All Posts By

Newswire Inovestor

StockPointer® Canada Portfolio Transactions – October 2020

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Stockpointer® Canada model portfolio. These trades are effective as of Friday, October 16th after market close. Here are the details of the trades:

Ins:

  1. Quebecor Inc. (QBR.B) – Market Trend. Increase in the telecommunication sector as shown by the Top 100 index, therefore, increasing our position in the portfolio. The stock is in the top of its sector.
  2. Stella-Jones (SJ) – Market trend. Increase in the material sector. The stock is in the top of its sector.

Outs:

  1. Magna International (MG) – Market Trend. Decrease in the discretionary sector as shown by the Top 100 index, therefore, decreasing our position in the portfolio. Furthermore, the EPI fell under 1.
  2. Sun Life Financial Inc. (SLF) – Market trend. Decrease in the financial sector. Furthermore, the EPI fell under 1.

Signs of Elevated Risk in Lofty Tech Stock Valuations

What are we looking for?
The tech rally shouldn’t be a surprise considering this year’s work-from-home environment. The health and safety measures put in place by government authorities around COVID-19 forced consumers to change their habits to include more tech products in their lifestyle. But do tech stocks justify their lofty valuations?

For perspective, we compare today’s results with a similar screen of tech stocks we did two years ago (tgam.ca/IT-Inovestor).

The screen
Here is a link for our screener

We screened U.S. tech companies focusing on the following criteria:

·Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA gives us a sense of how much value this stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the capital expense;

·Positive EVA and EVA growth on a per-share basis over 12 months;

·Economic performance index (EPI) – the ratio of return on capital to cost of capital – must be greater than one;

·Average five-year return on capital must be greater than 10 per cent and the 12-month change in return on capital must be positive (not shown);

·Future growth value/market value (FGV/MV) and the 12-month change in FGV. The FGV/MV ratio 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;

·Beta – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large.

For informational purposes, we have also included recent stock price, dividend yield and one-year return (as of last month’s end). Please note that some ratios may be reported at end-of-previous quarter.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) 12M EVA CHG. EVA/S Ch. 12M EVA per Share EPI Beta FGV Ch. 12M DIV. YIELD (%) 1YR PRICE RTN.(%) FGV ($M) ROC (Avg 5 Y) FGV / MV
ZM-Q Zoom Video Communications, I 482.23                        136,191 N/A N/A 0.81 3.8 0.5 78.7 0.0 526.4              133,352 12.4 97.9%
VEEV-N Veeva Systems Inc Class A 275.56                           41,798 6.7 0.2 0.82 1.6 0.9 38.3 0.0 80.6                38,458 15.1 92.0%
MSCI-N Msci Inc. Class A 348.16                           29,308 1.0 0.1 5.54 2.4 1.0 25.4 0.9 57.7                24,021 18.7 82.0%
ADBE-Q Adobe Inc. 478.99                        232,045 35.8 1.8 5.29 2.4 0.8 32.7 0.0 73.0              187,498 17.0 80.8%
TYL-N Tyler Technologies, Inc. 350.72                           14,302 14.4 0.4 2.59 1.5 0.7 36.6 0.0 34.8                11,158 14.8 78.0%
MSFT-Q Microsoft Corporation 206.19                     1,580,000 30.0 0.7 2.89 1.9 0.9 25.9 1.1 50.4          1,149,583 13.3 72.8%
CDNS-Q Cadence Design Systems, Inc. 105.32                           29,876 161.3 1.8 2.21 1.9 1.0 11.4 0.0 60.6                19,209 12.2 64.3%
JKHY-Q Jack Henry & Associates, Inc 161.56                           12,454 11.2 0.2 2.90 2.1 0.9 13.6 1.1 11.6                  7,933 21.5 63.7%
UI-N Ubiquiti Inc. 165.26                           10,998 72.9 1.7 5.26 5.2 0.9 4.9 1.0 39.8                  6,727 34.8 61.2%
LOGI-Q Logitech International S.a. 77.78                           13,558 194.5 1.6 2.16 2.8 0.5 13.5 1.1 90.8                  6,155 13.4 45.4%
GRMN-Q Garmin Ltd. 94.93                           18,398 79.1 0.8 2.52 1.8 0.9 6.3 2.6 12.2                  7,649 14.4 41.6%

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

The current market environment for tech stocks is more challenging than in late 2018: We see higher valuations and decreasing EVA per share growth compared with our previous screen. More companies show an extreme FGV/MV, signalling elevated risk, and the average EVA growth is 91 per cent, compared with 146 per cent two years ago.

