Category

Number Cruncher

Ten utilities with the power to generate dividend growth

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

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

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

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

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Revisiting Canadian energy stocks in wake of Aramco attack

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

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

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

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

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Ten mining stocks to watch in Canada’s materials sector

When markets are unstable and volatility is on the rise, investors tend to investigate alternative defensive products in order to protect their wealth. The materials sector can be seen as defensive insofar as gold (its production being a key part of this sector) is negatively correlated to the market. Last month, because of the strong rally of gold and silver, materials was one of the best performing sectors in Canada. The sector rose 5.7 per cent in August compared with the S&P/TSX Composite Index, which gained 0.2 per cent. Year to date, the sector has advanced 22.9 per cent compared with 14.8 per cent for the S&P/TSX.

For the Globe and Mail this week, we took a deeper dive into this sector and analyzed some companies that have benefited from this trend.

We screened the Canadian materials sector by focusing on the following criteria:

  • Market capitalization greater than $1-billion;
  • A positive 12-month sales change – a positive figure shows us that there is growth and progress in the company’s operations;
  • 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 future-growth-value-to-market-value ratio (FGV/MV). This 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;
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio;
  • A low beta – a stock with a beta less than one is considered less volatile than the market.

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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;

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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.

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Seeking wealth creators among U.S. consumer discretionary stocks

In this week’s filter created for The Globe and Mail, we screened for wealth creators in the US consumer discretionary sector. We are looking for improving performance and comparing it to the premium or discount the market has attributed to those companies. We screened the S&P 500 Consumer Discretionary stock universe by focusing on the following criteria:

  • Market capitalization above US$10-billion;
  • 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;
  • A positive 12-month EPI change – this measures the growth in return on capital versus cost of capital over the past 12 months;
  • A future-growth-value-to-market-value ratio (FGV/MV) between 50 per cent and minus 50 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as that would increase the risk. This 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.

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These 17 Canadian-listed small-cap stocks show solid fundamentals

In this week’s filter created for The Globe and Mail, we screened for Canadian-listed small-cap stocks showing solid fundamentals.

Today we highlight Canadian small-cap growth companies that have sound fundamentals.

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

  • Market capitalization between $200-million and $1-billion;
  • A current economic performance index (EPI) 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;
  • Positive 12-month sales growth;
  • A PEG, or price-earnings to growth, ratio between zero and two. This ratio compares the current price-to-earnings ratio with the average five-year earnings per share growth. For a stock to be fairly valued, the PEG ratio is one. For the stock to be undervalued, the PEG ratio would be lower than one, showing that the stock price does not fully reflect the earnings growth capability of the company.

Our Findings:

Magellan Aerospace Corp., an aerospace systems and components manufacturer based in Mississauga, is the largest company on our list by market cap. The PEG ratio is 0.8, which suggests that the earnings growth was stronger than what is reflected by the stock price – in other words, an attractive valuation. On the other hand, the company’s operations are efficient, as indicated by the EPI, which shows return on capital at 1.5 times the cost of capital.

TerraVest Industries Inc., an Alberta-based manufacturer whose products include fuel-containment vessels and wellhead processing equipment for the oil and gas industry, is one of the smallest companies on our list by market cap. It has a PEG ratio is 0.6, putting the stock at an attractive price point. In addition, the sales grew strongly, at 34.6 per cent, over the past 12 months.

This article is written by Noor Hussain, Analyst at Inovestor Inc. 

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

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Thirteen defensive U.S. health care and consumer staples stocks

In this week’s filter created for The Globe and Mail, we screened for Thirteen defensive U.S. health care and consumer staples stocks.

Looking back at May, it was the worst month so far in 2019 for the markets. The U.S.-China trade war spiralled deeper early in the month, with U.S. President Donald Trump raising tariffs on US$200-billion worth of Chinese products and China retaliating by setting tariffs on US$60-billion of American goods. Last week, the markets tumbled as the geopolitical mess worsened due to escalating trade tensions. In addition, last Thursday Mr. Trump threatened Mexico with a new wave of tariffs, which will begin on June 10. During this period of extended uncertainty, non-cyclical sectors hold up better due to their defensive characteristics. Today, we will screen U.S. health care and consumer staples stocks to identify some companies with solid operations and revenues that may be able to withstand this trade-war storm. We screened the U.S. stock universe by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • A 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 is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • A positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
  • A future-growth-value-to-market-value ratio (FGV/MV) of between 40 per cent and negative 70 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as that would increase the risk. This 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.
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.

Eleven U.S. energy stocks poised to withstand oil-price volatility

In this week’s filter created for The Globe and Mail, we screened for U.S energy companies that can withstand magnified volatility.

Market speculation around production cuts by the Organization of Petroleum Exporting Countries and the impact of U.S. sanctions against Iran and Venezuela have been among the factors driving recent oil-price volatility. Today, we will identify U.S. energy companies whose healthy operations and strong fundamentals make them solid bets to withstand the heightened unpredictability. We screen the S&P 500 energy sector for quality companies by using the following criteria:

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

Twelve established growth stocks poised for further gains

In this week’s filter created for The Globe and Mail, we screened for established growth stocks poised for further gains.

In the late stage of the business cycle, such as many argue we are in now, it is important for growth investors to improve their downside protection without sacrificing potential upside returns.

Today we look for growth stocks supported by favourable fundamentals that should allow them to capture further gains in a rising market.

We screened Inovestor’s U.S. universe of stocks by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • 12-month change in the economic value-added (EVA) metric greater than 10 per cent – 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 is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  • One-year return of at least 10 per cent;
  • Average annual earnings-per-share (EPS) growth over five years of at least 15 per cent;
  • Annual sales change one year ago or two years ago of at least 10 per cent;
  • Current economic performance index (EPI) greater than one. This is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. A ratio above one is key for sustainable investment opportunities;
  • Free-cash-flow-to-capital ratio. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are looking for a positive ratio.
  • Future-growth-value-to-market-value ratio (FGV/MV). This 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.