What are we looking for?
Canadian stocks that might provide you with a bit of protection if markets fall but can perform well in better times. Such stocks are of interest today because the S&P/TSX composite has dipped about 6.5 per cent in the past couple of months and many investors are looking for a cushion against further losses without sacrificing the possibility of additional gains.
How we did it
One way to measure the volatility of a stock against the broad market index is called “beta.” Stocks with high beta tend to move more than the market; stocks with low beta are more stable than the overall benchmark.
My colleague Rob Belanger and I looked for TSX stocks that have higher betas when the market is going up (“bull beta”), coupled with a lower beta when the market is going down (“bear beta”). We have also given these companies an overall score based on their “drawdown” – the biggest percentage drop that a stock has taken from its most recent peak.
We looked at Canadian companies with market capitalizations of more than $1-billion. For each of these firms, we looked at their five-year bull betas and five-year bear betas. The ideal mix is a high bull beta (indicating a stock does better than the market in good times) and a low bear beta (it tends to fall less than the benchmark in bad times).
We also show each stock’s drawdown, a key measure of financial risk. Stocks with big drawdowns have a history of hitting a peak, then falling by large amounts. We show both the one- and three-year drawdowns. A low number is best. We have also given these companies a score based on the equally weighted drawdown from the past 30 days to five years. In this case, we are looking for a high number.
What did we find?
Jean Coutu Group is a Canadian drugstore distributor and franchiser. When the TSX composite was up 1 per cent, Jean Coutu’s bull beta shows the stock rose 1.37 per cent. When the TSX dropped 1 per cent, Coutu only fell 0.55 per cent. The stock had a drawdown of 16.89 per cent from the high to the low in the past three years, and it tops the screen in total drawdown score.
Winpak and George Weston actually had a positive return when markets were falling, as is shown by the negative number in the bear beta column.
Investors should pay close attention to the bear beta, and other indicators, if they expect markets to sink further.
TSX stocks that mix downside protection, upside potential
|Shoppers Drug Mart||SC-T||8.85||43.36|
|Cdn. Nat'l Railway||CNR-T||40.37||94.60|
Source: Bloomberg, Wickham Investment Counsel Inc.
|Shoppers Drug Mart||SC-T||8.85||43.36||1.17||0.64||-18.85||-13.10||84.0|
|Cdn. Nat'l Railway||CNR-T||40.37||94.60||0.90||0.65||-20.93||-9.95||82.8|
|Bell Aliant Inc.||BA-T||5.78||25.34||0.74||0.56||-20.66||-12.86||79.2|
|Loblaw Cos. Ltd.||L-T||11.32||40.15||0.44||0.21||-30.40||-10.26||79.0|
|Bank of Montreal||BMO-T||39.75||60.86||1.77||0.73||-22.80||-14.58||78.0|
|North West Co.||NWC-T||1.13||23.39||0.40||0.24||-25.04||-14.07||77.8|
|CI Financial Corp.||CIX-T||7.73||27.28||1.41||0.72||-23.87||-17.38||77.2|
|Bank of Nova Scotia||BNS-T||66.05||55.37||1.60||0.94||-25.80||-11.62||73.6|