Zoom Video Communications Inc. has been one of the big winners during this upheaval. The communications technology company certainly has a good EPI, while its three-month sales growth (not shown) is an incredible 190.4 per cent. That said, its EVA per share of 81 US cents for a stock trading in the US$480 range definitely doesn’t support the current valuation.

Computer software company Adobe Inc. is one of two names on this list that made our screen two years ago (the other was Jack Henry & Associates). Adobe’s valuation based on the FGV/MV is lower than in 2018 (80.8 vs. 84.5). The company also has the second-highest 12-month change in EVA per share on our list. This indicates a strong improvement of its profitability. In this case, the valuation can be justified by strong financial performance and doesn’t seem disconnected with its fundamentals based on historical data.

Investors are advised to do further research before investing in any of the companies shown here.

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

 

Portfolio Manager’s October Comment For Q3 2020

In the third quarter, the S&P/TSX Composite Total Return Index increased by 4.7%, the S&P500 total return grew by 8.9% while the MSCI ACWI ex-USA returned 6.4%.

Q3 returns were eye-popping and are pointing to a V-shaped recovery. Growth and technology have continued their outperformance again compared to the rest of the market.

In Q3, NQICA returned 9.8% leading to a year-to-date return of -5% versus the S&P/TSX composite which increased by 4.7% in Q2 and declined 3.1% on a year-to-date basis.

In Canada, the best Q3 sectors were Industrials up 13.2%, Utilities up 9.9% and Materials up 8.8%. The worst sectors were Health Care down 14.4%, Energy down 9.4%, and Telecommunication services up 0.8%.

The NQICA’s worst performers in the third quarter were Constellation Software with a return of -3.4%, Open Text Corporation declined by 2.0% and Magna International with a return of 1.6%.

On the other hand, the best results in the third quarter were Richelieu Hardware with a return of 22.0%, Empire Company with a jump in price of 19.3% while Canadian National Railway share price rose by 18.5%.

StockPointer® US and ADR Model Portfolio Transactions – September 2020

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

Ins:

1. Charles Schwab Corporation (SCHW) – Market Trend. Increase in the financial sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.

2. Pfizer (PFE) – Market trend. Increase in the Health care sector.

3. Murphy USA (MUSA) – Intra-sectoral transaction. In the top of its sector.

Outs:

1. LyondellBasell (LYB) – Market Trend. Decrease in the Material sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio.

2. Verizon (VZ) – Market trend. A decrease in the Telecommunication sector.

3. Lear Corporation (LEA) – Intra-sectoral transaction. The EPI decreased bellow 1.

Here are the details for the ADR portfolio :

Ins:

1. Eisai (ESALF) – Market Trend. Increase in the Health Care sector as seen in the Top 100 index, therefore, increasing our position in the portfolio.

2. Toto Ltd. (TOTDF) – Market Trend. Increase in the Industrial sector.

3. Singapore Technologies Engineering (SGGKF) – Market Trend. Increase in the Industrial sector.

4 Koninklijke Ahold Delhaize N.V. (AHODF) – Market Trend. Increase in the consumer staples sector.

Outs:

1. CrediCorp (BAP) – Market Trend. Decrease in the financial sector as seen in the Top 100 index, therefore, decreasing our position in the portfolio. The company’s EPI also decreased bellow 1.

2. Grupo Financiero Santander Serfín, S.A. de C.V. (BSMX) – Market Trend. Decrease in the Financial sector.

3. Ping An Insurance (Group) Co. Of China (PIAIF) – Market Trend. A decrease in the Financial sector.

4. Telenet Group (TLGHY) – Market Trend. Decrease in the Consumer Discretionary sector.

Portfolio Manager’s September Comment for August Results

Equity markets had a strong positive monthly performance in August. In the U.S. the performance was particularly strong among technology large cap stocks while in Canada the performance was vigorous among financials large cap stocks. It’s widely believed that the FED market intervention is no stranger to the strong performance of equities as of late.

In August, the S&P/TSX rose by 2.3%, the S&P 500 increased by 7.2% while the MSCI ACWI ex USA gained 4.7%. At August end and over a 12-month period, the S&P/TSX returned 3.8% behind the S&P 500 gain of 21.9% and the MSCI ACWI ex. USA increased by 8.8%.

