Category

Number Cruncher

13 U.S. mid-cap stocks that may be overlooked by the market

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

U.S.-listed mid-cap stocks

TICKER NAME PRICE MKT VALUE ($ MIL.) EPI 5Y ROC (%) MVA/MV (%) P/E 3M SALES GRTH. (%) 1Y PRICE RTN. (%) DIV. YLD. (%)
CMC-N COMMERCIAL METALS COMPANY 47.46 5576 4.0 14.1 22.2 4.7 4.4 30.9 1.4
AN-N AUTONATION, INC. 119.7 6256 3.7 13.3 23.3 4.9 1.1 -5.0 n/a
RS-N RELIANCE STEEL & ALUMINUM CO. 205.95 12156 3.3 17.7 32.4 6.6 2.4 25.6 1.7
CE-N CELANESE CORPORATION 101.23 10972 3.2 16.5 30.2 6.6 0.4 -39.0 2.8
PAG-N PENSKE AUTOMOTIVE GROUP, INC. 124.21 8968 3.1 12.3 33.0 6.8 1.6 22.6 1.7
BLDR-N BUILDERS FIRSTSOURCE, INC. 64.2 9565 3.1 25.0 31.1 3.9 1.1 -10.6 n/a
LAD-N LITHIA MOTORS, INC. 227.81 6265 2.9 14.7 10.5 5.1 4.3 -22.7 0.7
WLK-N WESTLAKE CORPORATION 104.43 13331 2.7 13.5 22.1 5.1 6.0 6.6 1.4
CG-Q CARLYLE GROUP INC 28.29 10280 2.3 39.5 38.2 5.8 -7.9 -50.8 4.0
PHM-N PULTEGROUP, INC. 42.85 9780 2.2 12.7 5.3 4.3 3.1 -18.3 1.4
AMG-N AFFILIATED MANAGERS GROUP, INC. 153.87 5816 2.0 16.1 39.9 11.1 0.1 -11.7 0.0
WAL-N WESTERN ALLIANCE BANCORP 68.05 7412 1.8 17.8 32.3 7.2 7.5 -41.5 2.1
HII-N HUNTINGTON INGALLS INDUSTRIES, INC. 227.31 9070 1.6 12.9 36.7 15.8 2.8 19.3 2.2

 

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.

Small-cap strategy looks for quality amid volatility

 

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

TSX-listed small-cap stocks

TICKER NAME PRICE MKT VALUE ($ MIL.) SP SCORE 1Y EPI CH. ROC (5Y, %) EPI P/E 1Y PRICE RTN. (%) DIV. YLD. (%)
AW-UN-T A&W REVENUE ROYALTIES INCOME FUND 33.32 536 63 0.4 23.4 2.4 15.5 -14.1 5.4
HDI-T HARDWOODS DISTRIBUTION INC. 22.9 538 65 2.3 14.0 4.1 2.5 -42.4 2.1
AD-UN-T ALARIS EQUITY PARTNERS INCOME TRUST TRUST UNITS REG S 3C7 15.45 700 63 0.4 9.4 1.5 4.8 -17.2 8.8
AFM-X ALPHAMIN RESOURCES CORP. 0.62 789 67 1.2 10.7 3.2 5.3 -34.0 9.7
ABST-T ABSOLUTE SOFTWARE CORPORATION 15.92 814 66 1.3 15.5 2.6 n/a 12.7 2.9
CGO-T COGECO INC. 53.6 843 61 0.3 8.9 2.2 5.9 -36.6 4.6
ET-T EVERTZ TECHNOLOGIES LIMITED 11.08 845 70 1.4 15.9 2.8 9.6 -21.0 6.2
CVG-T CLAIRVEST GROUP INC. 69.05 1069 65 3.7 17.0 4.6 3.5 20.1 0.1
LNF-T LEON’S FURNITURE LIMITED 17.02 1141 64 0.8 11.8 2.9 6.5 -32.6 3.8
WDO-T WESDOME GOLD MINES LTD. 8.01 1141 69 0.5 14.1 2.3 39.5 -27.6 n/a
MTY-T MTY FOOD GROUP INC. 54.66 1334 63 0.3 10.6 0.9 14.5 -13.0 1.5

 

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.

