Getty Images/iStockphoto
Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com
What are we looking for?
Canadian companies that have received upward earnings estimate revisions from analysts, since such companies historically outperform the market.
The screen
My colleague Allan Meyer and I sorted our companies by market capitalization; all are greater than $200-million.
EBITDA to total interest expense is a ratio that is used to assess a company's financial durability by examining whether it is profitable enough to cover its interest payments. We are looking for a ratio greater than 1.
The debt-to-equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by the stockholders' equity. It indicates what portion of equity and debt the company is using to finance its assets. We are looking for a low number.
Quarterly earnings momentum, expressed as a percentage, is a measure of growth based on the quarterly earnings per share. We are looking for a large number.
Price-to-book (P/B) is a ratio that is used to compare a company's market value to its book value. A low P/B ratio means that the stock could be undervalued.
The companies listed in the quarterly earnings revision column are those where analysts' have raised the earnings estimates. This is shown as a percentage above the initial earnings estimate for the quarter. A high number is preferable; all had to be positive.
What did we find?
Earnings revisions have been a very successful quantitative factor. History shows that changes in earnings expectations are highly correlated to stock price movements.
Innvest REIT, which owns 134 hotels, has the highest earnings revision on our screen, although, like most REITs, it has a high debt-to-equity ratio.
Transat A.T., owner of Air Transat, scores well in every category, and trades below book value.
Advantage Oil and Gas is a pure play natural gas company. The quarterly revision is quite high, and the stock trades at below book value, as does Longview, which is 45-per-cent owned by Advantage.
EnerCare is the renamed Consumers' Waterheater Income Fund; while the earnings revision is over 452 per cent, the company seems overvalued at a P/B ratio of 6.95.
While stocks receiving upward revisions are likely to see this trend continue, investors should still contact an investment professional, or conduct further research.