NQICAT advanced by 1.9% in August and posted a 12-month return of 0.6%.

The best S&P/TSX sectors for the month were Financials up 6.7% followed by industrials up 4.2% and Consumer Discretionary up 1.9%. The worst performing sectors were Health Care down 7.5%, Consumer Staples down 4.7% and Utilities down 2.1%.

NQICAT’s best performers in August were National Bank up 14.5% and Great-West up 12.4% on the back of excellent quarterly results.

At the opposite, the weakest contributors were Alimentation Couche-Tard down 8.5% and Winpak down 6.6% mainly on profit taking and concerns about their respective outlooks.

SEVEN U.S. CONSUMER DISCRETIONARY WITH SIZEABLE LONG-TERM RETURN ON CAPITAL

What are we looking for?

In the second quarter, fiscal and monetary interventions were massive and to some extent, stronger than the shock from the COVID-19. As a result of these interventions, U.S. consumers’ disposable income is 6% higher than it was in January, leaving them with more money than before the crisis.

The economy appears to be recovering quickly with U.S. retail sales growing at 1.1% year-over-year favoring cyclical stocks. We will look at U.S. large caps operating in the consumer discretionary sector. These are serious candidates where consumers could spend their extra cash.

The screen (click here to access the screen through Stockpointer)

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

  • Market capitalization higher than 15 billion;
  • StockPointer (SP) Performance Score of more than 75 – The score mainly considers risk-adjusted return on capital and free cash flow per share. The score varies between zero and 100;
  • Return on capital (5Y mean) higher than 12% – We look for a firm with a considerable return on capital. Consumer discretionary stocks have profited from the last economic boom so we can set a high return on capital;
  • Positive 3 month change in sales – We want a business whose sales have not been hit too hard by the COVID-19;
  • Positive 1Y dividend growth – We look for a company that didn’t stop to increase its dividend.

    For informational purposes, we have also included recent, stock price, dividend yield, one-year price return, net operating profit (NOP) change over 24 months, return on capital and earnings per share growth (5Y-mean);

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.) SP PERF. SCORE RTN ON CAPITAL 5Y-MEAN (%) SALES CH. 3M (%) 1Y DIV. GROWTH (%) NOP CH. 24M EPS GROWTH 5Y-MEAN RTN ON CAPITAL (%) DIV. YIELD (%) 1Y PRICE RTN. (%)
HD-N Home Depot, Inc. 271.64 292160 90.0 30.4 1.7 25.4 20.3 15.3 35.5 2.2 29.4
ORLY-Q O’reilly Automotive, Inc. 465.18 34470 77.7 26.7 4.9 0.0 24.5 19.9 29.2 0.0 21.9
AZO-N Autozone, Inc. 1182.22 27620 76.5 26.4 0.0 0.0 7.6 13.0 28.8 0.0 8.6
TSCO-Q Tractor Supply Company 148.1 17120 88.5 18.2 9.7 9.4 43.4 14.9 23.2 1.1 35.8
LOW-N Lowe’s Companies, Inc. 152.78 115350 88.0 16.2 2.7 14.6 23.1 16.2 20.4 1.4 52.1
COST-Q Costco Wholesale Corporation 340.91 150520 82.7 13.1 1.6 12.3 30.1 9.9 14.2 0.8 24.1
DG-N Dollar General Corporation 195.29 49160 84.1 13.0 6.6 10.9 22.6 16.5 14.0 0.7 42.1

What we found

Home improvement retailer Home Depot has an impressive performance score of 90. The 5Y return on capital is also incredible at 30%. In the long run, we expect the company will manage to increase its sales around the GDP growth level while adding small amount of capital. The increase in free cash flow will allow to increase the dividend. The various restrictions related to the pandemic may have pushed consumer to renovate their house during their spare time. The company reports their Q2 on August 18th before market opening.

Auto parts & equipments retailer O’reilly Automotive has a robust return on capital of 26.7%. Its short-term sales grew by 4.9% despite the pandemic during Q2 showing strong execution by management while facing important demand by consumers. Individuals may have used their cars more for vacations as other options were limited. The company generated an impressive annual EPS growth of almost 20% in the last 5-year period. The company doesn’t pay a dividend, but it returned $1.1B to shareholders through buybacks.