Eleven large-cap TSX stocks that have stood out from the crowd

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

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

TICKER NAME PRICE MKT VALUE ($ MIL.) 3M SP SCORE GRTH. (%) SP SCORE P/E 5Y ANN. EPS GRTH. (%) 5Y FCF TO CAPITAL (%) 1Y PRICE RTN. (%) DIV YLD. (%)
CVE-T CENOVUS ENERGY INC. 21 40942 20.4 65 10.2 -2.4 4.6 55.8 2.0
SHOP-T SHOPIFY, INC. CLASS A 39.1 49378 18.6 51 n/a NM 1.7 -80.1 n/a
BIP-UN-T BROOKFIELD INFRASTRUCTURE PARTNERS L.P. 53.81 24647 10.6 73 46.7 22.7 -0.1 13.7 3.6
IMO-T IMPERIAL OIL LIMITED 57.09 36348 10.0 77 7.2 19.8 7.0 36.6 2.5
ARX-T ARC RESOURCES LTD. 16.34 10845 9.2 71 7.9 9.6 3.2 41.2 2.9
SU-T SUNCOR ENERGY INC. 36.95 50914 9.0 73 5.6 32.2 3.5 29.6 5.3
CU-T CANADIAN UTILITIES LIMITED CLASS A 39.45 10618 8.9 61 19.1 -0.7 -2.7 15.2 4.5
NTR-T NUTRIEN LTD. 112.7 60985 8.3 65 7.2 N/A* N/A* 25.2 2.2
AEM-T AGNICO EAGLE MINES LIMITED 53.09 24197 7.8 69 22.0 9.0 -1.1 -22.7 4.1
BEP-UN-T BROOKFIELD RENEWABLE PARTNERS LP 46.92 12908 7.7 56 n/a NM -0.9 -1.6 3.6
QSR-T RESTAURANT BRANDS INTERNATIONAL INC 75.31 23026 6.2 69 21.2 11.4 1.9 -12.2 3.9

*Five-year EPS growth not meaningful for SHOP, BEP-UN. **Less than five years’ data available for EPS growth, FCF-to-capital for NTR

Source: Inovestor

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.

Eleven defensive TSX dividend stocks for conservative investors

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

TICKER NAME PRICE MKT VALUE ($ MIL.) SP SCORE REL. EPI 3Y ANN. DIV. GRTH (%) 1Y DIV. GRTH (%) ROC (%) P/E P/B 1Y PRICE RTN. (%) DIV YLD. (%)
EMP-A-T EMPIRE CO. LTD. CLASS A 38.41 10089 76 1.38 10.9 15.4 8.6 13.7 1.18 -6.8 1.7
QBR-B-T QUEBECOR INC. CLASS B 28.91 6795 74 1.37 60.6 21.1 7.0 11.3 0.94 -7.8 4.2
WN-T GEORGE WESTON LIMITED 154.88 22408 72 1.27 6.4 13.1 7.5 13.7 1.87 14.4 1.7
ACO-X-T ATCO LTD. CLASS I 47.9 5468 65 1.23 5.2 3.0 5.8 14.8 1.16 12.9 3.9
NWC-T NORTH WEST COMPANY INC. 34.65 1660 76 1.20 4.5 4.3 17.2 11.7 2.92 -5.1 4.3
H-T HYDRO ONE LIMITED 35.36 21171 64 0.95 5.0 5.0 6.2 20.7 1.87 12.5 3.2
MRU-T METRO INC. 70.06 16715 75 0.94 11.3 10.3 9.8 19.4 2.48 9.8 1.6
BCE-T BCE INC. 64.65 58956 64 0.91 5.1 5.1 7.8 20.6 2.01 -0.3 5.7
L-T LOBLAW COMPANIES LIMITED 117.31 38364 71 0.89 7.7 13.6 9.1 19.6 2.53 32.2 0.4
T-T TELUS CORPORATION 30.1 41568 65 0.89 6.3 6.5 7.9 22.4 1.93 3.9 4.5
FTS-T FORTIS INC. 58.83 28162 61 0.88 5.9 5.9 4.9 22.2 1.52 1.9 3.6

 

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.

