Number Cruncher

What are we looking for?

Companies that deploy their capital efficiently.

We believe that companies that can invest in opportunities offering significant return while minimizing risk are less impacted by short-term market volatility than others, and they often possess a sustainable competitive advantage that allows them to deliver value to shareholders.

So, we will use the economic value-added (EVA) framework to find companies with favourable economics.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

• Market capitalization greater than $5-billion
• EVA on capital higher than 10 per cent. This is a measure of value creation calculated by using the EVA for the most recent 12 months divided by the company’s invested capital
• Economic performance index (EPI) higher than 2. The EPI is return on capital divided by the cost of capital, and it is a measure of profitability adjusted for risk. An EPI higher than 2 implies robust value creation

For informational purposes, we have also included return on capital, price-to-earnings ratio, dividend yield and one-year price return. Please note that some ratios may be shown as of the end of the previous quarter.

10 companies that spend their capital efficiently

What are we looking for?

Yield and income growth in the U.S. market.

With the S&P 500 yielding only 1.6 per cent, the U.S. index is disappointing for investors looking for income at the moment. On the other hand, we believe it is difficult to completely ignore the U.S. market because of its size and growth potential.

Today, we will look for stocks that are yielding at least 3.2 per cent, double the yield of the S&P 500, and that have demonstrated solid dividend growth in recent years.

The screen (add this screener here)

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

• Market capitalization higher than US$1-billion;
• Dividend yield higher than 3.2 per cent;
• Three-year dividend growth higher than 5 per cent. The threshold may seem low, but the COVID-19 pandemic forced many companies to limit their dividend hikes over the period;
• An Inovestor SP score higher than 65. The score mainly considers risk-adjusted return on capital, earnings-per-share growth and free cash flow per share. The score varies between zero and 100. A score of 65 implies a high-performing company;
• Three-month SP score increase of more than 2 per cent. To achieve 2 per cent, the company would need, for example, a current SP score of at least 51 if it was previously 50;

For informational purposes, we have also included price-earnings ratios, and one-year price return. Please note that some ratios may be shown as of end of previous quarter.

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added 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.

What we found

U.S. stocks distributing twice as much dividends as the S&P 500

What are we looking for?
Companies less risky than the market.

Investors are reluctant to add to equities given the possibility of further interest rate hikes and the risk of a recession. According to many research papers, it is impossible to time the market. We think investors are more likely to miss a potential rebound if they try waiting to jump back into the market at the perfect time.

As a half measure, investors could invest progressively in lower-risk stocks that would offer some protection in case of a market meltdown.

The screen (add this screener here)

We screened stocks from the S&P/TSX composite focusing on the following criteria:

Beta compared to the S&P/TSX composite lower than 0.9. (The beta is a measure of the volatility of the stock compared to the S&P/TSX composite.) A beta lower than one is considered less risky than the market;
StockPointer (SP) risk score lower than 30. The risk score is scaled from zero to 100, where 100 is a high-risk company and 30 is considered a low-risk one. The score takes into account many criteria; our software looks at leverage and stability of profitability, and uses an automatically calculated discounted cash flow to evaluate the expensiveness of the company;
Dividend yield higher than 4 per cent – a company that distributes a large portion of its profit to shareholders could be seen as less risky than one that needs to invest and innovate to perform.
For informational purposes, we have also included one-year dividend growth, three-month NOPAT (net operating profit after tax) growth, price/earnings and price/book ratios, and one-year price return. Please note that some ratios may be shown as of end of previous quarter.

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.

What we found

10 S&P/TSX Composite stocks with defensive attributes if the market melts down

Bank of Nova Scotia (BNS-T) has the lowest SP risk score and P/E of our screen at 14.8 and 8.6, respectively. The company underperforms other companies on the list on a three-month NOPAT basis with a decline of 4.1 per cent, the second-lowest on our list, leading to a one-year price performance of minus-24.9 per cent, the lowest of our list. However, the company has the third highest one-year dividend increase at 12.8 per cent, implying that the management could foresee a positive outlook despite the recent performance.

