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Number Cruncher Extra

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. tops the table, realizing huge sales growth over the past year. The return on capital is also a lot higher than our threshold, sitting at 50.9 per cent. Note: Results can be quite volatile for mining companies and we need to be careful with the short track record of this company.
Aside from K92 Mining, Wall Financial Corp. and Heroux-Devtek Inc. have had big years, with 72.9 per cent and 51.1 per cent, respectively, in sales growth. Wall Street Financial has shown strong price momentum over the past three months while Heroux-Devtek has done quite respectably over the past month.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE ($) EXPECTED DIV. YIELD (%) MARKET CAP. ($M) 3M PRICE RETURN (%) 1M PRICE RETURN (%) RETURN ON CAPITAL Sales Ch. 12M (%) 1Y PRICE RETURN (%)
KNT-X K92 Mining, Inc. 3.48                                                  –                            740.10                                  35.21                                  20.83                                  50.87                          192.20                                242.86
WFC-T Wall Financial Corporation 35.95                                            5.58                        1,220.62                                  37.51                                    7.06                                  11.86                            72.91                                  39.97
HRX-T Heroux-devtek Inc. 20.08                                                  –                            730.15                                  11.05                                    5.13                                  9.95                            51.07                                  47.72
PEO-X People Corporation 10.48                                                  –                            713.80                                  10.95                                    4.49                                  10.29                            23.17                                  37.68
GSY-T Goeasy Ltd. 73.39                                            1.69                        1,052.71                                  16.77                                    5.52                                  22.18                            22.23                                  94.44
REAL-T Real Matters, Inc. 12.75                                                  –                        1,083.06                                  11.59                                    3.49                                  7.34                            18.46                                273.33
ATZ-T Aritzia, Inc. 25.08                                                  –                        2,733.08                                  13.46                                  31.65                                  26.96                            15.47                                  16.16
ENGH-T Enghouse Systems Limited 52.25                                            0.85                        2,860.03                                  32.00                                    8.45                                  18.63                            12.54                                  45.10
HCG-T Home Capital Group Inc. 33.76                                                  –                        1,935.50                                  27.90                                    2.43                                  7.96                            11.59                                128.89
ET-T Evertz Technologies Limited 18.3                                            3.94                        1,405.47                                    7.40                                    2.46                                  17.89                            10.65                                  10.32

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.

Centamin PLC pays the highest dividend by far, but its negative NOPAT change over both 12 and 24 months suggests future dividend growth may not be sustainable. Newmont Goldcorp Corp., Royal Gold Inc., Yamana Gold Inc. and Kirkland Lake Gold Ltd. all show growing NOPAT over the past 12 and 24 months.

As the largest company on our list, suggesting more stable operations than smaller companies in this highly volatile sector, Newmont is well positioned to maintain and increase its dividend. Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE ($) 1Y PRICE RETURN (%) MARKET CAP. ($BIL) EXPECTED DIV. YIELD (%) LAST QTR DIV. YIELD (%) COST OF CAPITAL (%) NOPAT CH. 24M (%) NOPAT CH. 12M (%)
CEE-T Centamin Plc 2.12 5.37 2.45 4.40 4.00 9.74 -5.61 -3.61
OR-T Osisko Gold Royalties Ltd 12.27 0.5 1.77 1.60 1.62 5.93 0.02 -0.30
NGT-T Newmont Goldcorp Corporation 55.15 28 45.22 1.31 1.48 5.65 1.46 2.07
ABX-T Barrick Gold Corporation 23.29 40.59 41.40 1.08 1.17 5.75 -1.93 0.55
AEM-T Agnico Eagle Mines Limited 77.44 44.66 18.51 1.15 0.91 5.95 -0.88 -0.19
RGLD-Q Royal Gold, Inc. 113.79 33.33 7.46 0.77 0.86 6.20 0.68 1.69
YRI-T Yamana Gold Inc. 4.86 45.4 4.62 1.03 0.79 10.85 0.62 2.26
AGI-T Alamos Gold Inc. 7.5 41.98 2.93 0.70 0.69 9.97 -2.12 -0.86
SVM-T Silvercorp Metals Inc. 7.18 135.59 1.24 0.44 0.65 14.75 -0.32 0.34
BVN-N Compania De Minas Buenaventu 13.97 -14.42 3.54 0.60 0.55 6.57 -7.61 -8.19
KL-T Kirkland Lake Gold Ltd. 58.33 60.15 12.26 0.42 0.31 8.12 4.31 2.86

Retailers that are no Christmas Gifts

What we are looking for?