Nine TSX financial stocks that may be flying under your radar

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

TICKER NAME PRICE MKT VALUE ($ MIL.) SP PERF. SCORE 5Y EPS GRTH. (%) 4Y DIV GRTH. (%) 1Y DIV GRTH. (%) ROC (%) BETA P/E P/B 1Y PRICE RTN. (%) DIV YLD. (%)
CVG-T CLAIRVEST GROUP INC. 65.01 978.6 75.7 55.4 16.7 36.8 38.5 0.27 3.0 0.83 -2.2 0.2
CF-T CANACCORD GENUITY GROUP INC. 8.43 742.3 75.0 435.4 68.2 28.0 18.6 1.26 3.4 0.46 -39.9 3.8
GSY-T GOEASY LTD. 98.1 1564.7 71.5 63.9 39.4 43.8 18.9 2.07 10.2 1.91 -39.9 3.6
X-T TMX GROUP LTD. 131 7325.2 70.2 25.7 11.9 13.8 12.5 0.66 14.4 1.82 0.9 2.5
EQB-T EQB INC 53.15 1814.0 69.7 18.8 14.3 12.8 16.5 1.55 5.9 0.96 -22.0 2.1
GCG-A-T GUARDIAN CAPITAL GROUP LIMITED CLASS A 30.3 814.8 69.0 -16.1 15.8 12.5 16.2 0.70 5.7 0.83 -8.2 3.3
CWB-T CANADIAN WESTERN BANK 26.03 2383.5 62.8 9.0 5.3 1.7 11.3 1.27 6.9 0.80 -25.7 4.8
IAG-T IA FINANCIAL CORPORATION INC. 64.02 6891.3 60.4 10.9 11.0 14.4 11.7 1.45 8.5 0.94 -5.8 4.1
FN-T FIRST NATIONAL FINANCIAL CORPORATION 33.11 1985.5 60.2 13.7 5.9 15.7 40.5 1.15 10.3 4.11 -33.5 7.0

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.

 

These 11 consumer discretionary stocks should withstand cyclical headwinds

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

Consumer discretionary companies

TICKER NAME PRICE MKT VALUE  ($ MIL.) 3M SALES GRTH. (%) 3M NOPAT GRTH. (%) 5Y ROC (%) ROC (%) P/E 1Y PRICE RTN. (%) DIV. YLD. (%)
ABG-N ASBURY AUTOMOTIVE GROUP, INC. 182.72 4044 17.5 19.6 11.5 10.8 5.7 0.5 0.0
HLT-N HILTON WORLDWIDE HOLDINGS INC 142.17 39665 14.4 17.5 10.4 10.2 54.8 13.8 0.4
MAR-Q MARRIOTT INTERNATIONAL, INC. CLASS A 174.65 57163 13.6 12.9 10.5 10.4 38.7 22.6 0.7
CASY-Q CASEY’S GENERAL STORES, INC. 211.68 7856 10.2 10.6 11.4 11.1 24.6 -1.7 0.7
CHH-N CHOICE HOTELS INTERNATIONAL, INC. 131.01 7306 7.0 10.5 20.6 18.4 22.0 8.3 0.7
EA-Q ELECTRONIC ARTS INC. 141.00 39480 6.8 30.3 15.5 12.2 51.1 -3.2 0.5
TOY-T SPIN MASTER CORP 44.17 4541 5.4 27.8 16.7 10.4 15.1 8.9 0.0
IHRT-Q IHEARTMEDIA INC CLASS B 11.53 1640 3.8 22.7 11.2 6.9 74.2 -52.9 0.0
CMCSA-Q COMCAST CORPORATION CLASS A 42.93 192383 3.3 4.1 11.3 6.5 13.8 -24.6 2.2
DOL-T DOLLARAMA INC. 70.12 20532 2.9 20.5 30.0 25.2 32.2 30.7 0.3
MSM-N MSC INDUSTRIAL DIRECT CO., INC. CLASS A 84.52 4719 2.7 13.3 14.7 14.4 16.0 -8.0 3.9

Asbury Automotive Group Inc., one of the largest U.S. automotive retail companies, has a three-month sales growth of 17.5 per cent and a P/E of 5.7, the highest and lowest on our list, respectively. Auto dealerships benefited from rising used-car prices, sparked from high demand from consumers amid limited supply from auto manufacturers. But while overall performance was probably helped by the pandemic, volume growth was constrained by low supply. At the end of 2021, the company acquired Stevinson Automotive, a dealership group, and the NOPAT increased by a robust 19.6 per cent after the acquisition.