Toronto-Dominion (TD-T) is slightly more expensive than the Bank of Nova Scotia with a P/E of 9.4 and significantly more on a P/B basis, at 1.7 compared with 1.1 for the Bank of Nova Scotia. This higher valuation could be justified as it achieved favourable growth compared with the Bank of Nova Scotia with a three-month NOPAT growth of 20.7 per cent, the highest of our screen.

The North West Company (NWC-T), a general merchandise retailer owning brands such as Northern and Giant Tiger and which operates primarily in Northern Canadian communities, has the third highest one-year price change at 4 per cent and has a beta of only 0.5, demonstrating its resilience and low-risk profile. The company sold 36 Giant Tiger stores during the summer of 2020 for $45-million and has only five stores left. Following the divestiture, the company reorganized its operations and it seems to have paid off with an 87.2-per-cent increase in profits in 2022 compared with 2020.

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

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

What are we looking for?

Companies with a decent share price performance over the past six months and trading below their historical valuations.

Economic uncertainty is fuelled by the relentless rise in interest rates by central banks around the world, which could be leading to a global recession. In these uncertain times, the companies seen as the safest are sometimes overbid, leading to stretched valuations.

The screen (add this screener here)

We screened non-energy Canadian stocks focusing on the following criteria:

• A market capitalization higher than $1-billion;
• A StockPointer (SP) performance score higher than 70 – the score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100, a score above 70 implies a high-performing company;
• A five-year average price-to-earnings ratio under 30 and a current P/E that is lower than the five-year average P/E (in other words, only stocks trading below their historical valuations);
• A positive six-month price change (the S&P/TSX Composite Index increased by 1.4 per cent, excluding dividends, during the period).

For informational purposes we have also included three-month growth in net operating profit after tax (NOPAT), one-year NOPAT growth, one-year price return and dividend yield. Please note that some ratios may be shown as of end of previous quarter.

We decided to exclude energy companies because of their extraordinary earnings in the past year, which makes them all attractive from a historical valuation standpoint.

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.

What we found

What are we looking for?

U.S. mid-capitalization stocks with robust profitability, trading at a reasonable price.

Since 2014, on a calendar basis, the S&P MidCap 400 outperformed the S&P 500 in only one year – 2016 – while in the prior 10 years it outperformed the large-cap index eight times.

Given the extended outperformance of large caps in the United States, we think it could be time for mid-caps to shine. It’s worth noting that the MidCap 400 is on track to outperform the S&P 500 this year.

The screen (add this screener here)

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

• Market capitalization between US$5-billion and US$15-billion;
• Economic Performance Index (EPI) higher than 1.5. The EPI represents the return on capital divided by the cost of capital and is a measure of short-term wealth creation. An EPI higher than one implies short-term value creation;
• Five-year return on capital higher than 12 per cent – companies with healthy return on capital tend to be wealth creators;
• Market value-added as a percentage of market cap less than 40 per cent. This metric shows the discounted wealth creation priced in the company valuation. We derive the market value-added by subtracting the invested capital from the market cap, then dividing the result by the market cap. A positive value implies the market has priced in some future wealth creation; a lower positive value implies a cheaper valuation.

For informational purposes, we have also included price-to-earnings ratio, three-month sales growth, one-year price return and dividend yield. Please note that some ratios may be shown as of the end of the previous quarter.

What we found

Commercial Metals Co., which manufactures, recycles and fabricates steel and metal products, has the highest EPI on our list at four and the third-lowest P/E at 4.7. The company is showing resilience with sales up 4.4 per cent in the past quarter and has been rewarded by the market with a share-price increase of 30.9 over the past year. The company announced on Nov. 15 it would acquire a metal recycling facility from Kodiak Resources Inc. and Kodiak Properties LLC.