With Black Friday still fresh in our minds we decided to look at North American retailers that may look tempting based on yield but that face deteriorating economics. More precisely we selected dividend-paying stocks and we screened them based profitability trends and other fundamental quality criteria.

 

The screen

We screened for consumer discretionary stocks based in North America, specifically, those stocks listed in the subsectors of retailing or consumer durables and apparel. We then added the following criteria:

  • A market capitalization greater than US$1-billion;
  • Stocks must pay a dividend;
  • Return on capital (ROC) of less than 10 per cent in the past 12 months;
  • Declining ROC over the past 24 months;
  • Negative stock price change over the last 12 months;
  • Declining economic value-added (EVA) per share over the past 12 months.
  • Declining sales in the last 12 months.

 

What we found

There are four retailer stocks that meet our criteria in the North American markets. All are U.S.-based brick and mortar retailers: Children’s Place Inc., Bed Bath & Beyond Inc., Gap Inc. and Macy’s Inc. The Children’s Place operates as a children’s specialty apparel retailer with its network of speciality stores. Bed Bath & Beyond operates retail stores that sells domestics merchandise, including bed linens, bath items, kitchen textiles; and home furnishings products. The Gap operates outlets under the Old Navy, Gap, Banana Republic, and other brands. Macys operates department stores under the Macy’s and Bloomingdale’s names as well as a network specialty stores. The reality is that these four retailers are under pressure as online retailers continue gaining market shares.

Topping our list, ranked by dividend yield, is Macy’s. The stock is currently yielding 9.9 per cent. While providing an eye-popping payout, Macy’s is facing profitability challenges as measured by ROC and EVA measures. It is also experiencing declining sales. It will be hard for its board to keep paying this dividend to shareholders unless management succeed in turning around the economics of the business. Given how badly a stock price can react when shareholders are faced with a dividend cut, it’s better to avoid such stocks even if, at first sight, the yield looks attractive.

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

Ticker Name Price MarketCap Div Yield R/C R/C Ch. 24M Price Var. 12M EVA Ch. 12M Sales Ch. 12M
BBBY Bed Bath & Beyond $         14.58 $1.9B 4.60% -0.64% -11.22% -0.29% -831.39% -5.88%
PLCE Children’s Place $         72.26 $1.1B 3.10% 8.67% -3.59% -45.17% -26.25% -3.04%
GPS Gap, Inc $         16.61 $6.3B 5.84% 9.53% -1.26% -40.44% -101.16% -2.41%
M Macy’s Inc $         15.32 $4.8B 9.86% 6.16% -0.42% -55.79% -441.94% -1.02%

Christian Godin is a portfolio manager at Inovestor Asset Management.

Number Cruncher Extra – Eleven industrial stocks that meet our criteria in the North American markets

In last week’s Number Cruncher written for the Globe and Mail, we looked at high quality industrial names whose short-term operational returns continue to improve. The first company that came up on our screen was Westshore Terminals Investment (WTE).

The above chart shows that WTE’s EVA and Net Operating Profit have been trending upward since the first quarter of 2017, while prices remained within the $20 to $27 range. During the same period, WTE’s rising bottom-line along with decreasing number of shares contributed to diluted EPS to double as shown in the next chart:

Relative to its peers, WTE has an outstanding performance score of 72.9 with a comparably low risk score of 40.1. Its high performance score is attributable to high and increasing Return on Capital and Performance Spread. The company ranked in the 90th percentile in both metrics. Return on Capital was 20.5% as of Sep 2019 while Performance Spread, the difference between Return on Capital and Cost of Capital, amounted to 10.4% as of Sep 2019.

For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

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Number Cruncher Extra – Eleven Canadian companies with profit growth

We touched upon Rogers Communication (RCI.B) briefly in the number cruncher written for the Globe and Mail yesterday which focused on Canadian companies with profit growth. What’s interesting with Rogers Communication is that even though profits and EVA have been on a nice incline, the stock price disagreed and has been slipping since March 2019. This occurrence pushed up the stock’s intrinsic value above its current price for the first time in 2 years.