Hilton Worldwide Holdings Inc., a hotel and resorts company, has the second highest P/E at 54.8, which reflects the anticipation of a solid rebound in the company’s profitability as health restrictions ease and normalcy returns. This rebound seems confirmed by the three-month sales growth at 14.4 per cent, the second highest of our list. The return on capital is close to the five-year trend, but the COVID years are included in that number and so we could expect the return on capital to increase beyond the five-year return on capital for that industry.

Casey’s General Stores Inc., a convenience-store manager in the U.S. Midwest, achieved respectable three-month sales growth of 10.2 per cent and NOPAT growth of 10.6 per cent. Fuel sales, which represent about a third of Casey’s total revenue, fell dramatically during COVID. With gasoline prices now at historically high levels, the company could naturally generate healthy profits if it maintains a stable gross margin relative to its revenue for its service stations.

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.

15 attractively valued TSX stocks with profitability and declining price

What are we looking for?

Before Monday’s sell-off, the S&P/TSX Composite Index generated a return of 6 per cent over the past year, but a chunk of this performance is attributable to the energy sector, which doubled in the same time frame, camouflaging the sluggish performance registered by many non-energy companies.

We will look for companies with positive free cash flow and a declining stock price over the past year to find some that are trading at an attractive price.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization higher than $5-billion;
  • Negative one-year price return – we look for stocks with a lack of positive momentum;
  • Relative Economic Performance Index higher than 0.8 – relative EPI is a multistep calculation that compares the profitability of a company to 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;
  • Positive five-year average free-cash-flow-to-capital – we want companies that generates excess cash flow that they can redistribute to shareholders or pay off debt.

For informational purposes, we have also included the most recent trailing 12 months’ return on capital, price-to-earnings, price-to-book, dividend yield and one-year price return. Please note that some ratios may be as of the 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

Profitability, declining price make these 15 TSX stocks look attractively valued

TICKER NAME PRICE MKT VALUE  ($ MIL.) REL. EPI 5Y AVG. FCF / CAP (%) ROC (%) P/E P/B 1Y PRICE RTN. (%) DIV. YLD. (%)
ONEX-T ONEX CORPORATION 74.39 6457 2.17 N/A 11.1 3.7 0.6 -12.4 0.5
QBR-B-T QUEBECOR INC. CLASS B 29.54 7068 1.37 5.6 7.7 12.9 5.6 -13.4 4.1
CTC-A-T CANADIAN TIRE CORPORATION, LIMITED CLASS A 169.45 10192 1.36 6.7 11.9 9.2 2.0 -15.0 3.1
MFC-T MANULIFE FINANCIAL CORPORATION 24.96 48497 1.17 N/A 14.9 7.1 1.0 -3.4 5.3
BHC-T BAUSCH HEALTH COMPANIES INC. 20.69 7436 1.14 2.4 4.5 18.7 -42.9 0.0
LUN-T LUNDIN MINING CORPORATION 11.01 8125 1.09 1.6 11.9 6.4 1.4 -25.8 3.3
GWO-T GREAT-WEST LIFECO INC. 33.97 31613 1.06 N/A 14.0 9.9 1.3 -6.3 5.8
IAG-T IA FINANCIAL CORPORATION INC. 66.93 7199 1.00 N/A 13.6 8.7 1.1 -5.5 3.7
BTO-T B2GOLD CORP. 5.56 5864 0.92 8.0 13.4 11.2 1.6 -11.5 3.7
OTEX-T OPEN TEXT CORPORATION 49.36 13304 0.89 5.1 8.5 22.1 2.6 -15.1 2.3
CCL-B-T CCL INDUSTRIES INC. CLASS B 55.26 9957 0.87 7.9 12.0 16.7 2.7 -22.6 1.7
PKI-T PARKLAND CORPORATION 35.06 5405 0.85 6.3 9.3 43.8 2.7 -12.0 0.0
IGM-T IGM FINANCIAL INC. 37.42 8969 0.82 N/A 14.7 9.2 1.4 -16.5 6.0
SLF-T SUN LIFE FINANCIAL INC. 63.68 37316 0.81 N/A 13.7 9.5 1.6 -3.8 4.2
CAR-UN-T CANADIAN APARTMENT PROPERTIES REAL ESTATE INVESTMENT TRUST 47.34 8289 0.81 3.5 6.0 5.9 0.8 -17.2 3.1