AutoNation Inc., an automotive retailer, has the second-highest EPI at 3.7. On Nov. 15, the company announced the acquisition of a minority ownership stake of 6.1 per cent in TrueCar Inc., an automotive digital marketplace; TrueCar’s Nasdaq-listed shares rose 32.8 per cent after the disclosure. The news sparked speculation about a possible acquisition or potential value creation through more collaboration between the two companies.

Celanese Corp., a chemical materials producer, has the fourth-highest EPI on our list at 3.2 and the second-highest dividend at 2.8 per cent. The company announced on Feb. 18 that it would acquire DuPont’s mobility and materials business for US$11-billion with cash on hand and debt. The acquisition was completed on Nov. 1. Celanese’s share price has declined 39 per cent over the past year, possibly reflecting skepticism from the market about the value creation of this major acquisition.

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

For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

What are we looking for?

Small capitalization stocks with tailwinds and a track record of long-term profitability.

In times of high volatility, small cap stocks tend to decline proportionately more than larger caps, as these less familiar names are considered more vulnerable to an economic downturn. While this is true on average, we think some quality companies could be unfairly punished because of this reputation.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

• Market capitalization between $500-million and $1.5-billion;
• a StockPointer (SP) score higher than 60 – the score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100. A score of 60 implies a better than average company;
• five-year average return on capital higher than 7 per cent;
• a positive one-year change in the economic performance index. The EPI represents the return on capital divided by the cost of capital. A positive change implies an improvement in the company’s risk-return profile. This is our metric to evaluate the company’s short-term performance.

For informational purposes, we have also included the actual EPI, price-to-earnings ratio, one-year price return and dividend yield. Please note that some ratios may be shown as of end of previous quarter.

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.

What we found

A&W Revenue Royalties Income Fund, which indirectly owns the trademarks used in A&W restaurants, has the highest five-year average return on capital of our list at 23.4 per cent. The trust receives a 3-per-cent royalty on the sales of restaurants in the royalty pool and distributes all royalties received after deducting the trust’s operating costs. The trust offers an attractive proposition as it should profit from the inflationary environment as royalties rise with higher sales, while not being affected by the operating expenses, such as higher food and wage costs.

Hardwoods Distribution Inc. , a wholesale distributor of building products in North America, has the second-highest EPI of our list at 4.1, but nevertheless has declined by 42.4 per cent over the past year as the market anticipates the effect of a slowing real estate market on the company’s results. While a slowdown seems already priced into the stock valuation, the company continues to perform well at the fundamental level as seen by the massive positive EPI change of 2.3, the second-highest of our screen.

Absolute Software Corp., a cybersecurity company, saw its share price increase by 12.7 per cent in the past year despite the collapse of the Canadian technology sector, which has declined 46.3 per cent over the same period. Part of the company’s positive aura could be attributed to its 2021 acquisition, for US$340-million, of NetMotion Software Inc., which will naturally boost the current year’s sales.

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

For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.

What are we looking for?

Large-cap TSX-listed stocks that have become more attractive over the past quarter.

From Shopify on July 27 to Dollarama on Sept. 9, we can officially say that Canadian earnings season is over. This is an ideal time to review the performance of companies over the past quarter on a comparable basis.

We define the attractiveness as the trade-off between performance and risk. Our StockPointer (SP) score aggregates a performance and risk score and will help us to identify companies that stand out from the crowd.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

• Market capitalization higher than $10-billion;
• SP score higher than 50 – the score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100. A score of 50 implies an average company;
• Three-month SP score growth higher than 5 per cent – our SP score is calculated daily, therefore Friday’s sell-off is integrated in the displayed values.

For informational purposes, we have also included price-to earnings, five-year annualized earnings per share growth, five-year average free-cash-flow-to-capital, one-year price return and dividend yield. Please note that some ratios may be shown as of end of previous quarter.

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.

