Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. mike@mikebowmangroup.com
What are we looking for?
Canadian companies with price-earnings ratios that are less than their P/E ratios of five years ago.
The screen
My colleague Rob Belanger and I started with TSX-listed companies greater that $500-million in market capitalization, and sorted them in descending order.
Operating profit margin (OPM) is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 20 per cent, it means that it makes 20 cents before interest and taxes for every dollar of sales. A high number is preferable.
We then compared the forward P/E ratio based on consensus estimates for the next 12 months, with the P/E ratio of five years ago. If the forward P/E is higher than the P/E of that earlier period, then the likelihood of the stock being overvalued is much greater, whereas if the stock has a lower P/E than five years ago there is a greater likelihood of it being undervalued. We only included companies that had P/Es lower than they were five years ago.
Return on equity (ROE) shows whether a company is a profit creator or a profit burner, and if it is growing profit without pouring new capital into the business. It indicates how much profit the company generates with the money shareholders have invested. We want a high number.
The 30-day relative strength index is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine oversold and overbought conditions. An asset is deemed to be overbought as the RSI approaches 70, indicating the asset may be due for a pullback. On the contrary, if the RSI approaches 30, the asset may be oversold and due to rise. We only included companies with an RSI of 45 or less.
What did we find?
Canadian Oil Sands scored quite well on our screen. With thermal, wind and solar projects around the world, Northland Power sports the best ROE and one of the best operating margins. Cominar REIT, which is based in Quebec City and has a real estate portfolio of assets worth more than $5.9-billion, has a P/E that is half what it was five years ago – and the company scores in the top quartile for OPM and ROE.
Contact an investment professional or conduct further research before investing in any of the securities listed here.