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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%.

 

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.