What we found

Oil sands producer and refiner Cenovus Energy Inc. has the highest three-month SP score growth at 20.4 per cent. It is also the company with the highest one-year price change, at 55.8 per cent. While its EPS track record is unimpressive with a minus 2.4 per cent annualized growth, the company was able to generate free cash flow to capital at an average of 4.6 per cent a year in the past five years, the second highest of our screen, after Imperial Oil Ltd.

Shopify Inc., an e-commerce platform, has seen its SP score rise by 18.6 per cent. The company low and inconsistent profitability explains its SP score of only 51. The stock price has plummeted by about 80 per cent in the past year as the craze for technology companies transformed into a fear of the impact of inflation on the sector. In this case, the SP score increase reflects the share price drop being greater than the decline in the company’s fundamentals. While challenging times may be ahead, this could be a potential entry point for long-term investors.

Brookfield Infrastructure Partners LP, a manager of global infrastructure, experienced SP score growth of 10.6 per cent in the past quarter, bringing the SP score to 73, the second-highest (along with Suncor Energy Ltd.) on our screen. Infrastructure is known as an inflation hedge and relatively stable in any environment. The one-year share price increase of 13.7 per cent seems to bear that out, easily outperforming the return of minus 9.7 per cent return for the S&P/TSX Composite Index for the same period.

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

What are we looking for?

Profitable companies in defensive sectors selling at a reasonable price.

Despite a small decrease in inflation in Canada, a few points force us to stay conservative. The decrease was mainly due to cyclical factors such as gasoline prices. Inflation is still at 7.6 per cent and the Bank of Canada is expected to continue to tighten financial conditions through its monetary policy. Consequently, we think the market surged too much following the decline in headline inflation. We believe that defensive stocks are attractive given the recent rise in cyclical stocks.

The screen (add this screener here)

We screened Canadian stocks in the consumer staples, telecommunications and utilities sectors, focusing on the following criteria:

• Market capitalization higher than $1-billion;
• StockPointer (SP) score higher than 60. The score mainly considers risk-adjusted return on capital, earnings per share growth, and free cash flow per share. The score varies between zero and 100. A score above 60 implies a better than average company;
• Relative economic performance index (Rel. EPI) higher than 0.8 – Rel. EPI is a multistep calculation that compares the profitability of a company with its valuation and cost of capital. Higher profitability, a lower valuation and a lower cost of capital increase the ratio. Ninety-five per cent of the time the ratio falls between zero and two and is not meaningful below zero, which implies a negative return on capital. A ratio of 0.8 indicates economic performance in the top 20 per cent of the Canadian universe;
• Three-year annualized dividend growth higher than 3 per cent.

For informational purposes, we have also included one-year dividend growth, return on capital, price-to-earnings and price-to-book ratios, one-year price return and dividend yield. Please note that some ratios may be shown as of end of the previous quarter.

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.

What we found

Empire Co. Ltd., owner of the supermarket chain Sobey’s, top our list with a relative EPI of 1.38. Moreover, its SP score, at 76, is tied with North West Co. Ltd. for highest of our names, and Empire also has second-highest one-year dividend growth at 15.4 per cent. The company ranks higher than other grocery chains on our screen, such as Metro Inc. and Loblaw Cos. Ltd., owing to Empire’s significantly lower valuation on a P/E or P/B basis. The market seems cautious to award credibility to the company’s recent strong results.

Quebecor Inc., a telecom primarily serving Quebec, has the highest three-year and one-year dividend increase at 60.6 and 21.1 per cent. It also has the second-highest relative EPI at 1.37, reflecting its lower valuation. The company trades at the lowest P/E and P/B of our screen, at 11.3 and 0.9, respectively. Despite its recent plan to acquire Freedom Mobile, which would expand Quebecor’s wireless operations nationally, the market didn’t particularly react to the news. The market could fear the impact of the acquisition on the balance sheet or doubt the management’s ability to succeed in this breakthrough outside of Quebec.

Atco Ltd., an electricity, logistics and energy infrastructure company, is fourth in our list, the highest-ranking name from the utilities sector. Its performance metrics are generally less impressive than either Quebecor or Empire, but like the other utilities stocks on our list (Hydro One Ltd., Fortis Inc.), Atco provides stable results and is a candidate to weather almost any storm.