Farm supply and home improvement retailer Tractor Supply Co. has a trailing twelve month return on capital of 23.1% which compares positively to its 5Y mean of 18.2%. It increased its sales by 9.7% in the last 3 months and realized a NOP growth of 43.4% over 24 months showing great momentum both in the short and medium-term. The dividend growth is lower than other firms figuring on the list, but the company chose to strengthen its balance sheet by adding $1.1B in cash and cash equivalents compared to the previous Q2. An understandable decision considering the circumstances.

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

Number Cruncher Extra: Home Depot, O’Reilly Automotive & Tractor Supply Company

In our last Number Cruncher we discussed how Home Depot (HD), O’Reilly Automotive (ORLY) & Tractor Supply Company (TSCO) could be good candidates to take advantage of the economic recovery. Now, we’re going to look at these stocks with our Stockpointer software.

Here is the screener we used to find these incredible companies

Let’s start with Home Depot

 

the company has a high score of 68 in our system. It did not experience significant sales growth, but it did increase the most important metric, the EPS. its performance spread continues to increase, which means that the company is increasing its return on capital while maintaining adequate risk for the return on capital achieved

 

Home Depot has an incredible track record which makes it a high quality stock. It is first in all categories except for the return on equity which can be ignored as the company has negative equity due to the many dividends paid and share buybacks that have been made.

O’reilly Automotive has a similar profile than Home Depot, but with a bigger focus on growth specially in the short-term. It has a solid score of 60 with a higher risk perceived by our software. On the other hand, the beta of 0.92 indicates that the stock should be as much volatile than the market.

 

The growth of O’reilly Automotive is impressive because of its magnitude, but also due to its stability. Sales, operating profit and net income were up every year and stock has been repurchased every year also. There is approximately 25% less share outstanding than in June 2016.


Tractor Supply Company as a strong score of 62 while being identified as a growth, quality and low risk stock. The performance spread is increasing at a rapid pace, specificly 68.3% (relatively to its past performance spread) which is spectacular. Unsurprisingly EPS are up 29.8% year-over-year.

The company has a strong short-term momentum, but we cannot conclude it is the only reason. There is a clear break in the growth of its net operating profit in 2018. In March 2017, the company changed its Chief Financial Officer. It is not known if this decision alone made a difference, but it could be one of the reasons.

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

New Stockpointer Beta

The formula we used to calculate the beta (β) for companies has changed. The 5-year quarterly beta (20 observations) have been replaced by a weekly 2-year beta. (104 observations)

Changes were made for the following reasons:

  • 2-year beta is widely used across the industry.
  • 2-year beta includes more observations, therefore reducing estimation errors.
  • 2-year beta reflects fundamental changes of a company more accurately and relevant to today’s price.

This results in a small adjustment to the SP scores. (-/+ 1 or 2 points)

The previous definition of the “5Y beta on quarterly prices” will be replaced to reflect the new formula.

If you have any questions or concerns, feel free to contact Anthony Menard: Amenard@Inovestor.com.

Portfolio Manager’s August Comment for July Results

The S&P/TSX rose by 4.5% in July and the S&P500 increased by 5.6% while the MSCI ACWI ex USA gained 4.1%. At the end of the 12-month period ending July 31th, the S&P/TSX posted a positive return of 1.9%. Over the same 12-month period, the S&P500 surged 12% while the MSCI ACWI ex USA gained 0.7%.

The NQICAT recorded a net gain of 8% in July and a 12-month return of -2.3%.
.

The best TSX sectors for the month of July were Materials up 13.1%, followed by Consumer Staples up 6.2%, and Information Technology up 6.1%. The worst performing sectors were Financials up 0.1%, Energy up 1% and Health Care up 1.1%.

 

The best monthly performers in the portfolio were Kirkland Lake Gold up 30.9% and Financial National up 22.8%. At the opposite, the weakest contributors were Toronto-Dominon, which was down 0.9% and Great-West down 0.5%.

 

3 stocks were sold and bought in the strategy in July. For this rebalancing, the model required an exposure reduction of to the Materials sector equivalent to 2 stocks. Stella-Jones (SJ) and CCL Industries Inc. Class B (CCL.B) were sold because of their relatively lower SP scores compared to Kirkland and Winpak.
The model also called for the selling of Gildan (GIL) due to a deterioration of its SP score.

 

The model required an increased exposure to Consumer Staples and Consumer Discretionary. The names that made it into those sectors were Empire Company (EMP.A) and Thomson Reuters Corp. (TRI). Richelieu Hardware Ltd (RCH) was bought as a replacement for Gildan.

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%.