Source: Inovestor

Note: Free cash flow is not calculated for financial corporations owing to their structure, so free-cash-flow-to-capital is not available.

Onex Corp., an investment manager involved in credit strategies and private equity, stands out of the list with a relative EPI of 2.17. The nature of its profits is volatile since most of it comes from changes in the fair value of their investments. While the company will record losses from time to time, especially in a stressed environment, investors looking for value may take comfort in its P/E of 3.7 and price-to-book of only 0.6. The company’s stock has fallen more than 25 per cent year-to-date. The company is slated to report its first-quarter earnings on Friday.

Quebecor Inc. has been invited by Rogers Communications Inc. to participate in negotiations to acquire Freedom Mobile from Shaw Communications Inc., according to a Globe and Mail report. The Competition Bureau is seeking to block Rogers’s takeover of Shaw. The acquisition of Shaw’s Freedom would allow Quebecor to follow an earlier expansion plan outside Quebec and could put it in a better position to compete with its telecom rivals. The company will release its first quarter results on Thursday.

Manulife Financial Corp. has a return on capital of 14.9 per cent, the highest of our list, and a juicy dividend of 5.3. The life insurance industry has seen some tough times in the past decade with historically low long-term interest rates, but that could be about to change with the Canadian 10-year bond hitting 3.11 per cent, the highest level since 2011. The company will release its first-quarter results on Wednesday.

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.

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.

17 consumer staples that offer portfolio protection from an economic downturn

What are we looking for?

Consumer staples with a balanced exposure to performance and risk.

The U.S. yield curve inverted at the beginning of April, which is a signal that a U.S. recession could be ahead in the next 12 to 18 months. In addition, inflation in basic needs such as food, housing and energy, combined with higher interest rates, could significantly erode discretionary purchasing power.

We believe that consumer staples is the most likely sector to offer resilience in this environment.

The screen (add this screener here)

We screened U.S. stocks in the consumer staples sector focusing on the following criteria:

  • Market capitalization higher than US$1-billion;
  • StockPointer (SP) performance 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 above 65 implies a well-performing company;
  • StockPointer (SP) risk score lower than 35. The risk score is scaled from zero to 100 where 100 is a high-risk company. 35 is considered low-risk. 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;
  • positive five-year earnings-per-share growth. We look for a company that demonstrated improvements over the past five years;
  • SP performance score minus SP risk score, which is how the stocks are ranked.

For informational purposes, we have also included trailing 12 months’ return on capital, price-to-earnings, dividend yield, and one-year price return. Please note that some ratios maybe 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

