What are we looking for?
The Trudeau government was elected on a platform that included more infrastructure investment, tax benefits for middle- and lower-income Canadians as well as improved employment insurance benefits. We are looking for stocks that might benefit from these commitments, notably construction, engineering and retail-oriented names. Rankings are determined by the INK Edge V.I.P. criteria (valuations, insider commitment and price momentum). This is the same approach we apply across the broad market to determine membership for the INK Canadian insider index, which is used by the Horizons Canadian Insider Index ETF (HII).
The screen
To make the grade in this screen, a stock must trade over $3 and have a market cap of at least $250-million. We begin by determining a stock's rank in each V.I.P. category based on equally weighted factors.
Valuations (past 12 months except dividend yield)
- price-to-earnings, price-to-book and price-to-sales ratios;
- enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization);
- price-to-cash flow or price-to-cash;
- shareholder yield (buybacks plus dividends).
Insider (officer and director) commitment
- recent net insider buying;
- personal holdings (excludes shares held for other investors);
- insider intensity, based on the number of insiders buying.
Price momentum
- based on three-, six- and 12-month returns;
Next, each V.I.P. category rank is equally weighted to determine a composite ranking.
In context
The percentile V.I.P. category and composite rankings are in relation to all other stocks in the market. Rankings are between 0 and 100, the higher the better. A composite ranking over 90 goes into the top decile "sunny" outlook category. A composite ranking between 70 and 90 goes into the next two deciles, the "mostly sunny" category. INK sunny and mostly sunny outlook categories are not buy recommendations but are designed to identify groups of stocks that have the potential to outperform the market.
What we found
While small cap steel component maker Canam Group Inc. grabs the No. 1 spot, most stocks on the list are retail-oriented names. Given the likelihood that tax and EI measures will affect the economy before construction starts on new infrastructure, the tilt toward retail stocks is timely. We have included retail-oriented REITs in the group as they could potentially benefit from a combination higher consumer spending and inflation. Two REITs made the cut: Eastern Canada-focused Plaza REIT and Canadian Tire spin-out CT REIT. Investors should conduct further research before buying any of the companies listed here.
Ted Dixon, CFA, is CEO of INK Research, which provides research and alerts on insider trading reports in Canada and the United States. Please visit CanadianInsider.com to find out more about INK services and insider reporting in Canada. INK staff may also hold a position in profiled securities.