What are we looking for?
High-quality and inexpensive, low-beta stocks.
Volatility season is back. October is known for bringing the highest shifts in volatility for a couple of reasons: third-quarter earnings season kicks off early October, and trading volume is significantly higher after the calm summer months.
With North American indexes being close to all-time highs, relatively expensive valuations, and some rate-hike uncertainty, the fourth quarter has everything it needs to become very interesting. To mitigate part of the market risk, one of the solutions investors have is to replace their expensive and volatile holdings with high-quality, reasonably valued low-beta stocks.
The screen
We have screened our Canadian universe (about 1,650 stocks) with eight different criteria, focusing on high and rising economic performance, low/reasonable valuation multiples and low volatility.
- A market capitalization of $500-million or above;
- A return on capital above 10 per cent;
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.0. 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 past 12 months;
- A beta of 1.0 or less (a beta of less than 1.0 indicates the stock is less volatile than the market in general);
- All companies have to pay a dividend
- Price-to-earnings ratio below 20 (The S&P/TSX composite index P/E currently sits around 17);
- Positive price performance over the past three months.
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 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Only eight companies fit our list of criteria. Metro Inc., Rogers Sugar Inc., Canadian Imperial Bank of Commerce and Toronto-Dominion Bank all offer high economic performance and decent dividend yields.
They might also have another advantage against other members of the list given this screen's objective: They are considered defensive stocks, which tend to be less volatile and less affected by macroeconomic events.
A quick word to yield chasers: Sirius XM Canada Holdings Inc. certainly looks attractive with this 8.77-per-cent yield, but beware. The company's payout ratio (not shown) is very high, above 110 per cent, and the company is also heavily leveraged. This could mean the current dividend is not sustainable in the long term.
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.