What are we looking for?
About the same time last year, we ran a small-cap screen that, as it turns out, performed extremely well in 2016: The average total return for the 10 stocks we found was 39 per cent. Given how well the strategy performed, we are running a very similar screen today.
The screen
We have screened Canadian companies with the following criteria:
- Market capitalization between $100-million and $500-million;
- Debt ratio of 50 per cent or less. The ratio is calculated by dividing the long-term debt by the invested capital;
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.5. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- A positive EPI change over the previous 12 months. A positive result indicates a strengthening economic performance;
- Positive revenue growth over 12 and 24 months;
- Positive free cash flow/capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flow, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good, 5 per cent and above is excellent.
The dividend yield is displayed for informational purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 7,500 companies (Canadian stocks, U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Only nine companies made the cut, and they are all different from last year's results.
High Arctic Energy Services is certainly one of the most interesting companies in that list; it has no long-term debt whatsoever, offers the second-best EPI of the group, the highest free cash-flow/capital ratio and an attractive dividend yield. It managed to increase its revenues in 2015 and 2016 while most of the companies' in the energy sector were falling.
NeuLion Inc., an IT company specializing in digital video broadcasting and distribution, also generates very high free cash flow and has the highest revenue growth rates of the group both over a 12- and 24-month period.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.