17 staples that offer portfolio protection

TICKER NAME PRICE MKT VALUE  ($ MIL.) SP PERF. SCORE SP RISK SCORE PERF. MINUS RISK 5Y EPS GRTH. (%) ROC (%) P/E 1Y PRICE RTN. (%) DIV. YLD. (%)
VGR-N VECTOR GROUP LTD. 12.22 1881 75.9 15.6 60.3 23.7 20.3 13.2 -15.5 6.6
TSN-N TYSON FOODS, INC. CLASS A 92.44 32859 79.1 19.8 59.3 15.2 13.5 8.7 20.7 2.0
PM-N PHILIP MORRIS INTERNATIONAL INC. 100.07 155126 76.9 19.9 57.1 5.4 26.9 17.2 9.9 5.0
CHD-N CHURCH & DWIGHT CO., INC. 103.45 25091 78.9 31.6 47.3 13.7 16.1 31.2 19.2 1.0
KR-N KROGER CO. 61.67 44834 70.8 24.7 46.1 1.2 8.0 28.4 63.2 1.4
ADM-N ARCHER-DANIELS-MIDLAND COMPANY 95.25 53340 71.6 25.5 46.0 17.1 12.0 19.9 62.7 1.7
CPB-N CAMPBELL SOUP COMPANY 45.47 13732 70.5 24.8 45.7 13.7 11.7 15.0 -5.4 3.3
SFM-Q SPROUTS FARMERS MARKETS, INC. 34.75 3861 68.2 23.0 45.2 20.3 11.5 16.5 33.1
COKE-Q COCA-COLA CONSOLIDATED, INC. 488.14 4576 72.9 29.1 43.8 30.3 14.8 24.2 61.0 0.2
PG-N PROCTER & GAMBLE COMPANY 160.1 383770 73.3 32.1 41.2 10.5 15.3 28.3 17.4 2.2
CAG-N CONAGRA BRANDS, INC. 34.5 16570 67.0 26.7 40.3 17.2 7.0 16.0 -4.7 3.6
K-N KELLOGG COMPANY 67.56 23063 68.9 29.5 39.4 17.1 9.4 15.6 7.8 3.4
HRL-N HORMEL FOODS CORPORATION 52.71 28622 69.8 31.4 38.5 0.3 9.6 31.2 13.7 2.0
BG-N BUNGE LIMITED 118.25 16680 70.4 32.0 38.4 23.4 16.3 8.8 48.8 1.8
FLO-N FLOWERS FOODS, INC. 26.54 5610 68.2 30.2 37.9 4.3 9.9 27.4 11.1 3.2
WMT-N WALMART INC. 157.41 434609 69.1 31.6 37.5 2.2 12.8 32.3 12.6 1.4
ANDE-Q ANDERSONS, INC. 54 1828 67.4 30.0 37.4 50.5 8.0 18.3 94.6 1.3

Tobacco manufacturers Vector Group Ltd. and Philip Morris International Inc. rank No. 1 and No. 3 in our performance-minus-risk ranking, at 60.3 and 57.1 respectively.

Vector also ranks first in terms of dividend yield (6.6 per cent), while Philip Morris has the highest return on capital on our list, at 26.9 per cent.

Tobacco stocks have their risks related to regulation as well as ethical or sustainable investing issues, but for those comfortable with them, they offer significant downside protection in case of lower discretionary spending.

Tyson Foods Inc., a processor and marketer of chicken, beef and pork, has the lowest P/E of our screen at 8.7. This low valuation could be explained by the multiple price-fixing lawsuits filed in recent years. However, that didn’t stop Tyson from generating a healthy price return of 20.7 per cent over the past year. The combination of strong performance and a cheap valuation could have potential for defensive investors.

Church & Dwight Co. Inc., well known for its Arm & Hammer home and personal care products, seems a bit expensive with a P/E of 31.2, and a risk score that reflects that higher valuation at 31.6. On the other hand, the company has a solid brand, which is indicated in its financial metrics: the second-highest performance score of our list at 78.9 with an EPS that has increased by a respectable 13.7 per cent over the past five years on an annual basis.

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.

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

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.

13 TSX large cap stocks profiting from higher inflation

What are we looking for?
Large cap stocks that have improved their profitability in an inflationary environment.

With the end of the earnings season, Canadian companies should have reported approximately three fiscal quarters when inflation was higher than 2 per cent, which gives us enough information to properly identify companies that are profiting from higher inflation.

We will focus on companies that increased their return on capital, or ROC, in the past three months and in the past year, as they are likely to continue to deliver solid performance if inflation remains prominent.

