.1 per cent over that period. With a dividend payout of 24.8 per cent, we see room for future increases.

Media conglomerate Quebecor Inc. increased its dividend in the past four years by an average annual 66.5 per cent. The lack of investment opportunities may be the reason behind this decision, in which case increasing the dividend rather than doing bad investments could be viewed as a wise decision. The payout ratio is the lowest on our list at 16.8 per cent, leaving further room for additional increases without jeopardizing the business’s sustainability.

Telus Corp., one of the Big Three mobile phone operators in Canada, has the second-largest market capitalization of our screen (the largest market cap, belonging to American Water Works Co., is shown in U.S. dollars). Telus also shows stable and high returns on capital, which are reflected in its SP Performance Score of 69.7. The company seems a safe choice. Although its four-year annual dividend growth rate is considerably lower than either BWX or Quebecor, Telus’s strong market share and economies of scale should allow it to continue to increase its dividend in the future.

Investors are advised to do further research before investing in any of the companies shown in the accompanying table.
Here is the screen we used :

Portfolio Manager’s June comment For May Results

The Canadian stock market continued to rally in May. The S&P/TSX Total Return Index rose by 3% during the month, while the S&P 500 and the MSCI ACWI ex. USA gained 4.7% and 3.3% respectively. At May end, the year-to-date S&P/TSX Total Return Index loss was 9.7% while the S&P500 shrunk by 5% and the MSCI ACWI ex. USA fell off 14.6%. Despite being in negative territory, all equity indexes are now into a V-shape recovery.

The best TSX sectors for the month of May were Information Technology up 14.6% and Consumer discretionary up 8.1%. At the opposite, the worst performing sectors were Real Estate down 0.4% and Utilities unchanged on the month.

Our best performers in May were Canadian Tire up 20.4%, Parkland Corp up 17.6% and Constellation Software up 16.9%.

On the other hand, the weakest contributors were Kirkland Lake Gold down 7.8%, First National down 4.5% and Equitable group down 3.7%.

Real estate investments to cushion your portfolio

The increased uncertainty in the economy and volatility in the stock markets is causing investors to stumble on their investment decisions and looking to diversify their portfolios.

It is widely viewed that real estate is recession-proof. While the large capital investment is the common hurdle that prevents most investors from dipping their feet in the water, we look at real estate investment trusts (REITs) as the welcoming alternative. REITs enable investors to diversify their portfolio by owning shares of real estate properties with the desirable feature of liquidity while earning some steady monthly income.

WPT Industrial Real Estate Investment Trust (“the REIT”) (TSX: WIR.U, WIR.UN) focuses on acquiring, developing, and managing industrial properties primarily located in the United States.

Diving into the fundamentals using Inovestor’s Stock Guide platform, the REIT has demonstrated strong performance YOY with an upward trending revenue and controlled cost of operations. With a decent return on invested capital, the company appears to have no major issue meeting its debt obligations as evidenced by several historical debt-related ratios, a healthy interest coverage ratio, and a comfortable level of cash. It is also worth noting that the operating revenues do not follow the growth of assets and debt. As a result, asset turnover is declining while the return on assets is increasing.

2019-12-31 2018-12-31 2017-12-31 2016-12-31 2015-12-31
Accounts Receivable / Days 8.255 7.776 7.658 7.448 6.659
Acid Test 0.194 0.219 0.188 0.549 0.248
Assets to Debt 4.98 3.185 2.868 2.514 2.341
Assets to Debt + EECD 4.98 3.185 2.868 2.514 2.341
Cash Flow to Debt 0.248 0.158 0.159 0.152 0.15
Cash Flow to Debt + EECD 0.248 0.158 0.159 0.152 0.15
Current Ratio 0.194 0.219 0.188 0.549 0.248
Debt to Equity 0.366 0.605 0.662 0.835 1.631
Debt + EECD to Equity – EECD 0.366 0.605 0.662 0.835 1.631
Debt Ratio 0.268 0.377 0.398 0.455 0.62
Debt Ratio + EECD 0.268 0.377 0.398 0.455 0.62
Dividend Payout  (Common) 44.504 67.994 57.298 68.935 61.823
Dividend Yield 7.159 8.044 7.516 8.599 8.339
Earnings Yield 16.749 11.727 13.114 12.4 13.435
Interest Coverage 4.944 3.771 4.811 3.576 2.584
Net Profit 83.347 53.175 64.199 47.791 31.977
Price to Book Value 0.798 0.772 0.855 0.804 0.827
Price to Cash Flow 7.614 7.85 7.232 5.679 3.375
Price to Invested Capital 0.584 0.481 0.515 0.438 0.314
Price to EBITDA 4.68 6.204 6.041 5.808 4.547
Price to Sales 4.977 4.538 4.896 3.853 2.372
Price to Earnings 5.971 8.528 7.625 8.064 7.443
Return on Invested Capital 10.485 7.387 7.574 6.749 6.911
Return on Common Equity 11.555 7.08 9.537 7.488 7.506
Return on Assets 6.097 4.378 5.148 4.154 2.868

 

Change in supply chain management will play a key role in the real estate allocation in a portfolio. Given that WPT Industrial Real Estate Investment Trust is engaged mostly in the Industrial sector and the US President’s call to reclaim the global supply chain back in the U.S, investing in companies that are vertically integrated seems to be a good strategy. Intuitively speaking, Industrial REITs will benefit from manufactures relocating operations to North America in search of warehouse and distribution centers

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