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

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

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

What are we looking for?
Small and mid-cap stocks in the financial sector with attractive trade-offs between performance and valuation.

Everyone appreciates large Canadian banks and they are indeed solid companies. Unfortunately, when a stock is highly appreciated it will naturally sell at a higher price and our banks, beloved by investors, are no different.

We believe smaller companies in the financial sector could be overlooked owing to the large weightings portfolio managers typically assigned to the large Canadian banks and the current volatility in the stock market.

The screen (add this screener here)

We screened Canadian financials focusing on the following criteria:

• Market capitalization between $500-million and $10-billion, which would exclude any of the Big Six banks;
• StockPointer (SP) Performance score higher than 60. The score mainly considers risk-adjusted return on capital, earnings a share growth and free cash flow by share. The score varies between zero and 100. A score above 60 implies a better-than-average company.

For informational purposes, we have also included five-year annualized earnings a share growth, four-year annualized dividend growth, one-year dividend growth, return on capital, beta, price-to-earnings and price-to-book ratios, dividend yield and one-year price return. Please note that some ratios may be shown as of end of previous quarter.

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.

What we found

Smaller financial players that may be flying under your radar

Source: Inovestor

Non-prime lender goeasy Ltd. increased its dividend by 43.8 per cent and 39.4 per cent on an annualized basis over the past year and the past four years, respectively. While these hikes seem aggressive, they were fuelled by an annualized EPS growth of 63.9 per cent over the past five years, which indicates a margin of safety in the dividend policy. Affected by the uncertainty of an economic slowdown, goeasy is 54.9 per cent cheaper than at its peak last September. As the bad news gets incorporated in the stock, the gradual decline in the valuation is worth keeping an eye on.

TMX Group Ltd., owner of the TSX and other financial exchanges, is the most expensive stock of our list on a P/E basis, standing at 14.4. However, it has increased its EPS by an annualized 25.7 per cent in the past five years and seems less risky than many of its counterparts, as reflected by its beta of 0.66, the second-lowest of our list. On Aug. 12, 2021, the company completed the acquisition of AST Investor Services Inc. (Canada), a provider of transfer agency, corporate trust and related services.

Digital bank EQB Inc. recently changed its name from Equitable Group to more closely align it with subsidiary Equitable Bank and its trade name, EQ Bank. This followed the acquisition of Concentra Bank, the 13th largest Schedule 1 bank in Canada. The deal, announced in February, is expected to close in the second half of 2022. EQB generated a healthy return on capital of 16.5 per cent, which contrasts with its P/E of only 5.9.

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

For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

What are we looking for?

Consumer discretionary companies whose trailing return on capital is below historical levels, suggesting that there is room to grow their profitability.

The screen (add this screener here)

The consumer discretionary sector is cyclical, and a trend reversal is anticipated. Companies that have profited heavily from the pandemic environment, pushing their return on capital to unsustainable levels, can expect this key profitability metric to revert to historical levels in the next few quarters.

That said, not all consumer discretionary companies will be equally affected by the trend. A solid contrarian strategy is to buy companies where the return on capital is historically low – and sell when it is high.

With that in mind, we screened North American stocks focusing on the following criteria:

• Market capitalization higher than $1-billion in their respective currency;
• Five-year average annual return on capital higher than 10 per cent – we look for a company with proven long-term profitability;
• Trailing return on capital lower than the five-year return on capital (and which, according to our strategy, can reasonably be expected to revert to its historical level);
• Positive sales growth in the past three months – we look for a company with a positive industry trend (and this is how our list is ranked);
• Three-month growth in net operating profit after tax (NOPAT) higher than 3 per cent.

For informational purposes, we have also included price-to-earnings, dividend yield and one-year price return. Please note that some ratios may be shown as of end of the previous quarter.

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.

What we found