In addition, we can look at the future-growth-value (FGV) graph for a double confirmation as to whether or not the stock is undervalued, overvalued, or fairly valued.  The FGV metric 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. Take a look at the graph below, during Q1 2019 there was a small premium factored into the stock price. In Q2 that premium disappeared, and the stock was fairly priced. And now, in Q3 – the stock was valued at a discount to its actual potential.

For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

Number Cruncher Extra – 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.
For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

Number Cruncher Extra – Revisiting Canadian energy stocks in wake of Aramco attack

While looking over the results generated for the Globe and Mail number cruncher earlier this week, a great tip is to switch to Pfscan to get a comprehensive graph plotting all your results. This gives you an idea of how each company stands versus the rest of your findings.

For our screener focusing on Canadian Oil stocks, this is what we get:

We can easily see that the best wealth creating company is Parkland Fuel Corporation (PKI) since it is the highest company on the Y-axis. The Y-axis represents the Economic Performance Index which is the Return-on-Capital divided by Cost-of-Capital.

Also notice that it is on the right-hand side reflecting a discounted stock price.

In general, we want to avoid companies that are below the x-axis because that means that the company’s costs are too high to sustain. However, this depends on the sector. For the energy sector for example the costs of capital are huge and therefore the average Economic Performance Index would be lower than a more stable sector (such as Financials).

Lastly, companies that are in the bottom left are in the least attractive positioning, at the moment, since they’re returns are not covering their costs efficiently AND their stock is trading at a premium.

For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

Number Cruncher Extra – Ten mining stocks to watch in Canada’s materials sector

Centerra Gold Inc. (CG) was briefly covered in the number cruncher written for the Globe and Mail earlier this week. Shareholders have enjoyed a steep rally in this stock’s price so far this year and from a fundamental stand point the company is pretty sustainable. By looking at its scorecard, we quickly notice the attractive positive outlook and the high SPscore.

Not only is the score above our 50% threshold, it also has increased by 7 % since last quarter which is a great sign. Both the Performance and Risk are in the green shaded area reflecting an undervalued stock (as can be seen on the Intrinsic Value versus Price graph) and an EVA uptrend.

Lastly, in terms of diversification, this stock will give our portfolio a Quality, Growth, and is a Low Risk stock compared to peers in the Canadian Materials sector.

For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

Number Cruncher Extra – Eight wealth-creating stocks in the U.S. real estate sector

In the midst of trade tensions and geopolitical disputes, it is the cyclical sectors – communications services and energy are prime examples – that tend to suffer most. As investors, sector allocation is crucial to the wealth our portfolio creates and thus we are curious about the sectors that hold up the best during a market shakeout. Interestingly, the best performing S&P 500 sector in the current quarter as of Aug. 23, at 5.6 per cent, is a cyclical one – real estate – followed by information technology. For the Globe and Mail this week, we focused on the U.S. real estate sector, which is largely unaffected by tariff disputes and indeed benefiting from the current conditions of low unemployment and interest rates.

This strategy uses the Inovestor for Advisors platform to screen the S&P 500 real estate sector using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A positive free-cash-flow-to-capital ratio. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
  • 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 net operating profit after tax minus capital expenses;
  • Economic performance index (EPI) greater than or equal to one. This is a key criterion as it represents the ratio of return on capital to cost of capital. An EPI greater than one indicates that the company is generating wealth for shareholders – for every dollar invested into the company, more than one dollar is generated in returns;
For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

Number Cruncher Extra – Eighteen low volatility S&P 500 stocks capable of withstanding market shocks

The unresolved and further complication of the Sino-U.S. trade dispute hit the markets once again last week, which I believe will cause higher volatility in the markets in the short run. On Friday, U.S. President Donald Trump confirmed that, for now, no business will be made with Chinese telecom giant, Huawei, and that he is not ready to finalize a trade deal with China. This follows China’s decision to stop purchasing American agricultural products. Therefore, for the Globe and Mail this week, we screened the U.S. market to identify companies with low volatility and sustainable operations that can withstand further potential market turmoil.

This strategy screens the S&P 500 using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A beta of one or less. A stock with a beta less than one is considered less volatile than the market;
  • A five-year average return on capital (ROC) greater than or equal to 10 per cent, reported as of last quarter’s end, and a positive change in the 12-month return on capital figure;
  • A minimum free-cash-flow-to-capital ratio of 5 per cent. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
  • 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 net operating profit after tax minus capital expenses;
  • A cost of capital less than 10 per cent, reported as of last quarter’s end.
For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.