What are we looking for?
Undervalued Canadian companies.
The screen
Canada has been an area of increasing interest for investors as energy and materials sectors have lifted the country's main index to near the top of worldwide charts so far in 2016. Year-to-date, the S&P/TSX composite index has posted a return of 8.4 per cent. The rise has some investors questioning, however, whether the market has gotten ahead of itself or if there is still room to run.
In order to identify a diversified group of potentially undervalued Canadian companies, my colleague Lawrence Ullman and I used Morningstar CPMS to find the top 15 companies above $300-million in market cap with the best mix of:
- forward price-to-earnings ratio;
- forward price-to-cash flow ratio;
- price-to-book ratio;
- price-to-sales ratio;
- three-month consensus EPS estimate revision (cannot be worse than minus 5 per cent).
For diversification, the list was restricted to no more than two stocks a sector.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
Using CPMS we performed a back-test starting March 31, 2006, initially selecting an equally weighted portfolio of the top 15 qualifying stocks and each month replacing those that are no longer in the top 30 per cent of the rankings or if earnings revisions fell by more than 15 per cent.
Over the entire period, this strategy would have generated an annualized total return of 9.6 per cent compared with 4.1 per cent for the S&P/TSX composite total return index. Over the past 12 months, the strategy produced a total return of 2.3 per cent while the index has lost 6.6 per cent.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.