ROC is a great metric for comparing the profitability of companies with various degrees of leverage because the metric – unlike return on equity, for example – is unaffected by company leverage.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization higher than $10-billion;
  • Three-month change in ROC – company must have increased its ROC by at least 1 per cent in the past quarter;
  • One-year change in ROC – company must have increased its ROC by at least 3 per cent in the past year;

For informational purposes, we have also included trailing 12-month ROC, five-year average ROC, price-to-earnings, 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, advisors 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

TSX large-cap stocks profiting from rising inflation

TICKER NAME PRICE MKT VALUE  ($ MIL.) 3M ROC CH. (%) 1Y ROC CH. (%) ROC (%) 5Y ROC (%) P/E DIV. YLD. (%) 1Y PRICE RTN. (%)
WFG-T WEST FRASER TIMBER CO. LTD. 124.4 12840 2.4 61.1 83.9 29.8 3.6 1.0 52.8
BAM-A-T BROOKFIELD ASSET MANAGEMENT INC. CLASS A 70.46 115600 4.6 26.4 29.0 16.2 23.3 1.0 24.9
TFII-T TFI INTERNATIONAL INC. 135.15 12430 2.1 12.0 24.3 15.1 15.4 1.0 42.7
IFC-T INTACT FINANCIAL CORPORATION 186.49 32770 3.6 9.9 22.9 13.5 15.0 2.1 23.9
ARX-T ARC RESOURCES LTD. 15.58 10780 9.5 18.0 22.1 8.1 12.4 2.6 106.9
TOU-T TOURMALINE OIL CORP. 50.58 16770 5.7 10.0 17.4 7.7 7.9 1.6 116.5
BIP-UN-T BROOKFIELD INFRASTRUCTURE PARTNERS L.P. 79.03 24125 1.4 5.8 14.5 10.5 33.9 3.6 20.7
OVV-T OVINTIV INC 60.34 12370 5.8 21.6 13.8 5.7 9.0 1.7 98.5
CNQ-T CANADIAN NATURAL RESOURCES LIMITED 76.4 70930 4.2 12.5 13.7 7.9 11.9 3.9 106.3
CVE-T CENOVUS ENERGY INC. 19.29 30450 2.9 16.9 13.0 3.3 71.6 0.7 95.8
NTR-T NUTRIEN LTD. 125.06 68950 3.6 5.8 11.6 7.5* 18.0 1.9 73.5
IMO-T IMPERIAL OIL LIMITED 54.07 36180 7.2 17.3 11.5 4.6 15.6 2.5 82.4
TECK-B-T TECK RESOURCES LIMITED CLASS B 49.11 26310 2.9 6.0 7.0 6.2 9.3 1.0 81.6

*Nutrien’s five-year average return on capital of 7.5% actually reflects a three-year history owing to a merger in 2018.

West Fraser Timber Co. Ltd. has the highest one-year ROC change, most recent ROC and five-year average ROC standing at 61.1 per cent, 83.9 per cent, and 29.8 per cent, respectively. Last Thursday, U.S. housing starts in February once again showed robust numbers, up 22 per cent from the same month last year. Many observers point to chronic underbuilding in Canada and the United States, coupled with robust demand, as favourable to sustainably higher lumber prices.

Casualty and property insurer Intact Financial Corp. reported solid results, but behind others on this list, with a one-year ROC increase of 9.9 per cent. We think Intact may need a bit more time to effectively capture the interest rate tailwind. As rates increase, the bonds that Intact holds provide a higher expected return because of the higher yield. The three-year Canadian bond yield, a proxy for interest income earned by the company, has increased sharply from the start of the year, from 1.02 per cent to 1.9 per cent.

Arc Resources Ltd., an oil and gas company, has the largest increase in ROC in the past three months at 9.5 per cent, and with the increase in oil prices since the last quarter, investors should also expect an impressive quarter ahead.

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.

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

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.

Nine growing mid-cap stocks with sustainable dividends

What are we looking for?

Growing Canadian mid-cap stocks that also distribute their profits.

Investors can be doubly rewarded by companies that can distribute a part of their net income to shareholders without penalizing growth. The reason could be that the company is able to grow organically without too much capital, with only time needed to build an incredible company. Mid-caps can offer the best of both worlds: enough stability to distribute dividends while having higher growth potential than large caps.

