Skip to main content

What are we looking for?

We are halfway to the next semi-annual rebalancing of the INK Canadian Insider Index, which will be implemented on Nov. 20. Today, we look for the stocks that are leading candidates for inclusion in the 50-stock index used by the Horizons Canadian Insider Index ETF. A stock already in the index before rebalancing date stays so long as it is in the top 30 per cent of all stocks ranked on the basis of the INK Edge V.I.P. criteria (valuations, insider commitment, price momentum). We replace index drop-outs with the top ranked V.I.P. stocks which are not already index members. To identify where insiders see the best opportunities right now, we focus on the top 15 INK Edge ranked TSX stocks.

The screen

Our universe includes some 800 TSX-listed stocks that meet minimum size and liquidity requirements. To make the final grade, a stock in the group 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 ownership;

-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. Today we are looking for the top 15 stocks in this category. However, keep in mind that even if a particular stock has a bright outlook, it could still rain on your portfolio's parade. Diversification is key.

What we found

Of the top 15, seven stocks are currently not in the index and are in contention for inclusion this fall: Lassonde, Cott, Silver Standard, Plaza Retail, Just Energy, Metro and New Flyer. Meanwhile, just as they were at the time of the spring index rebalancing, insiders are sticking with the consumer. Companies with potential pricing power are gaining in popularity with non-cyclicals counting for seven of the top 15. Also worth noting is top ranked Cascades, which sells recycled paper products into the U.S. It could benefit from a weaker loonie, provided of course that the American consumer holds up. 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 via INKResearch.com. INK staff may also hold a position in profiled securities.

Valuations, insider commitment, price momentum: INK Edge top 15 (TSX)