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Number Cruncher

An alluring mix of stability and profits Add to ...

What are we looking for

Stocks that would appeal to a conservative investor looking for a bit of income.

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We’re looking for companies that have the characteristics necessary to withstand a softer economy while still offering the potential for gains if things turn upward.

Inspired by Warren Buffett, the billionaire U.S. investor, we chose return on equity as our first test because it’s one of his preferred ratios to consider before putting down his money.

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We used Bloomberg’s equity-search tool to identify shares in companies that meet the following criteria:

-Exchange: TSX.

-Market capitalization: at least $200-million to eliminate the least-liquid companies that may be difficult to trade.

-Return on equity: a five-year average of at least 15 per cent. ROE measures profit as a percentage of shareholders’ equity. A company that has a history of producing high returns on equity usually has a sustainable competitive advantage.

-Earnings growth: five-year increase in net income of at least 12 per cent. We wanted companies with a history of increasing profits over several years.

-Dividend yield: at least 2 per cent. We like companies that pay dividends because it signals management is confident enough to return money to shareholders.

What we learned

The screen turned up only 26 companies out of more than 1,200 that are listed on the TSX. After just six weeks of trading this year, this group has climbed an average of almost 6.6 per cent, compared with only 4.5 per cent for the benchmark S&P/TSX composite index.

While the ratios we picked need to be reviewed in the context of each industry to determine whether they’re high or low relative to peers, it’s notable that the range of companies that passed through our filter spans sectors from energy to mining and finance to telecommunications.

As with any stock screen, they can serve as a valuable starting point for identifying ideas of what to buy and sell, and investors should continue the process with more research and analysis before investing.

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