The screen (add this screener here)

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization between $2-billion and $5-billion;
  • Three-year dividend growth rate higher than 5 per cent – and this is how our table is ranked;
  • Five-year average return on capital higher than 10 per cent – we want companies that can sustain their dividends with robust profitability;
  • Two-year cumulative growth in net operating profit after tax (NOPAT) higher than 5 per cent – we want companies able to grow their business while distributing a dividend.

For informational purposes, we have also included dividend payout ratio, five-year annual sales growth rate, 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

Best of both worlds: Growing mid-cap stocks with sustainable dividends

TICKER NAME PRICE MKT VALUE  ($ MIL.) 3Y DIV. GRTH. (%) 5Y ROC (%) 2Y NOPAT GRTH. (%) PYT. (%) 5Y SALES GRTH. (%) P/E DIV. YLD. (%) 1Y PRICE RTN. (%)
LIF-T LABRADOR IRON ORE ROYALTY CORPORATION 37.53 2402 88.1 17.0 63.2 102.0 18.9 6.4 16.0 14.6
GSY-T GOEASY LTD. 152.85 2521 41.6 26.9 231.6 15.5 18.5 10.3 1.7 56.7
ENGH-T ENGHOUSE SYSTEMS LIMITED 44.48 2471 21.1 18.9 31.9 38.2 10.3 26.8 1.4 -29.6
STLC-T STELCO HOLDINGS, INC. 32.02 2476 20.5 41.5* 734.9 5.7 24.5 2.6 2.2 35.1
SJ-T STELLA-JONES INC. 39.94 2576 14.5 11.8 33.5 19.7 10.3 10.9 1.8 -13.8
ELF-T E-L FINANCIAL CORPORATION LIMITED 913.75 3388 14.5 11.7 454.2 2.0 2.5 2.7 1.1 13.6
EQB-T EQUITABLE GROUP INC. 70.35 2394 12.1 16.4 48.8 9.0 12.7 8.6 1.1 30.5
FN-T FIRST NATIONAL FINANCIAL CORPORATION 42.97 2577 5.8 41.3 38.2 60.0 10.5 11.8 5.5 0.8
CWB-T CANADIAN WESTERN BANK 38.66 3456 5.1 12.2 24.6 31.0 7.2 10.4 3.1 30.3
*Stelco figures for return on capital and sales growth reflect a four-year history

Labrador Iron Ore Royalty Corp. has increased its dividend by 88.1 per cent annually in the past three years and the 16-per-cent dividend yield and P/E of 6.4 unquestionably catch the eye. Despite that extreme payout, the company has the second-highest five-year sales growth rate of our list at 18.9 per cent. It’s worth noting that iron ore prices fell by 63.2 per cent between May and November largely owing to concerns over Evergrande and the Chinese real estate market, but, since the November bottom, the price has risen by 57.4 per cent. (The high yield should not be taken as a signal of trouble, but neither should investors treat the current payout as “normal.” It will depend on the iron ore price, which is a good indicator of profitability/growth for the company.)

Enghouse Systems Ltd., a software and services company, may not have the best price momentum right now, but it has the key attributes of a dividend grower: a dynamic industry, high and sustainable return on capital of 18.9 per cent, sustained dividend growth, 21.1-per-cent annual growth in the past three years, and solid management. The company paid a special dividend of $1.50 in January, 2021. According to management, there were few opportunities for acquisitions. As it turned out, the Canadian technology sector has fallen by 7.8 per cent on a total return basis over the past 12 months as of Jan. 21, while the S&P/TSX has climbed 18.2 per cent. Distributing a special dividend was probably the best decision available to maximize shareholder value.

Stella-Jones Inc., a producer and marketer of pressure-treated wood products, shows a relatively low dividend payout and NOPAT growth rate, but these figures don’t reflect that, since 2019, the company has bought back $207-million worth of shares in addition to distributing $113-million in dividends. With lumber futures back to about US$1,140, the near-term outlook of the residential lumber division, which represents 25 per cent of the company’s revenue, may be better than management had anticipated in November when prices were around US$650.

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

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

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.