What are we looking for?
Canadian companies that have strong – and growing – profitability that also appear to be trading at reasonable valuations.
More on the screen
Craig McGee, senior consultant at CPMS Morningstar Canada, helped us out on our hunt by searching the CPMS database for the top 15 stocks that met the following criteria:
-a return on capital ratio greater than industry average;
-a positive change over the most recent four quarters in return on capital versus the previous four quarters;
-a ratio at or below the industry average when dividing enterprise value (debt plus common and preferred equity less cash) by earnings before interest, taxes, depreciation and amortization;
-a price-to-earnings ratio less than the median of at least the past five years;
-a return on equity ratio greater than the median of at last the past five years.
He also filtered out stocks with less than a $500-million market cap.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
This list was limited to no more than two stocks per industry so that we could expose some profitable and inexpensive stocks across several sectors. You’ll see everything here from gold companies to financial services.
As always, use this screen as just a starting place for further research before placing any buy orders. But we point out this has been an effective strategy for finding stock market winners in the past.
Mr. McGee ran a simulated screen to find the top 15 stocks using the same filters annually for the past several years. The backtest revealed that the stocks generated an annualized return of 12.7 per cent between Dec. 31, 2001 to June 30, 2013, almost double the S&P/TSX composite return’s of 6.7 per cent.
Even more impressive: Over the past five-year period, the strategy produced annual returns of 9.4 per cent, versus a negative 0.5 per cent return for the index.
Profitable Canadian companies trading at reasonable valuations
|1||Alamos Gold Inc.||AGI-T||27.28%|
|2||Coastal Energy Company||CEN-T||86.68%|
|3||Kinross Gold Corp.||K-T||10.50%|
|4||Open Text Corporation||OTC-T||12.91%|
|7||WestJet Airlines Ltd.||WJA-T||5.64%|
|9||Superior Plus Corp.||SPB-T||5.10%|
Source: Morningstar Canada
Historic ROE %
|1||Alamos Gold Inc.||AGI-T||27.28%||0.40x||2.87%||0.21x||16.23%||1,810|
|2||Coastal Energy Company||CEN-T||86.68%||0.51x||17.05%||0.08x||51.64%||1,740|
|3||Kinross Gold Corp.||K-T||10.50%||0.23x||0.43%||0.26x||1.38%||6,086|
|4||Open Text Corporation||OTC-T||12.91%||0.64x||1.03%||0.59x||15.72%||4,248|
|7||WestJet Airlines Ltd.||WJA-T||5.64%||0.53x||5.71%||0.34x||2.49%||2,548|
|9||Superior Plus Corp.||SPB-T||5.10%||0.84x||3.50%||0.84x||4.23%||1,623|
|11||Canada Bread Company||CBY-T||5.45%||0.94x||2.88%||0.94x||2.26%||1,528|
|12||Royal Bank of Canada||RY-T||4.98%||1.00x||1.24%||0.82x||1.91%||94,033|
|13||Shaw Communications, B||SJR.B-T||3.77%||0.94x||0.44%||0.16x||23.33%||11,559|
- Alamos Gold Inc$5.740.00(0.00%)
- Kinross Gold Corp$3.410.00(0.00%)
- Open Text Corp$60.970.00(0.00%)
- Norbord Inc$19.900.00(0.00%)
- Transcontinental Inc$18.240.00(0.00%)
- WestJet Airlines Ltd$15.930.00(0.00%)
- Finning International Inc$17.750.00(0.00%)
- Superior Plus Corp$9.900.00(0.00%)
- TransAlta Corp$5.480.00(0.00%)
- Royal Bank of Canada$69.290.00(0.00%)
- Shaw Communications Inc$23.620.00(0.00%)
- Canfor Corp$13.350.00(0.00%)
- Linamar Corp$51.030.00(0.00%)
- Updated February 8 4:00 PM EST. Delayed by at least 15 minutes.